Richard Walsh investigates the possible interventions the FCA could make to bring income protection (IP) to the masses.
Every now and then the FCA publish ‘a think piece', with the aim of revealing ‘the mind of the regulator', and to alert us to potential future interventions.
It is especially interesting that unlike FAMR, where protection barely gets a mention, this report lists the top four insurances that most people would need as being: home contents insurance; homeowners needing buildings insurance; drivers needing motor insurance; and "millions would ideally have some form of income protection".
The nub of Chapter 7 is that segmentation (as opposed to greater pooling of risks) can result in many customers being classed as high risk or ‘non-standard', and they may find few insurance options open to them.
This may only become clear after a lengthy (sometimes distressing) search.
And if they can find products, they may end up paying a high price for one that doesn't fully meet their needs.
As insurance markets become increasingly segmented, these issues are likely to increase.
So what options are available to address this problem?
As you would expect, we find reference to areas specific to protection (for example, the genetics moratorium).
However, they also mention interventions that have been used in other insurance sectors which, if the government and FCA were minded to, could be applied to IP insurance.
In my view these interventions become more likely if IP were to become a mass market.
One fairly simple intervention would be ‘signposting'. There is an agreement between the government, the ABI and BIBA that means where an older person is turned down for motor or travel insurance because of their age, the insurer or broker concerned must refer the person to another source that can provide cover or to BIBA's Find-A-Broker service.
However, the agreement is not restricted to signposting. It requires the ABI to publish annual data on how age affects risk and premiums for travel and motor insurance. This has led to an interesting FOS decision.
A man in his early eighties bought a new car. He was told he would receive one year's free motor insurance.
After buying the car he was told that this was available only to people aged between 21 and 80.
But the FOS pointed to the ABI figures that showed drivers aged 21-25 were a higher risk than him and that there was no significant additional risk until the age of 86.
The insurer had to pay for the alternative insurance he had taken out, and a payment for the trouble the insurer had caused him.
So the publication of data not only aided transparency in setting premiums but also penalised a company that did not take it into account.
The most extreme example of an intervention is probably Flood Re.
From 2000, there was an agreement to ensure that many homeowners could still get cover. But it did not regulate costs or policy conditions.
Flood Re replaced it in April. It is a flood reinsurance fund established to ensure domestic properties at the highest risk of flooding can receive affordable cover. It is funded by an industry-wide levy.
Consumers in high-risk areas should find more insurers willing to provide cover and the cost more affordable.
Insurers paying the levy will pass on the cost by increasing the premiums they charge to all insured homeowners.
Given the importance of IP, especially with cuts in the welfare state, it will be interesting to see if any of these interventions are replicated in our sector.
Richard Walsh is a fellow of SAMI Consulting (www.samiconsulting.co.uk)
