Ben Heffer provides Paul Robertson with an insight into the workings behind Defaqto and an analysis of the market's future
Despite a reasonably high profile there is a certain amount of confusion about what Defaqto actually does. In the main, advisers see it as the author of data tables and as a rater of products. Fair enough, as the firm is to be found monthly in COVER supplying a product analysis and Defaqto star ratings are to be seen in bank windows across the country, but this is not the entire story.
Ben Heffer, as an analyst responsible for the life and protection sectors, attempted to clarify the matter, setting out his credentials as a market analyst. "Basically we have two other functions. We make sure that the database continues to collect the sort of information that is current; we may add new criteria for instance. Then we have an outward facing function. This is writing reports and reviews on a consultancy basis."
"Clients are typically providers. When they bring a new product to market they might want to see how their product will fit in with the competitions, or they might want to know what sort of features are important, to IFAs for example. We may help design a product, but it is basically market positioning we get involved with."
While Defaqto provides a popular range of services to its clients, the firm is not without critics, chiefly that its rating system is skewed towards the commercial protection providers at the expense of the friendly societies.
Far from biased against, Heffer was enthusiastic about friendlies, but was not sure they were in the same market. He said: "The products tend not to have the bells and whistles that the IFA market products have, so compete in a different market. If you look at the income protection (IP) type policies, they are more geared towards the blue collar and self employed market, they fit quite well into that group.
He saw the sector's main advantage as Holloway products. "In our research one of the main things that puts people off protection is that they pay their premiums and they don't think they are going to be getting anything back, or they don't trust that a claim would be paid.
"One of the easiest ways of addressing that is for protection policies to have some premium paid back at the end of the term. This would address the value for money idea, although the policy would obviously be more expensive.
"Generally people are not alien to the idea of saving for a rainy day. People like the concept and the demise of endowments has deprived people of this sort of vehicle, but friendly societies still offer this concept."
As a rule, any interview with Heffer would feature heavily on the rating of products but, as COVER carries a feature on the subject we are spared too much detail on a subject one suspects Heffer is often called on to defend.
Not the only runner
But Defaqto is not the only game in town, COVER columnist Richard Walsh is leading an ongoing project to give some sort of quality mark to IP products, defining them as pressure grows from rebranded PPI products and hybrids.
Heffer is a fan of this plan, seeing it as a way of refocusing the adviser community back to IP. "Anything promoting IP is good. We have two problems here, one is the lack of promotion to consumers and the other is the battle to persuade financial advisers to sell it. An awful lot have got out of the habit of selling it and offer critical illness (CI) as a replacement.
"The Income Protection Task Force and Richard Walsh's quality marking are really good at promoting IP to advisers, switching them back over to IP."
Advisers' ability to sell enough IP is something that comes up more than once in conversation and Heffer is unsure they can meet the market's need, if not its demand.
"The reality is that it is difficult to sell and there are relatively few people selling it. The IFA sector is relatively small compared to the populous and so people don't know they need it, there is nobody there to tell them.
"Something therefore has to give in the complexity of IP and I suspect that that will result in more short-term IP products in future.
"Because of the PPI crisis, the general insurers are bringing in standalone short-term income protection products and will be encroaching on the IFA market.
"The industry needs to get this message across. These products are fine as far as they go, they are not a bad product, but they typically only pay out for 12 or 24 months. The difficulty is that they are brought to market by general insurers so they have cancellation and variation clauses in them. People might be left without cover."
In an ideal world
Heffer's stated ideal would be that long-term life insurers would come into this market and provide IP products that are easier to buy. Yet, as all IFAs know, it is not the products that are a problem, it is getting over the need for them to anyone other than the financially aware who already have a financial adviser. Heffer strays from the often held view that simplified products are an easier sale.
"While simple products are fine, so are complicated products if you have an IFA who will take you through a choice. So complexity versus simplicity is not really the issue. The issue is distribution."
Given that the IFA sector is relatively small, a clear way of getting more protection to more people is to at least try and cover those that are employed, which means targeting the SME market. "It is a relatively low number of employers that actually provide these benefits," said Heffer. "Around 25% of employers provide protection, which is quite good going, but provides plenty scope for providing a lot more.
"The reason we don't distribute much protection is because people don't get up in the morning and think I must buy some cover. Changing mindset is what will increase sales."
Fortunately the industry's attitude to advertising seems to be changing, with Aviva beginning a national advertising campaign, and Unum with plans in the works for later in the year. Heffer notes that the amount of advertising spend within the industry compared with wealth management is miniscule, noting any sales generated may not be written in trust, thus highlighting that financial advice is as important as ever.
He is more positive on the government's obvious reduction in the welfare state as a mindset changer. He said: "The change in government is positive for protection for two reasons, one that this government is probably more biased towards encouraging people to do things for themselves but it has no money, so cannot bail people out if it wanted to. This will be a possible incentive towards protection, but is certainly an incentive towards saving.
Window of opportunity
"There is a real opportunity for the industry to work with government here."
Many will see this as a reprise of last summer's mutterings on a government-industry link up, a window of opportunity that would seem to have closed. While cynicism could be forgiven, Heffer is no rosy optimist: "There are two issues here. The first is trust. Before the government starts saying "go out and buy insurance" it has to be really sure that there will not be another mis-selling scandal, with people getting ripped off.
"The second issue is that we need the products in place to provide this sort of service. We need something very simple and straightforward, so people understand what is going on."
Heffer sited the Long-Term Care Commission as an example, which will have worked for around a year before reporting. It is largely anticipated that it will come up with some sort of insurance based or co-insurance solution.
"But look at the industry, what long-term care products are there out there?
"Providers say to me "Oh we have the products, we are just waiting to launch when the time comes." But the government when it looks at where people can go now will maybe wonder if the industry is ready for this. This boils down to the industry stepping up to the mark and being open and honest about what we do."
Stepping up to the mark
One could reasonably wonder if the protection market is capable of stepping up to the mark as a cohesive industry, after all it is in the middle of a period of flux. The last year has seen turmoil in protection markets, as the market cannibalised itself through consolidation and several firms assessed whether they saw a future in this sector. The question is, are we to see much more of the same in 2011?
"There is probably going to be more contraction in this market, although I'm not going to speculate as to whom. However this might ultimately be good for the consumer. If there is less choice then it is probably easier to handle the market. The possible risk is that a lack of a range of products in the market would present people with a paltry choice."
Never the less Heffer concludes that the government may boost the fortunes of the protection sector. "I would like to think they would consider it. The benefit system is a very basic safety net and there is a need for people to organise things for themselves now, before any cuts. Again it all boils down to the consumer's mindset."
We shall see.
