The UK protection market can be an insular pool. If you need a bigger picture you need a reinsurer, so Paul Robertson talks to Jules Constantinou
If reinsurers can be said to have an advantage in assessing a market it would lie in their global perspective. So, it is somewhat surprising to hear that Jules Constantinou, Gen Re's head of marketing in the UK, is quite up beat about the UK protection sector.
He feels the UK protection market is near some breaking point, but in a good way. However, he notes that margins and prices are falling and the market is consolidating as players leave the game.
"The sort of consolidation we are seeing in the primary market is not strange," he says. "The difficult thing to understand is why it is happening when the economy is down. Is it because firms believe this situation will be around for a while and that they cannot afford to make losses into the future? Or is this just a short-term view?"
"If you look across the world, I'm not sure there is a comparable market. From a reinsurer's perspective, we see this market as attractive. There is certainly room to grow and innovate," he says.
There is an impression, perhaps due to the protection gap, that the UK protection market is small. In actual fact, it is the second biggest after the US.
"This dovetails with the social security system; where it is good you get a smaller protection market. So in Scandinavian countries there is no large market. However, a healthy social system would make it clear that it could not pay for everything, no system can, which then creates opportunities for supplementary private products. The UK market is actually quite healthy," says Constantinou.
Healthy or not, the focus at the moment seems to be on group business, yet Constantinou says Gen Re is seeing a little more of the American model, which is basically work site marketing of an employer sponsored plan.
"We are also seeing the growth, but off a very low base of flexible benefits and individual products sold in a quazi group environment," he adds.
Changing the model
But more fundamentally, rather than expecting employers to fill the breach, Constantinou questions whether the distribution model should change: "If employers are willing to tick a box saying ‘OK, these people are trustworthy' and are willing to make time available at work, then perhaps the providers can fill the gap. They could market directly to the employees."
This would not be popular with the IFA community, many of whom pride themselves on their employee benefits expertise. Yet Constantinou does not see them necessarily cut out of the loop.
He says: "Why don't IFAs do this? There is no need to sit in the office; presenting and selling within an employer's work space is perfectly possible. It is an interesting method to perhaps grow their market, in partnership with specific providers. This market is predominantly distributed through IFAs at the moment; the man from the Pru is long gone. But both IFAs and providers have an interest in growing the market and so possibly they could do this in partnership."
Leaving aside the question of whether many IFAs would be willing to abandon a whole of market approach, employee benefits are nevertheless evolving as providers seek to form a package covering a range of situations, offering maximum flexibility and controlling employee absence. PruProtect is raised as an example; the provider's fusing of critical illness (CI) and private medical insurance (PMI) is a case of reinsurance complexity within one product.
Constantinou maintains that the fundamental benefits of these products are quite simple and easy to understand and quantify. The problem lies within the fact that the dynamics of these products can shift. "From a reinsurance point of view we would want to reinsure the whole package, because we understand where the package is going, rather than its component parts," he says.
"For example a CI package with elements of PMI, we might find that the sum of the whole is less than the sum of the parts. This may be due to some savings and synergy within the package. But the point is we don't know where the cost is going to emerge, on the PMI or the CI, hence reinsuring the whole package makes more sense."
As happens often in the interview, this raises another point. Constantinou is not sure that insurance companies should always fall into the financial arena through product design. "This is because we deal in money, both in collecting premiums and paying benefits, but I'm not sure we have done enough. Society is changing and people want a tangible benefit; an immediate satisfaction on spending their money. We have not cottoned on to that.
"The question is, can we add tangible benefits to critical illness, income protection and life insurance? We have sort of done it with the Red Arc, used by Bright Grey, Best Doctors, and group employee assistance programmes, but can we make a package?"
He cites PruProtect's Vitality concept that it is in the interests of the provider that the client be healthy, asking if it is not in the client's interest to be more healthy too.
Rewarding healthiness
"We need to have incentives to health," he says. "This could even work within the proposed state top up scheme. We need to reward people for healthy living, not only because it is going to benefit ourselves, the insurance industry, but also benefit the State as it lowers costs within the NHS. This is not only a financial need but a societal need."
The proposed state top up scheme Constantinou refers to was first raised at the recent Protection Review Conference and is essentially a plan to offer the Government a top up product to state benefits. It is envisioned that the product would be marketed by the Government as a non underwritten group scheme that the individual would sign up to.
Like many people COVER talks to, Constantinou sees some merit in this plan, as the public is unaware of it's protection needs. He believes a pan industry product continuously advertised by the Government could only be to the good.
"People say the industry should do more to market itself but the Government would have a lot to benefit itself, the more people with private provision, the fewer people falling back on the State," he says. "We also have this huge NHS promise that really drives sentiment in this country. The idea that the State will provide actually stops people buying insurance. So maybe a huge, government sponsored, awareness campaign is the way forward.
"There is merit in pursuing growth schemes and ideas like this. We look at Australia with its compulsory pension provision and its tacking on of slivers of life cover. People speak of the South African market, with its Zimele products aimed at the lower income groups. But I would be hesitant to say we should copy these. We are in a different political and taxation environment."
So, if it is a cracking idea, what does Constantinou think the odds of the protection sector combining and approaching the Government, and the Government accepting? Perhaps wisely, he refuses to be drawn into exact numbers; "The odds of it happening are better than they were two years ago as the spending review is forcing the Government to actually think about what it is spending money on.
A game of averages
"But this is something that other markets have looked at. I believe that Germany has had ideas of a top up benefit. The biggest challenge is providers and reinsurers getting their head around the fact that this is not going to be individual business and it is not going to be underwritten, that it will be a large pool and we are going to have to play the averages.
He concludes with the observation that the two most popular products in recent years have not been underwritten. "We had PPI and we have the funeral covers, which Lloyds Banking Group is selling, and which have caused the whole of life markets to liven up. Maybe there is a lesson in that. The key is not the pricing; we have enough clever people that could manage that risk, the key is anti selection. It may need an element of compulsion so everyone is in it."
"If you look at where we have been going in protection, it has all been about tightening process and underwriting in order to get the best price out. This is throwing the whole lot out, going the other way and saying I've got these people with this average risk, so this is what we are going to charge them," he concludes.
Nobody could talk to a reinsurer nowadays without mentioning some of the big ticket accidents and disasters that seem to have befallen the industry, the latest being BP's dealings in the Gulf of Mexico. So how do big events like this affect other sectors that the reinsurers deal in, such as the UK protection market?
Constantinou says different reinsurers deal with this question in different ways, dependent on what proportion of their business is general insurance and what proportion is life. He says: "At Gen Re, it is roughly a 50:50 split. So what we do on both sides of the business is to manage our aggregations separately."
In any case, Gen Re seems to genuinely expect growth. Constantinou explains: "If we think of the classic market curve, we have a flat start and then a huge acceleration as a market takes off, then it flattens out in maturity. Our market from a protection perspective is in the flat stage, but there are things happening.
"There are product innovations out there and we see a bit more direct to market activity, which is still new. The thing is that a market can never move fast enough when we are in it, but perhaps in five years we will look back and see that this was a dynamic time."
Perhaps.
