When cover is allowed to lapse, it incurs costs to the client if they wish to resume at a later date. Andy Milburn questions this practice and devises a cunning plan…
Readers of COVER are frequently reminded how much the individual protection industry in the UK has evolved in recent years. Yet our industry continues to ignore certain tasks, processes and practices that we have undertaken for years without ever questioning if they could be done in a better way. We have still got some great examples of processes that remain the same as they were 20 or 30 years ago.
Lapses and reinstatements are two of those areas that spring to mind.
Some may say those areas do not help us to write more business so why should they give them any focus? The recession has started to suggest that people with that opinion may be narrow-minded. Increasing numbers of unemployed people in the UK have resulted in an increasing experience of lapses amongst other things (how many providers still offer unemployment cover?).
For a while now lapses and reinstatements has become an area we are taking more seriously. Traditionally, we have waited until clients stop paying their premiums before we start to issue reminder letters asking them to complete a new direct debit, or their cover will eventually lapse. In the last few years, a number of providers have created ‘early warning systems' that help the adviser to discuss these situations with the client before their cover lapses. Certain distributors have begun to set aside resources to manage these situations with clients much more carefully than we did before.
Place yourself in the situation of a client who has been made compulsorily redundant. Let's say you have no option but to lapse some of your insurance policies in order to pay the more important bills. You start to get back on track financially. Five months after you lapsed your insurance policies you ask for them to be reinstated. What happens?
Most clients would be expected to pay the premiums due in arrears. That's how the system works. Let me ask you a vital question though: Why?
The client is paying for cover they have never had - cover that takes into account the past, not the future. They didn't die or fall ill during that period so can't claim. Most actuaries would say the cost of the cover over the full term is worked out by the total premium payable over the term of the policy, meaning the client has to pay the premiums owed in arrears. Is this really TCF?
What if we offered clients a new GIO (guaranteed insurability option) as an optional extra at the time of purchase which covered them against having to pay back premiums, for a period of say six months, if they are ever made compulsorily redundant and have to lapse their cover as a result. It would mean a slight increase in premium, but nothing dramatic.
They would have to answer an underwriting question confirming that they are not in danger of being made redundant, or under notice of redundancy to avoid anti-selection. The client would have to produce proof of the employer's notice of redundancy for this to work. That could be scanned and emailed by most people though.
Secondly, we usually request a statement of good health before reinstating the clients cover. Why don't we utilise the same techniques that we offer clients in our new business processes such as tele-underwriting interviews or an online reinstatement process supported by underwriting rules and drop-down question sets? The process would be much shorter for reinstatements compared to our current new business applications too.
Some experts may challenge this and say that the client is better off buying new cover rather than reinstating their old cover. What if they had critical illness conditions that were not future proofed though? The client would have aged since they bought their original policy and so would have to pay a higher premium. Providers should also consider the acquisition costs of a new policy, which could be 30-50% of the new product's first year's annual premium.
The odds of the client's cover remaining in place until they reach the end of the term of the policy are very low, which challenges the cost of cover/total premium argument against changing what we do currently. Most protection business has lapsed by the end of year 20 anyway, so the total premium over the term of the plan never gets paid in full in most cases.
We have done some rough calculations and reckon this GIO could be introduced for an additional 1% of premium. It might even be less. Providers can change their underwriting rules pretty quickly these days too. So what's stopping us? Let's change the way the system works!
