While the FSA has made strides that could further COVER's industry-backed Promoting Protection campaign, Mark Twigg explains why the Government needs to throw its hat in the ring.
The distribution of retail financial services is facing greater political scrutiny now than at any point in recent years. The protection industry should not be isolated from this debate, yet strangely the gaze of policymakers is fixed elsewhere. With the Financial Services Authority's (FSA) retail distribution review (RDR) working towards a root and branch overhaul of the market for investment products and financial advice, the European Commission, through its retail market review, is also keen to examine what steps can be taken to develop a more sustainable and accessible market for long-term savings products. It is also worth acknowledging the work of The Treasury's Thoresen Review into how or whether consumers are able to access generic information about financial planning and products, in particular to help support consumer decision making when the new personal pension accounts come into being in 2012.
Clearly, the public policy agenda is dominated by savings and investments. In essence, all these agencies are responding to the same set of social and demographic changes. The realisation that society is ageing brings with it additional costs in funding retirement. Greater access to long-term savings and the need for more accessible financial advice has become a strong political imperative. The failure to meet these growing costs has resulted in a growing pensions gap, which, thanks to the efforts of the Pensions Commission and two major pieces of legislation, is set to be addressed. What is not instantly clear to the outside world is whether policymakers have yet worked out where exactly protection insurance sits in this rather blinkered narrative. Most people would agree that there is little point in saving for the long-term unless one protects themself against unforeseen risks that may arise in the short-term. Ill health, periods of long-term unemployment or the death of a breadwinner can all put paid to any long-term savings plans long before the onset of retirement.
Indeed, the Government's disproportionate and heavy-handed response in dealing with the pensions term assurance issue, which The Treasury interpreted as an industry feeding frenzy aimed at exploiting a newly created tax loophole, masked a more fundamental debate around the extent to which the individual should be given incentives by the State, not only to save for their own long-term financial security, but also to protect their long-term financial security from unforeseen events.
The long-term solutions currently being enacted in the pensions world will mean the individual is expected to take ever more responsibility for bearing the additional costs of living for longer. If the State is expecting the individual to bear the cost and associated risks of long-term saving, it should also encourage the individual to protect themselves against those risks. Yet, the Government has no clear strategy for protection. While compulsory annuitisation helps (albeit rather inefficiently) to deal with longevity risk, other risks - for which there are a suit of protection products - go almost unnoticed by the Government.
Loud and clear
This is not a call for compulsory protection products - though some MPs have called for such a move to protect mortgage repayments - it is a call for the Government to take more seriously attempts to build greater consumer awareness of the risk consumers face and how they can mitigate those risks. On this awareness point, it has now been over a year since we saw the launch of Promoting Protection, an industry initiative to raise the profile of protection insurance. Whether that campaign is judged to be successful in the long-term will depend, ultimately, on how well protection is recognised as a consumer need, not just among the public at large but also within Government and the regulator.
Fortunately, there are some glimmers of hope on the horizon. The FSA will look to bed in changes under the - now delayed - Insurance Conduct of Business (ICOB) review. The creation of a new protection suite must be seen as a positive development, notwithstanding the efforts of some organisations that lobbied hard to water it down or carve out exemptions for their favourite selling products. The message to the FSA as it now seeks to take into account wider, overlapping policy initiatives, is clear: the protection suite must go ahead, with term assurance within it. The FSA has, albeit the second time around, finally recognised that, from the consumers perspective, these are not commodity purchases like motor insurance, but are highly emotive and rather more complicated purchases to which the very lightest touch sales regulation should never have been applied. That may not be a popular message for everyone, but any race to the bottom that risks commoditising protection will do little to help build consumer awareness of their protection needs or how to protect them.
regime change
Ultimately, the current sales regime for protection products does little to plug the UK's growing protection gap. The ICOB review may at least slow, and hopefully reverse, that trend.
Perhaps another positive is the slowly changing perception within The Treasury. The Government has belatedly accepted that the protection gap not only exists but has wider implications for social policy. It has yet to work out what that means in terms of defining the boundary between the State's responsibilities and those of the individual. But changes are occurring. Back in 2004, when the Financial Inclusion Task Force first reported protection insurance was conspicuous by its absence, consumer access to financial protection was not deemed to be a priority compared with other more basic needs such as banking and consumer credit. The task force has now extended its remit to look at the protection market. However, somewhat disappointingly, the focus remains on insuring people's property rather than their life or income. It will be interesting to assess to what extent protection insurance has been mainstreamed within Government thinking when the next financial inclusion task force report is published in early 2008.
And then there is the FSA's RDR. On one level, the FSA's agenda - including issues of sustainability in the distribution sector, the impact of incentives on the advice process, access to products and good quality financial advice, standards of professionalism and reputation, as well as the role of regulation in helping to develop or hinder the market - could be applied to any element of the retail market (even the consumer credit market, thanks to the likely fall out in the sub-prime market during 2008). However, on another level, the FSA is right to reflect on the different features in the investment and protection markets, even though the products themselves are often sold alongside each other. While the FSA discussion paper is therefore right in not supporting any 'read-across' into the protection market, that should not be the end of the debate as far as the protection market is concerned.
The RDR will inevitably seep into the protection market, and all market participants, whether they be focused on manufacture or distribution, need to think about the possible contagion effects. Finding market-based solutions to the objectives set out in the RDR could well help to address some of the fundamental issues currently holding the protection market back.
promoting protection
Implementation of ICOB and the RDR are both opportunities for the industry to build better awareness of the protection industry, and of its benefits to consumers, within what can be a sometimes skeptical Government audience. Currently, where the industry is engaged with the Government, it is a largely negative story of poor sales practices, poor product design and declined claims. Developments in the Competition Commission inquiry into payment protection insurance will continue to cast a shadow over the whole industry throughout 2008. In addition, the Ombudsman is now turning the screw on the industry for its record on declined claims in the critical illness (CI) market and non-disclosure. Similar themes of course are being raised by the Law Commission's review of contract law and its proposals on non-contestability.
An industry that currently rejects one in six CI claims will inevitably leave itself open to criticism from all quarters. High declinature rates will dampen consumer appetite for the products on offer while regulators will rightly demand to know what the protection industry is doing to apply Treating Customers Fairly (TCF). There are already concerns at Canary Wharf that the insurance industry will fail to meet its deadlines for implementing TCF in 2008, so it is difficult to see how confidence in the industry - either among consumers or policymakers - will return very quickly. The industry has much to do in 2008 to get its house in order. Failure to do so will limit how well it can raise the awareness of this Cinderella product. Promoting protection within Government will not be an easy task. n
Mark Twigg is director at Cicero
