Does the external rating of products add value and what can advisers use them for? Ben Heffer explains
The protection industry is at a crossroads. New business levels are low and advisers have had to work hard to make sales in the face of consumers who largely do not believe they need protection in the first place.
Figures from the Association of British Insurers (ABI) reveal that quarterly new individual protection premiums remain about the £200m mark and have fallen by almost 5% over the year to the end of September 2010.
In many cases, protection is sold on price, resulting in little value for the industry and potentially inadequate cover for its customers. This is a challenging area for providers and advisers.
There is much debate about the dissemination of simple products to consumers through non-advised channels and how to achieve the change in consumer mind set towards protection that would make that line of distribution a success.
Financial vulnerability
Protection advice is not necessarily about complicated portfolio planning, although it can be that. Essentially, it may be as simple as acquainting someone with the extent of their financial vulnerability if they fall seriously ill or have an accident and identifying whether they should have critical illness, income protection or life assurance, or all three.
These hurdles overcome, how should consumers select the most suitable product? For consumers to buy without advice, there will need to be a higher general level of awareness of product features, otherwise people might just buy the cheapest and their needs may not be met. It is relatively easy for online shoppers to identify which policies are cheap, but the question, 'which one is right for you?' remains.
Given the complexity of protection products, advice plays an important role in helping consumers to understand the options available and what will best suit their circumstances.
There are many criteria to be taken into account when selecting a protection product. Broadly, they may be divided into three groups: features and options that give flexibility to the client; features and options that form part of the provider's proposition to the market; and those that relate to the benefits available under the plan.
For example, a critical illness policy will cover a number of critical conditions and procedures and these are probably the most important criteria. On average there are 36 critical illnesses specified per policy on the market, which should cover most eventualities.
However, the value of the policy is not necessarily invested in the number of conditions covered, some of which could be quite rare, but rather the quality of definitions applying to the more important ones. Choosing a policy with the most critical illnesses is easy, but assessing how much more one should pay for such a policy is more difficult. Most claims are due to heart attack, cancer, multiple sclerosis and stroke; approximately 80% in 2010.
Flexibility is an important part of any insurance contract. People's circumstances change, and being unable to adapt ones cover to cope with those changes is less than ideal.
Critical illness buy-back and life buy-back are the options to reinstate benefits under a plan after a claim. These are good options for customers. Most critical illness is sold as an accelerated benefit to a life assurance policy. It stands to reason that there may still be a need for life cover following a critical illness claim.
After a claim on a joint policy, it makes sense to be able to reinstate critical illness benefits for the non-claiming partner.
Indexation enables the benefits to keep pace with the rising cost of living. Options to vary the term of the policy or the cover are desirable features that more closely match the product to the client's financial planning needs. Similarly, the provision of guaranteed insurability options, which permit cover to be increased at certain times without further medical underwriting are desirable.
In recent years, providers have sought to differentiate themselves by improving their proposition to advisers and customers. For example, the use of tele-underwriting helps to minimise the risk to the insurer, the adviser and ultimately the client in terms of non-disclosure. There are time-saving benefits for the adviser and clients may feel more comfortable discussing their health and lifestyle details with a life office professional on the phone rather than their financial adviser.
We have seen an increase in providers offering premium discounts where it is necessary as a result of underwriting to exclude an element of the cover, typically cancer or heart attack. It makes little sense to consumers to be paying for something they cannot benefit from and is an important part of treating customers fairly.
Claims support
Many products incorporate claims support services. Making a claim under a critical illness policy by definition occurs at a vulnerable time for the claimant, and the additional help and support that some insurers give their clients through the provision of professional counselling and help and advice lines is a valuable benefit to the client.
The provision of health and wellbeing services has clear benefits for the insurer, which achieves a healthier book of business, and the customers who are encouraged towards a healthier lifestyle to the extent that they may never need to claim on their policy
Other forms of engagement with clients include severity-based critical illness. This is the practice of paying a partial benefit on the diagnosis of less severe illness or on undergoing some medical procedure from which a full recovery is expected. These new levels of engagement with clients can only help to reverse the rather bad press that the insurance industry receives from its detractors.
All this serves to demonstrate that no one policy, or set of policy options, are right for every person and the decision process when buying a protection policy has to incorporate a process of matching features and benefits to needs. For those who have a financial adviser, he or she will do that for them, for those buying direct, they may undertake this process based on their own research from shopping around.
Defaqto research shows that 94% of consumers compare the features of different products when choosing a financial product, and 80% of people see independent ratings as an important factor when making a decision.
Rating products
Defaqto publishes Star Ratings for protection products, including critical illness cover and income protection. The idea is to give an independent assessment of the level of features and benefits provided by different products on the market.
Ratings help clients understand what different policies offer, and support advisers' recommendations by giving a clear indication of the features provided by products they select for clients.
They cannot replace the advice process but they do provide independent validation of the product choices or recommendations made. These ratings can also help providers differentiate and promote IFAs with an initial view of where each offering sits within the wider market.
Advisers can also use ratings to validate and reinforce the price versus cover message to the client that is played out in their recommendation. Further, they can be used to support up-sell and cross-sell initiatives. For example, for reasons of affordability a recommendation of a three or four star product might be made, however, that creates an imperative to upgrade to a product with wider cover as exhibited by a five star product when funds become available or priorities are reassessed.
For consumers, they can feel confident that the recommendation they receive has an independent, unbiased validation from a third party. And for those undertaking their own research, ratings give an immediate visual impression of which products are likely to have the cover they might need, helping to narrow down the market.
Raising the debate to one of cover versus price from the current fixation with the cheapest will be good for consumers and good for advisers and insurers.
Ben Heffer is an Insight Analyst for Protection at Defaqto
