As support for COVER's campaign mounts, political analyst Mark Twigg explains how closing the protection gap is in the interest of the Government
The recent launch of COVER's Promoting Protection campaign has been widely welcomed, not just by the industry but further afield. The decision by the All Party Parliamentary Group on Insurance and Financial Services to hold an evidence session with campaign members is testament to the wider concerns felt in Parliament, and elsewhere, that the protection market needs to do more to raise its profile if it is to close the gap between the level of protection insurance Briton's currently have in place, and what they actually need.
The trends in protection cover are indeed a cause for concern. The annual snapshot provided by Swiss Re puts the UK's overall shortfall, measured by sum assured, at around £2.3trn. Another report by Scottish Widows revealed that, while the average household in the UK needs around £130,000 in financial protection to safeguard against a long-term loss of income following a major health crisis, typically only around two-thirds of that need is currently covered.
All the evidence suggests that the amount of protection people have in place is not keeping pace with their protection needs.
This failure to protect ourselves comes at a major cost. Not only do hard-working families face major financial difficulties when disaster strikes, but the additional strain is eventually pushed onto the State's already over-stretched safety net. It is therefore critical that Promoting Protection builds a dialogue within Government. After all, a good part of the welfare budget spent on incapacity benefits, currently around £12bn annually, could be reduced if only more people insured their own incomes.
The Government also has much to gain through a willingness to listen and learn from the private sector, which has a major role to play in helping the Government to manage its Welfare Reform Act agenda, helping those incapacity benefits cases back into work through active case management, emphasising the need for early intervention and access to rehabilitation. Couched in these terms, the benefits in promoting protection represent a clear win-win for the Government. There are two problems with this approach, however. First, the benefits to the Government are not always so clear cut; and second, the industry needs to do much more to build confidence within Government that it is looking out for the consumer's interest.
On the first point, one need look no further than the recent Pre-Budget Report, and the decision on pension term assurance (PTA), to see that the Government is, at best, agnostic on the benefits of individuals protecting their own financial risks. While the Government was quick to see sense on the need to protect pipeline PTA business, and is currently looking for ways to retain PTA in some form beyond the current tax year, the whole experience highlights that the Government's desire to listen and learn soon evaporates when the cost to the Exchequer gets out of hand.
On the second point, the industry has not always covered itself in glory in its attempts to put consumers first. The complexity and vast array of products creates an alphabet soup, seemingly designed to confuse consumers; payment protection insurance (PPI), mortgage payment protection insurance, income protection (IP), family income benefit, critical illness insurance, accident, sickness and unemployment, PTA and the list goes on. The perception that the industry hides behind contract definitions to avoid paying out claims also needs to be addressed.
Quite apart from the performance of investment-linked protection products, which blurred the lines between savings and protection, often leaving consumers confused as to what they were buying into, the industry now has serious problems to grapple with in the form of PPI, on a range of consumer offerings from store cards to bank loans. In fact, mention the words 'protection insurance' to anyone at The Treasury and it will not be long before they recount tales of bad market practice on PPI sales.
While many in the protection industry would not appreciate being tarred with the same brush, it has to be recognised that the recent decision by the Office of Fair Trading to refer PPI to the Competition Commission, can only continue to damage consumer trust in the whole protection market - a point which is not lost on the mandarins in Whitehall.
Government officials know full well that millions of consumers buy these products every year without stopping to ask themselves what benefits they will receive.
A good dose of treating customers fairly (TCF) could deal with many of these issues. The campaign should therefore take the opportunity to highlight how the industry is applying the TCF principle, and what impact that is having on product design, marketing and, ultimately, the appropriateness of consumer purchasing decisions. If it fails to do so, Government will be less inclined to listen.
There are, of course, other major public policy initiatives where we need to be active. It is notable that the IP Task Force, which published its recommendations at the end of 2006, highlighted the importance of training and qualifications in raising standards throughout the industry. Following the introduction of general insurance sales regulation in 2005, the Financial Services Authority's (FSA) decision to apply a light touch approach to examination requirements was no doubt the right one, given the wider concerns that a heavy-handed regulatory approach could possibly restrict consumer access to protection products. Though that is not to say that more cannot be done to promote the general benefits of training and qualifications in the sector. Higher standards will lead to better advice, which will feed through into greater consumer confidence.
With the FSA launching a thorough review of the Training and Competence Handbook at the end of February, alongside its wider review of retail distribution, which has 'professionalism' as one of its themes, now is perhaps a good time to be thinking about what steps the sector can take, not only to make sure that salespeople are competent, but also to publicise the industry's efforts to consumers.
Alongside the need for competent providers and intermediaries, we also need to address the weaknesses on the demand side, through improving the competence of consumers to make more informed decisions.
Here, the Government proposes a long-term programme of financial capability to equip individuals with the basics. However, the FSA, which is overseeing this initiative, could do with taking the protection message more to heart. When the regulator published its baseline survey on improving financial literacy in March 2006, the word 'insurance' was conspicuous by its lack of fanfare. The report spoke of the need for individuals to prepare financially for unforeseen events, though it linked this with the need to amass greater levels of short-term 'rainy day' savings. Considering that the sum assured needed by the average household is £130,000 following a major health crisis, the thought of plugging that need through any sort of savings vehicle is simply unrealistic, particularly for the low-paid and financially excluded. While The Treasury is keen to examine the potential for protection products in meeting these more immediate household needs, it is clear that the campaign has a lot to do in 'mainstreaming' protection into Treasury and FSA policy thinking, alongside the more popular preoccupation among policymakers of promoting long-term savings.
So with the forthcoming presentation to the All Party Parliamentary Group in mind, ideally the industry needs to be devising a framework for solving these problems, rather than simply agreeing that there is a problem. What I would like to see this campaign achieve is a recognition within Government that more needs to be done to understand the major causes of the protection gap and start to work up some long-term viable solutions to eradicating it. There is a rather obvious parallel to be drawn with recent developments in pensions policy. The perception of a large and growing pensions 'savings gap' prompted a major independent commission, chaired by Adair Turner, the former head of the Confederation of British Industry. That commission spent three years analysing the minutiae of the UK pensions system, and whether it was 'fit-for-purpose' in the 21st century. This resulted in the most widespread package of pension reforms in the UK for over 50 years. That blueprint for reform is now speeding through Parliament in the form of the current Pensions Bill, and come 2012 will have a major impact in how we as a nation plan for anticipated changes in household income as a result of entering retirement. Yet faced with a large and growing 'protection gap' there is, as of yet, no blueprint for changing the way people prepare for more unexpected changes in household income as a result of death or ill health.
This oversight is surely a failure of public policy, and one which can no longer be tolerated in a world where individuals will be increasingly responsible for protecting their own welfare.
Mark Twigg is director of Cicero, the UK's leading financial services public policy consultancy
