Keep It Simple Stupid: The Review of Simple Financial Products is a significant strategic development in the protection sector. Richard Walsh highlights some key issues and a few problems in the making.
As the report focuses on non-advised sales it is not surprising independent financial advisers get only a brief mention. For raising awareness, the four core areas will be the Money Advice Service, product providers, affinity group intermediaries (like Age UK), and industry-led campaigns.
The question is – will this be enough? And what will the interrelationship be between the four areas? On the first question, we have lots of previous experience of similar simple product initiatives – eg stakeholder pensions and CAT standards. This suggests that, barring a spectacular increase in the visibility of the Money Advice Service, more is needed.
Here, government should engage too. After all there is a societal gain from people taking responsibility for their protection needs and not relying on the increasingly pressurised benefit system.
The Income Protection Task Force’s idea of the Department for Work and Pensions (DWP) working with employers to produce an annual statement of state and company benefits for employees could be the “nudge” individuals or companies need to increase their protection.
On the second question, we can learn from the CFRI report. What happened there was that companies did not sign up to the simple product brand in a positive way. Sales increased but this was related mainly to the efforts of their own branding.
One might say, so what? Unfortunately this position is not sustainable in the longer term. Company initiatives wax and wane. Only an overarching brand with full industry support can accommodate changing priorities across companies and enable innovation in the simple product offering over time. Zimele is beginning to stall.
Product Practicalities
The report sets out eight principles for simple products to be assessed against and then goes on to do so for life and income replacement products. As mentioned before though, the criteria are related entirely to simplicity.
There is no consideration of consumer detriment in having or not having particular terms and conditions. Indeed, surprisingly, I have been unable to spot the phase “consumer detriment” anywhere in the report. This is a serious problem.
Unless it is addressed then we cannot have confidence that a mass market for these products will not throw up another scandal.
After all, PPI was a pretty simple product. Beyond that, the opportunity is missed to look at the relative costs and benefits of particular features. These could have been addressed within the overall concept of simplicity and “doing what it says on the tin”.
Turning to life insurance, the report recommends that:
- There is no payment in the event of terminal illness
- Consumers cannot increase their cover without further underwriting
- There is no waiver of premium benefit in the event of illness
- The only exclusion would be suicide within the first 12 months of the policy
- There is no standardised underwriting process
- Premiums are fixed for the life of the policy
- There might be an annual statement of cover etc – as happens for pensions
So let us imagine this product really took off and dominated the market for low to middle income earners - we would have a new market in the UK for people with terminal illness holding a life policy.
Although there is no payout on terminal illness the policy does have a real value at that point. It easy to envisage a new set of ambulance chasers emerging who would target such vulnerable people and buy their policies off them. This market is big business in the US.
