The introduction of simple protection products is being hampered by divisions among providers, writes John Letizia.
Following the Sergeant Review of Simple Financial Products in March, the ABI was tasked with submitting its recommendations for a Simple Income Replacement/Protection (IP) product to the Treasury within six months.
That time is now up and the industry's response has been timid as a result of some fundamental tensions between individual and group providers.
The Sergeant Review of Simple Financial Products was, appropriately, a brilliantly simple idea. Consumers regularly complain that financial products are too complex to understand, undermining their ability to make an informed choice.
The size of the protection gap in the UK - where 90% of people have no financial back-up plan should they be forced to leave work due to illness or disability - is proof consumers' ability to make informed choices to protect themselves is constrained by product complexity.
By "providing straightforward, easy to understand products that are clearly identifiable", the Simple Products review was explicitly designed to "increase the number of new participants" in the protection market to the benefit of the industry and consumers alike.
Unfortunately, this simple idea has become horribly complex to deliver. After six months of wrangling, progress on the proposed recommendations for what a Simple IP product might look like have seemingly ground to a halt.
While some positive steps have been taken, hopes we would see a radical attempt to tackle what is a long-standing Achilles heel for the industry have been proved hopelessly optimistic.
Mistrust of financial services
So, why is this? At issue are two different perspectives on how protection products, simple or otherwise, will be delivered in future. Societal change is challenging our industry's old assumptions about who is most likely to buy protection, at what stage in their life, and why, resulting in tension between group and individual providers.
As a result, the Simple Products issue has acted as a microcosm of how the broader changes to the protection industry, but also points to the potential for innovation and growth in the market in future.
Before looking at the detail of the Simple IP Initiative, we must consider why the initiative was raised in the first place.
It is an inconvenient truth that consumers do not trust financial firms at all. In fact, trust barometers place financial businesses the lowest in consumers' estimations.
First, financial firms remain closely associated with the crisis of 2008 and ensuing recession. Second, consumers have been directly affected by the PPI and other scandals and quite rightly outraged by excessive bank bonuses. And finally, potential policyholders will in all likelihood have encountered dense terms and conditions filled with jargon, or heard media reports of isolated cases of unreasonable exclusions or unfairly denied claims.
Many readers will point out that this is a very unfair assessment. It is entirely valid to do so. However, to do so would also be to entirely miss the point. It is the big picture here that is important.
Consumer mistrust pervades every level of our industry and it reflects concerns that financial firms and their products are not engaged with the needs of consumers.
This is why at Unum we have been such enthusiastic supporters of the Simple Products agenda. Rather than being hostage to circumstances beyond our control, the Sergeant Review represents an opportunity to grasp the nettle and take constructive and proactive action to rebuild consumer trust.
There does seem to be general consensus that the industry has a problem with consumer trust and that a Simple IP product is a promising route to redress the balance. The question then becomes about how to distribute such a product.
In recent decades, the individual market has been the predominant distribution channel for IP.
This is because of rising prosperity, a perceived generous welfare state and increased rates of home ownership (over the past 30 years a house purchase became the most obvious time for consumers to engage with the concept of IP, given the need to protect their mortgage payments).
