Battling production innovation
Johanna Gornitzki: To kick off the debate, I thought we could begin with having a closer look at what product developments we are seeing in the protection market. Are we experiencing any real product innovation?
Paul Cowman: No, not until recently. We launched our new serious illness cover in June and it is completely different from the critical illness (CI) product currently on offer in the market in the sense that it is providing more comprehensive cover. It also pays out earlier, based on the severity of an illness. Another new and truly innovative product to hit the market earlier this year was the Virgin Money cancer-only cover. While this one is at the other end of the spectrum, it offers something that was previously not available – and that is good.
Nick Telfer: Indeed, there are two products you rightly just discussed dominating this area. One is simple and cheap, the other product is complex and deals with financial planning.
Nick Kirwan: Does that reflect the market as a whole – either developing simple products sold on a direct sales basis or other richer propositions that need to be sold by an adviser?
Richard Verdin: The key thing that we need to bear in mind is the concept that the consumer understands what it is they are getting. Advisers have said the Virgin Money product is not fit for purpose. The important thing, though, is the underlying need to make sure people know what they are buying.
Paul Cowman: It's difficult offering broader cover because it is perceived as more complex, and that is why we need advisers. There is a general consensus in the industry about the underlying importance of trying to give people an increasing amount of clarity. Consequently, the role of the adviser has become increasingly important.
Dale Tranter: Innovation is not being driven solely by the provider, but by reinsurers too. In practice, at least 75% of CI covers are backed up by a small number of reinsurers and most of them have ideas of their own. It is not always right to assume that a particular provider has been innovative. For instance, Prudential has been able to experiment in the CI market because it has nothing to lose in the way of market share.
Tom Baigrie: To answer the initial question – are we seeing any true product development? – as previously mentioned there seem to be two outposts in the industry. On one side there is the Prudential product and on the other the Virgin Money product; there is nothing in the middle. In reality, consumers need cover when their income stops. But there are no signs that providers are addressing this reality.
Richard Verdin: I know what they think is right for the consumer. It's important to consider the concept of what the consumer thinks is right for them. At present, it is CI and income protection (IP). They choose CI because of the lump sum payment, which is seen as more attractive. The whole process is about overcoming consumer cynicism.
Tom Baigrie: I think we have an obligation to consumers to do what we think is right, not what they think they want. For example, it may be advisable to inform consumers that tax-free income is better than a lump sum. This is because the consumer's needs are greater than their wants, and therefore, the industry needs to lead.
Richard Verdin: Fundamentally, there is little point in having products on the market that people are unable to sell. In order to combat this, we have to educate the adviser about the products available.
Tim Eadon: We need to make sure the adviser fully understands the products they are advising on.
Richard Verdin: I think it has mainly to do with the amount of training providers are offering advisers. Let me ask Prudential directly, seeing as Stephen is sitting here, how many consultants do you have that go out and train intermediaries about your new product?
Stephen Huller: At the moment, we have about six people helping advisers with training, but that is just because we are trying to roll out this product in a controlled way.
Tim Eadon: I'd like to pick up on that, if I may. In this industry there is a massive protection gap. This area is massively undersold and I think that is primarily to do with the level of training that is being given to people who advise on these matters – or rather the lack of it.
Stephen Huller: This all very much depends on what form of training it is. The average IFA needs six to eight weeks of engagement. Interestingly, the Financial Services Authority (FSA) attends our training sessions. While it's about educating people, it also goes a stage beyond and is something that should be embedded within the sales process.
Nick Kirwan: Training is absolutely essential to raise standards across the whole industry. However, do you trust insurers to train their advisers in an unbiased way? Do you have any reservations about whether training by insurers, while helpful, is enough?
Paul Cowman: Sometimes you have to retrain IFAs so that they know how to re-sell.
Richard Verdin: There is a huge demand for training. I really do think that advisers want to learn. However, insurers have left no financial margin in which to train advisers. They need to understand that it's necessary to deal with such issues as well as the products themselves.
Tom Baigrie: There's a logical sequence here. This is a price-driven market. Using an adviser cancels out any savings for the consumer. Perhaps we should consider developing differentiated products, which have the potential to not be driven by price.
Richard Verdin: I really do think that product training is key here. For example, most mortgage intermediaries don't know anything about IP.
Tom Baigrie: I agree with you.
Richard Verdin: From what I have picked up, there appears to be a knowledge gap as they don't understand the definitions surrounding pre-existing conditions.
Paul Cowman: How do we communicate our products to these advisers with regards to terminology? They need to understand what constitutes a claim and what doesn't. This is the area where there is a greater chance for the adviser to add real value. IFAs have a compliance structure and this is centred around price.
Nick Telfer: You are talking about clarity, but when you look at some product areas it is very difficult to compare products from different providers; like IP for example.
Nick Kirwan: It's all very well talking about a unified language and terminology, but confusion arises when providers say one thing and then proceed to keep changing the definitions. It's not helped when they join two products together and then separate them again. Consumers say they want to know three basic things: what am I going to have to pay; what am I going to get and when will the claim pay out. On top of that, you need to be able to inform the consumer about those three things in one clear and concise sentence.
Richard Verdin: This is all very well but most consumers are sold insurance when in actual fact they want to know three things about mortgages, such as: how much can I borrow; how much will it cost and how long will it take to arrange. Realistically, none of the three mortgage questions relate to insurance, which, in turn, is why advisers always appear to have a bit of an uphill struggle.
Johanna Gornitzki: So what is driving the need for product innovation?
Richard Verdin: I think it's necessary to drive innovation in this industry. I think the current products are difficult for driving innovation. We must look at the needs of the consumer in order to drive that innovation.
Nick Telfer: Are providers differentiating in the right areas, such as in the IP sector? The way products are currently designed means people are forced to make decisions without being able to compare products properly.
Paul Cowman: Is that where the adviser comes in? For example, there is an ongoing interest in supermarkets protection products but value is only added when you get an adviser.
Richard Verdin: I think supermarkets are an issue but the market is overestimating just how much of an issue – they are not that big a problem. Supermarkets shouldn't worry advisers as they are not a huge distribution channel. They may be drivers of product change. Where they have been innovative is in the delivery methods and perhaps this is something that the industry can learn from.
Nick Kirwan: That's for sure. I agree with you. There is a definite need for more distributors in this area. However, it's also important to be ensure we don't limit the market because we still need simple products.
Tom Baigrie: For me, that is a flawed example. Supermarkets have been giving a megaphone message. But there is a real need to tell people that protection products may be a bit more complex and it may be necessary to pay a bit more attention to them.
Nick Kirwan: Consumers already think that financial products are far too complex, so that line of argument may well turn people off. If we want to grow the market, what we should be doing is developing simpler products that consumers find easier to understand, so they can buy with more confidence. Consumers do not have sufficient faith in financial services these days and, if the consumer doesn't understand what they have bought, we shouldn't be surprised when they don't know what they can claim for.
Stephen Huller: This is the issue though. Who decides what clients need? For most consumers, the price is the key factor. It's also important that they have the right product to match their needs.
Richard Verdin: Let's be realistic here. The majority of protection policies are sold by mortgage advisers. The FSA says secondary sales are sub-standard and encourages brokers just to tick the accident, sickness and unemployment cover box.
Tom Baigrie: The industry has a problem with secondary sales. It is hard to know all you should about markets that are only of secondary importance to someone's business plans. That's why mortgage brokers – and many others too – should refer their protection business to specialists.
Richard Verdin: This is the trouble with the mass market. You will either have to spend a fortune on education or find an expert in the field – or alternatively develop tools.
Johanna Gornitzki: Do you agree, Tom?
Tom Baigrie: Yes, I do. The consumer drops their issues with protection when they realise they are talking to someone in the industry who is knowledgeable. Instead, you have a situation where they openly discuss all their issues. However, the fact remains that you have these two polarised products in the market. You need to think of what the consumer needs.
Nick Kirwan: There's one difference here though. You're setting out a case for specialist advice versus GP advisers rather than the case for advice versus non-advice.
Johanna Gornitzki: What do we need?
Dale Tranter: The new Prudential product is unlikely to take over the market while there is still a buoyant, or at least sizeable, CI market.
Paul Cowman: I think the market is dominated by a few players. Realistically, there are three or four players with a big enough range. You have to give advisers a product that they can justify selling.
Stephen Huller: This is ongoing. It shouldn't just be at the point of sale.
Richard Verdin: You have a potentially 25 to 30-year relationship with a client in front of you here.
Tom Baigrie: With regard to advertising, the industry needs to do something. This should be something that the industry does as part of its business. It's important to close the protection gap as at the moment there is nothing.
Nick Kirwan: Doing it generically is extremely difficult as the devil is in the detail. The question arises as to who is going to pay for it. Plenty do advertise on TV. For example, the over-50s plans are often advertised on TV.
Tom Baigrie: The industry spends most of its money on advertising products, but that is not what the consumers want.
Richard Verdin: We need to look at what the consumer needs rather than what they want. We need to meet their needs and not necessarily their aspirations.
Stephen Huller: Advisers need to understand insurers commercial reasons. Fundamentally, advertising could help improve their bottom line. If advisers do a more holistic job regarding protection, where they sit down and talk about protection planning rather than just advising on it as an add-on to a mortgage sale, then it is likely to result in a better sale.
Nick Kirwan: The thing is, protection is not an attractive subject. Consumers actively put their protection needs out of their minds. They don't want to talk about it. But if you take it seriously, you don't want to spend a long time dealing with these issues. It's much easier to buy an iPod. You can do that in 10 minutes. It's a far longer process for protection.
Richard Verdin: The great thing about an iPod though is that when it breaks, you can get a new one.
Tom Baigrie: Hang on, this is what is wrong with the industry. Retail analogies are dangerous. The analogy with the iPod is wrong: it's different. Within this market, you don't know that the policy a consumer has taken out is broken until it's time to make a claim.
Johanna Gornitzki: Looking at the products in the market, how important is product innovation when it comes to growing the market?
Richard Verdin: This industry is famous for tinkering with existing products.
Tim Eadon: The industry should encourage longer-term products, which in turn should encourage long-term relationships.
Richard Verdin: So, Stephen, concentrating on your product, how long does a consumer spend with an adviser for the Prudential product?
Stephen Huller: It very much depends on their needs. There are various options, which could be slimmed down to fit people's needs. Some people are discounting options.
Richard Verdin: But how can you discount options on behalf of the consumer?
Tom Baigrie: That's what being a professional adviser is all about; you have to apply your professional expertise. That is what every expert is for. The adviser needs to concentrate on what is right for the consumer.
Stephen Huller: The most holistic approach is that we have three one-hour meetings with the client.
Richard Verdin: This doesn't sit with the lower socio-economic classes.
Paul Cowman: It can do because it is not a niche product. There are menu options and it's possible to sell it to the whole of market.
Tom Baigrie: Don't knock the product innovation idea. We need product innovation in the lower socio-economic sector. Those who earn just enough to render State benefit inadequate are in the greatest need of IP and life cover as they have no safety net at all. Until recently, the most important cover of all, IP, was not readily available to the predominantly manual occupations that dominate that socio-economic group. Fortunately, thanks to decent product innovation from Pioneer, it is now available – although at a cost commensurate with the risk.
Johanna Gornitzki: Any final comments?
Paul Cowman: I think we are now at the stage where innovation can make a real difference. The market has slowed down in terms of sales, there is a growing consumer protection gap, confidence is at a low and one in five claims are rejected. We are at a time when the market needs change in order to grow. Innovation should provide an opportunity for advisers to really re-engage with protection and see the opportunity it presents for them to grow their business. However, change always makes some people uncomfortable. There will always be people who see this as a threat, and many of those people see our new product as complex. Fundamentally, though, innovation has allowed us to cover more; take a fairer approach of linking payments to severity; and use a more objective payment criteria. This market needs radical thinking.
