Paul Robertson talks to Dennis Smith about quality standard marks, HSBC's choice to implement this initiative and the bank's protection plans
Few who read Richard Walsh's column last month could have failed to be interested in his case for a quality standard to be applied to Income Protection (IP) products. In a nutshell the concept is that these products should have a minimum standard to meet and that standard should be acknowledged with a quality mark, through the Office of Fair Trading (OFT).
Customer confusion and misunderstanding are a perennial problem in protection markets and one would expect the major players in this market to be flocking to the scheme.
However, one of the concept's biggest early adherents is one of the less obvious candidates. HSBC, currently number one in IP sales, due in the main to its LifeChoices product, is one of the first companies to actively discuss implementation.
The Early Days
Dennis Smith is head of life & protection at HSBC. He is responsible for all life assurance and creditor business, this also makes him CEO of Marks & Spencer Life Assurance. In conversation he is keen to stress the early days aspect of the design.
He says: "This originally came out of the Income Protection Task Force's and Richard Walsh's discussions, but it is vital if this is to take off for us to get enough product providers to the table to help design this standard."
Cynics might point out that pan protection industry initiatives have a poor record of success, IFA Lifesearch's attempt to unite the market in promoting protection to the public was heavily lauded but nevertheless failed. So why should this succeed?
"The easy answer is that there is less cost involved", says Smith. "The cynic in me notes that Tom Baigrie was trying to raise millions where we are talking about a relatively small financial commitment. Tom's campaign was exactly what the market needs but proved a step too far for the industry. This is a smaller step, albeit with less impact. We need to be incrementally looking at our products."
The OFT will always look favourably on anything that improves customer awareness and understanding. "Richard Walsh is more of an expert than I, but we have been led to believe that they would support this approach, given the work that has been done on quality standards previously in other industries. Which?, who are strong supporters of income protection, as opposed to PPI, have also voiced some interest."
However, a hurdle remains in that discussions so far are showing that there is perhaps not one quality standard to fit all protection products. The reality of the situation is that a mass market customer may be more orientated towards a simple product, and will not want what a more sophisticated IFA type customer would want. This raises the question of how to set the standard.
"If you look at existing income protection market players, a lot would say it had to be a product that paid for the rest of the client's life. I don't mind saying that if that were the standard we ended up with, then HSBC would probably not participate. The question is how to make income protection as a whole simpler for Joe Public to understand."
Simplified products
With LifeChoices, HSBC has the best selling simplified product in the market at the moment. However, the bank is not fundamentalist in its outlook, following a practical line.
Smith says: "The LifeChoices product was introduced before we withdrew from the PPI market. It was definitely in early anticipation of there being problems with PPI, designed with simplicity in mind under the expectation of the end of PPI. We are neither strong PPI advocates nor IP advocates. As far as we are concerned it is only important that we design things that customers want, and that meets their needs.
"I have a personal view that it is very easy to drive premium rates down by being much more selective in terms of who you will insure. The risks are that you end up with an absolutely awful customer experience. We still fundamentally believe in a value based proposition, rather than something that is pared to the bone.
"Ultimately it is about giving the customer choice, not too much choice though, as that brings us back to confusion. Which is, of course why we are now looking at a quality standard."
Another point of discussion is ancilliary services, such as rehabilitation. Smith says: "While any good claims manager would use rehabilitation support, I doubt that it would fit within the quality standard. Within a standard we are looking at things that are objective and measurable.
"The message for the market as a whole is that anyone who wants to come along and participate is more than welcome. For me the strength of this plan will be in the number of providers coming in and committing in the first place. It gives a broader strength to the views," concludes Smith.
According to Smith, HSBC has ambition to drive significantly more protection through its branches and call centres. "If you look at our ambition this year, compared to last year, we are talking in the order of a 25% increase in sales relative to where we were", says Smith.
However, without saying "never", there are no immediate plans to sell through the IFA market as a whole. "I think as things become clearer in a post RDR environment it is something that we would look at again, but in the short term, no.
"We still think there is a significant untapped potential in the protection markets, largely through mass markets, to be honest. It hinges on having conversations with customers. There is a danger that the demise of PPI will leave a significant number of people unprotected.
"People talk of the protection gap but the industry has just not applied itself to addressing that issue. The question is: Can we drive people in the protection direction?"
If it comes to pass, the quality mark is a certainty to swiftly become the minimum standard an IFA would look to sell to clients, with an impact on providers who fail to meet the standard. "I think if somebody could not meet the quality standards then it would pretty much mean the end of that type of product," says Smith. "However, it would never displace Defaqto. The standard would be to a level but products would still need analysis. There is a lot of product differentiation in the income protection world, at the moment - probably an excess, confusing to the customer. This initiative is about reducing that to a degree, laying down what an income protection product should absolutely have."
