A fighting chance
Johanna Gornitzki: To kick off today's debate, I thought we could look at why income protection (IP) is punching below its weight. What are the main problems with the cover?
Nick Kirwan: In November last year, at the Association of British Insurers' (ABI) IP meeting, we established there were five main areas that need to be looked at. Firstly, we need to do more to raise awareness of the product, both with intermediaries and consumers. We also need to find a way of simplifying the transactional side of IP. The product is very complex and diverse, which means it is difficult to compare and contrast, and therefore the understanding is low. The third area is finding a role for standardisation. The fourth area is around raising the standard of advice. And the fifth is whether or not IP should always be an advised sale.
Roger Edwards: I agree with the five points and I agree with Nick saying there are some underlying issues as well. I think one of the reasons critical illness (CI) cover has been so successful is that beyond the potential complexity of the definition within the CI policy, it is easy to explain to somebody what they are getting. With IP, you have absolutely no idea what you are buying and what you are going to get at the claim stage because there is a whole series of events that may or may not happen between now and when the claim takes place.
Johanna Gornitzki: Do you think the media can play a key role in raising awareness of IP?
Roger Edwards: I absolutelythink the media could play a pivotal role in it, but I am notnaïve enough to expect thatthe media is just going to startsaying how great protection iswhen, unfortunately, what sellsnewspapers and magazines ismore negative experiences. Butthere must be a balance thatwe can strike between negativeand positive messages. It wouldhelp the industry move forwarda bit.
Clive Waller: The clients IFAsare going for are not IP clients.The people we want to sellIP to do not go to financialadvisers. To amplify that, inour last piece of research, wewent to three banks and askedto buy IP. None could provideus with any details. When youhave that side of the marketrefusing to sell IP because itwants to sell something else,then that is a huge problembecause we are not going toget into that market.
Kevin Carr: IP is punchingbelow its weight because thesort of distribution models thatmost consumers come intocontact with don't sell it. Theymay sell life insurance, but mostof the time they are far toobusy selling payment protectioninsurance (PPI) and mortgagepayment protection insurance(MPPI), which are vastly inferiorversions of IP. Consumers don'tbuy products that they don'tknow exist.
Nick Kirwan: Other productshave been very successfullyembedded into the cultureof the mortgage sale by theadvisers. IP is just not in thatspace. Getting it in that spaceis probably the biggest singlething that we could do to reallytransform the number of sales.
Roger Edwards: It comes backto what Kevin was saying aboutinvesting in infrastructure. If youlook at the amount of business that the majority of protectionproviders write on IP, it equatesto between 5% and 10% ofproviders' overall protectionbusiness. When you look atsuch a small part of your overallbusiness, it is difficult to get abusiness case for IP to stand up.
Mike Owen: I am intriguedby the IFA sector because itcould be taking the moralhigh ground with IP, giventhe comments we have heardabout the other distributionchannels. Why are they notselling it? I guess one area isfear. They are uncertain aboutselling the wrong IP product.I think it is also about costbenefits. The time they spendadvising the client on theproduct and the relative lowtake-up as a result. And this iswhere I think training comes in.
Mark Johnson: It is also a reallyhard sell for them. Underlyingall of this is the fact that mostconsumers don't actually thinkthey are going to be long-termincapacitated. It is not thathigh on their list of concerns- most people know they aregoing to die at some stage, sothey can see the need for lifecover but saying 'do you thinkyou may be off work for morethan six months' is a wholedifferent concept.
Johanna Gornitzki: If advisersare shunning the IP market, arethey treating customers fairly?
Clive Waller: Interestingly, theObudsman actually says yes.When it made its comments onclaims not being paid or paidin full, the warning that cameout was 'be careful when sellingIP because there are too manythat don't get paid'. So, in otherwords, if you don't sell it, youwon't get any problems.
Kevin Carr: I completelyagree, there are unnecessarylevels of complication - areasthat providers don't need to compete on. There shouldbe standardisation. However,I think there is perhaps asecondary issue to this, which isthat we know the Ombudsmanhas issued warnings aboutover-insurance and it is cited asthe main negativity around IP.But just how bad is it if you areover-insured? Let's say you haveinsured yourself for £1,000 amonth and that is the moneythat puts the dinner on thetable and pays the mortgage.The only reason you are notgetting paid all of that moneyis because you are getting themoney from somewhere else. Iam concerned the Ombudsmanhas not quite got the rightpecking order in terms of theseverity of the impact to theconsumer. Being over-insured alittle bit is not going to ruin yourlife. Not getting a penny out ofCI, is.
Roger Edwards: I don't know,for example, if the actualamounts that people tend tobe over-insured for is 5% or100%? Are they taking outtwice as much cover as theyare actually earning? Thiscomes back to the fact theseproducts are complicated.When customers take themout, we financially underwritethem to find out whether theyare entitled to have that levelof cover in the first place. Andthen in 15 years' time, whenthey claim, we financiallyunderwrite them again. Withthe financial underwritingat claims stage, this is whena client finds they are overinsured,and we don't refundthe claim or refund premiums.And that creates this issueof distrust. Is it not beyondthe realms of possibility, and I have said this to reinsurersand actuaries before, just tofinancially underwrite it at thestart and then just let peoplehave what they have bought atthe claim stage.
Nick Kirwan: I agree. Ithink when people take outinsurance, they ask threequestions. How much do I pay?How much do I get? And, whathas to happen for me to get it?So, if you can't answer thosethree questions in about onesentence consumers may notgrasp it.
Johanna Gornitzki: Is there anyway that we can solve this?
Clive Waller: Yes. In Australia,that policy is commonly sold.Here, one of the objections weget from IFAs is 'you won't pay'.
Kevin Carr: A point was madeearlier about IFAs being veryelitist and not that many sell IP.And I completely agree. I thinkwe all know that IFAs are notfantastic at selling protection,especially in certain markets.But I would also look at the roleof the provider because there isa significant lack of informationavailable to help the IFA sellprotection. Most providersdon't even allow protection tobe keyed online.
Nick Kirwan: That came overloud and clear at the IP daywe had at the ABI. That issomething we need to thinkabout building into the work totake forward.
Mike Owen: There is also afear of not paying out due tonon-disclosure.
Nick Kirwan: I agree with that.Two-thirds of unpaid claimsare due to non-disclosureand it is something that wedefinitely need to pick up asan industry and work on. Weneed to build into this thepsyche that you need to fill inthe application form fully atthe start and answer all themedical questions, you need tosatisfy the definition of disabilityand you need to be off workfor this period of time. Forother products, that messageis starting to get through. Weneed to make sure customersunderstand that they have tobe frank with us and then theirclaims will be paid.
Johanna Gornitzki: Who isactually responsible for pushingIP forward?
Nick Starling: I don't knowthe answer to that one, but Ihave been very intrigued bythe discussion so far, whichhas really concentrated on themanufacturers and the advisersand not the wider world. Ifyou talk to organisations likeCitizens Advice, I think 90%of people coming to them arecoming to them about debt.Even on something like PPI,which is a controversial product, Citizens Advice thinks it is avaluable product because itdeals with debt.
Roger Edwards: It is aninteresting concept. PPI/MPPIis the whipping boy at themoment, it is not a goodproduct, and the sellingpractices are against thecustomer. If PPI is bad, IP isgood, but nobody is selling IPbecause it is too complicatedfor all the reasons that we havealready gone through. But asan industry, we are actuallyfocusing on the IP product andsaying what can we do to makeit sell more and to get people toappreciate it more. Why don'twe look the other way and seethat the PPI concept is actuallynot bad, what is it that we cando to improve that and maybewe will meet in the middle.There is quite a lot that I likeabout PPI and MPPI such as theslick, quick application process.
Nick Kirwan: I think the timingfor us to try and get IP intogood shape is right because ifthere is going to be some fallouton MPPI, it would be great tohave a product that can fill thatgap. At the moment, I don'tthink IP is in sufficiently goodshape to fill that gap because itdoes not fit with the slick easyto sell and easy to take out sortof process, which offers simpleand straightforward benefits.
Phil Hull: I think we have gotto go back to basics. Whydo people buy insurance? Toget themselves back into theposition they were in beforethe event happened. We needto see if we can add someform of unemployment coverbecause that is a common occurrence, a long-termdisability will normally meanat the end of it there is no jobto go back to. So they needthat bit of extra time to dothat. And that sort of addedbenefit is where you are goingto be genuinely saying 'thiscontract gets you back towhere you were before theevent happened'.
Roger Edwards: We haveonly very briefly touched onrehabilitation but is thereever a scenario we couldget to where we are puttingpolicyholders back, not onlyfinancially but physically, intothe situation they were inbefore. Maybe the rationalefor taking out IP isn't that - 'Itake this policy out because Iwant a load of money if I can'twork' - it becomes 'I take thispolicy out because it will helpme get back to work and helpme recover'. And while thatis happening, it will pay thebills. And you actually turn thewhole proposition on its head.
Johanna Gornitzki: So, goingback to the question I askedpreviously, who is responsiblefor pushing IP forward?
Mike Owen: The Governmentshould be. It realises there is abig protection gap but it doesnothing about it other thanundermine the whole concept.
Johanna Gornitzki: How canyou persuade the Governmentto do something about this?
Clive Waller: With a greatdeal of difficulty. We tried totalk to the Government, butat the wrong time because itwas prior to the election andthe MP responsible wouldnot even give us the courtesyof a call or an email back. Idon't know if it is actually theGovernment that should beresponsible, but I think it is theregulator. I think the regulatoris the one body that can makean overnight change - it hasintroduced regulations that,if applied, would result in thebanks and mortgage advisersthinking very seriously aboutrecommending IP.
Nick Kirwan: I am reallypleased that the ABI ProtectionCommittee is trying to becomethe facilitator for some of this.But it can't do it on its own, itdoes need the wider industry.I am hoping that the industryitself can be the catalyst tobring other people to engagein this debate and perhaps wedo need to try and influence the FSA and other people tomake something happen. ButI think we do need a focuswithin the industry to makethat happen. Whether that isenough, only time will tell.
Mike Owen: I think we need toget the consumer to buy into it.
Johanna Gornitzki: So is thatlikely to happen over the next12 months?
Nick Kirwan: Yes, if we canbuild a real consensus aboutsome of the things that weneed to do, I sense that thereis that around. Let's see if wecan make the case to the Officeof Fair Trading (OFT), that weneed to standardise things likeover-insurance, co-insuranceand maximum benefits. AndI think we can make the caseto the OFT for that because noinsurer acting on its own canaddress that. No insurer can sayit is going to have a commonmaximum benefits formula. Itjust can't because it dependson what the other providers aregoing to do.
Nick Starling: I know twothings that will definitelyhappen in the next 12 months.The FSA will announce theresults of its review of generalinsurance regulation. Andthat will be quite interestingbecause we know obviouslyit is a bit of a black box at themoment. But we know that itis looking at it. At the momentthe regulation is a bit one sizefits all. And I think the regulatoris looking at differentiation ofproducts. But whatever theoutcome, I am pretty sure thatthe Competition Commissionwill accept the challenge thathas been passed to it from theOFT to look at PPI. I expectthat it will accept it and that isobviously, one way or another,going to focus attention onprotection type products.
Clive Waller: The IP Task Forcehas agreed this week, ouraction plan for the coming year.And we have divided the groupinto four sub-groups on thebasis that one committee can'tdo very much at all. It will justargue for a long time. We havefour groups that are going tolook at delivery. There will bea media group; one looking atgovernment regulation of allthose areas, which will also betalking to the OFT; another thatwill look at product issues andwill be talking to the ABI; andanother that will be focusing onadviser awareness.
Johanna Gornitzki: Shouldthere be an advancedprotection exam?
Kevin Carr: What any examshould do at the end of thelong process, is actually beencouraging trust. That is thewhole point about it. You get a better qualified, better educated adviser which leads toa better educated consumer.
Clive Waller: I wouldn't totallyagree with that. It staggers methere is not a GP qualificationfor a financial adviser thatmade them totally competentin protection. I find it mindboggling. If anybody is a socalled qualified financial adviser,and they don't understand IP itis just incredible.
Kevin Carr: Going back tothe original question, I thinkthere are three things thatwill happen over the next 12months. I think the first is thatthe PPI debate will rumble on.The OFT has a say, as does theCompetition Commission andso forth. I may well be in theminority but I am of the viewthat PPI is unavoidable. Whatadvisers do is compare productsbased on their knowledgeof the market and theirknowledge of the customer'ssituation - by default thatmeans that you rank oneabove another. I also think wewill see new products in 2007- perhaps similar, perhapsdifferent to what we knowalready. And finally, I think weall know that we will see newproviders in the market.
Johanna Gornitzki: Any finalthoughts anyone?
Kevin Carr: There is a genuineconsumer need for IP and for alot of products.
Phil Hull: I agree completely,there is a consumer need that isnot properly communicated byany of the other stakeholders inthe market place. I don't thinkproviders make it easy enoughto understand and I don't thinkadvisers understand what thebenefits are that they can getfrom selling it.
Nick Kirwan: I think thereis a message of hope. If youlook at other markets, suchas in the US, it really is amainstream product out there- it comes first and is sold timeand time again. It is the samein Canada - it has really highpenetration rates in thoseplaces. There may be thingswe can learn from thosemarkets but the good news isthat it can be done. There isno reason for us to be timid, Ithink now is the time to graspthe opportunity, knowing thatit is possible.
