The UK's protection industry appears to have lost its way in recent years, so now more than ever before, with the economy struggling to get back on its feet, is the time for a turn around. Peter Carvill talks to John Pollock.
John Pollock, group executive director for protection and annuities at Legal & General, is outlining his current role in the company as the head of… well, pretty much everything: “I guess I’m responsible for this company’s business strategy, overall profit and loss, the risks it takes, the levels of those risks, and the risk appetite across all of the business. The business itself incorporates two principles: protection business such as our individual protection and our group protection businesses plus, in addition, our housing business.
“We run the Mortgage Club which is a very successful mortgage distribution network and I also look after our general insurance business. And that’s together with individual and bulk annuities. So those are the businesses that make up my responsibility at Legal & General.”
If, on reading this, you think that Pollock might be spread too thin to spend much time working on the protection, he is quick to dispel that thought: “I do quite a bit of work on the protection side, partly because my background is quite heavily protection-based. In this company, I used to run operations and the biggest physical component of that was the protection business.”
Low uptake
The sector, he argues, has a major problem in that the uptake among consumers is still too low: “The biggest issue is the protection gap. I’m also interested in how the retail distribution review (RDR) may generally affect advisers and the consequential impact of that with customers failing to receive the advice which, in my view, is a critical component. It’s also impossible to conceive any environment where you could be successful in closing the protection gap without strong advisory services for consumers. And sometimes that advice may not be more than asking someone if the provider in front of them is a good company to be with.”
He continues: “It doesn’t necessarily have to be pro bono advice but, in the protection market, there tends to be a lower advisory burden. But, clearly, if the RDR does impact too heavily on the adviser community, then customers could find it hard to get hold of advice that they should be getting.
Opportunity knocks
“I think there is the possibility that if adviser numbers do fall materially, and I’m not saying that this is definitely going to happen, there is clearly the prospect for them being less accessible to customers. And that makes me slightly concerned that there is a backwash, a reaction, to the impact of the RDR and how it may impact on the protection market. Of course, that does create opportunities. There may well be advisers in the marketplace who choose to specialise in protection. In an environment like now where there is so much fear and doubt in customers’ minds over the economy and their personal security, is there a better time to be advising in protection? There are a lot of people now for whom difficult circumstances have arisen who are wishing that they were better protected. And I think that creates the opportunity in the marketplace – we do our ‘Value Of A Mum’ scheme on an annual basis and it shows the continuing cost of covering people who undertake the work in the home. Those duties may then be forced on people if their income is impacted by the difficult economic conditions. So I think the protection market is one which has huge opportunity.”
However, he concedes that for a market that is not fulfilling its potential, there have been some great advances recently: “The innovations in this sector have been in the implementation of Treating Customers Fairly (TCF) which is an excellent piece of work from the Financial Services Authority (FSA). We’ve also made changes that we think fall in line with TCF, such as introducing ongoing disclosure on applications that makes sure that customers get access. As an industry, we should be proud to pay claims because it’s what insurance is for and I think that our brand stands for a high level of trust and value for money.”
The recession has not left Legal & General completely untouched. Since the interview was conducted, Fitch Ratings downgraded the Insurer Financial Strength of Legal & General Plc from ‘A+’ to ‘A’ because it downgraded the Legal & General Assurance Society from ‘AA’ to ‘AA-‘ and Legal & General Finance PLC from ‘A’ to ‘A-‘. In a press release outlining why, Fitch Ratings concluded: “The negative outlook reflects the potential for further deterioration given Legal & General’s exposure to credit risk and bank hybrids, and the uncertain economic climate. […] Offsetting these factors are Legal & General’s strong band and franchise in the UK, and its strong capital position, liquidity and operation cash generation.”
Pollock, speaking before the downgrading, acknowledged that the provider had spoken with the FSA about the risks it was carrying but was bullish against any hints that the company is in trouble: “The whole of the market talks to the FSA. Our credit portfolio is diverse, of high quality and is performing well. There are no concerns over that. Market conditions have caused a markdown but it is still a high quality portfolio. We have been very open in discussing what we have held. Previously, we have been to market and shown analysts so there are no concerns. Default allowances were products because the markets had changed more than anyone had ever expected and the spreads have narrowed. A lot of that was distressed spreads, which didn’t reflect the fault. We have a strong reserve.”
Business as usual
On the group side, it has pretty much been business as usual: “It has gone well although there are no new developments. By mass, we are the strongest player in group life. There are areas where we could still play a stronger hand such as in group income protection. We’ve had the ONEderwriting system that we have introduced into the market place that has been going well and I am very pleased overall with the group protection business.”
Speaking about the immediate future of Legal & General, Pollock hints that there are some interesting developments coming up in the group rather than the individual side: “We have a number of things in the pipeline. I think the group market is interesting as defined benefit schemes are closed and replaced with direct contribution arrangements. We have seen some companies decide that defined benefit schemes are now in the past. I expect to see an acceleration of this in the next year or two so I think we will do well with flex benefits.”
Staying focused
Industry-wise, Pollock has a few things that he wishes advisers and the Government will do to help the protection sector: “I hope advisers will stay focused on protection as it shows itself to be of benefit to all in economic environments like the current one. I do believe that it should be seen more widely than mortgage protection. The history of the adviser and provider communities has been with advisers focusing more on investments and wealth management. I think the voice of protection, therefore, has been lost but there is now a greater focus on it as the industry is doing more work to raise awareness in these economic times. The statistics still point to a lack of underwriting, though, or a drive in consumers to buy protection, so I think the Government has a role to play here in helping the industry get its message across.”
He expands on this point: “There was a time when life assurance was tax-advantaged. There is scope for discussion on how protection might come to the market. There needs to be discussion with the regulators and the treasury about these issues.”
