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Comment - Business protection begins at home

Why providers must keep hold of customers – at all costs

November 2008 News

There is an oft-repeated Confucian saying which goes “may you live in interesting times”. It is a curse – after all who wants to live through those awful and often awesome events that dominate the news? There has certainly been much of “interest” over recent times – and little, if any, good. Cast your mind back a few weeks and a pillar of world capitalism was collapsing every day. If it wasn’t AIG, it was Lehman Brothers or Fortis. And if the rumours were not swirling over Goldman Sachs, they engulfed the poor old Halifax, and drowned the hapless Bradford & Bingley – proof that no lasting value came from building society demutualisations and the stock market’s insistence on continually higher profits – while Iceland (the country, not the frozen food store) may well have been mortgaged off the map by now. That crisis-a-day rate could not continue as we run out of top firms left to implode.

Of course, Confucius never said anything about living in interesting times. Those who have researched the saying can trace it back no further than a 1950s science fiction story although that may have borrowed the quote from a 1930s book on alchemy. There is, however, a Chinese proverb along the lines of “it’s better to be a dog in peaceful times than a man in a chaotic period.”

Where are we now in the chaotic period? It may depend on whether you read this column the day this publication arrives or 24 hours later when all could change. Along with everyone else, I have no real idea -except that it cannot be good for those in the insurance protection industry.

But it is abundantly clear that a speedy return to the days of fat and plenty is wishful thinking. We are now in the biblical lean years, which, if they turn out to be the worst in anyone’s lifetime, will draw parallels with the 1929 crash, built like our present problems on a sea of unsustainable cheap debt (made worse in our case by exporting our inflation to Far East manufacturers and Polish plumbers).

On one level, however, protection insurance professionals can allow themselves a pat on the back. No one working directly in life assurance, the private medical cover world or income protection is involved in collateralised debt obligations or credit defaults or securitised synthetised swaps (I’m not sure if I made the last one up).

But that’s only half a sigh of relief. If this is the once in three generations crash – despite greater longevity, anyone still alive who was active in 1929 would have been no more than a clerk or liftboy – then whatever the short term recovery potential, we are far from being out of the woods. Even in the most severe bear markets, there are more up days of false hope than sessions of misery – the downs are always bigger than the ups.

There are big hurdles to jump before life returns – if it ever does – to the days when the main worry was the Financial Services Authority’s (FSA) retail distribution review.

For while the protection world itself is a simple enough insurance proposition, who knows what toxic combinations are further up the food chain? AIG is big in protection. So is Fortis. Those marketing and underwriting traditional insurance needs balanced their books at the end of the day. They did not know of the alphabet soup of comprehensible instruments on which those paid more had bet the future of the bank (or insurance company).

Even if the insurance rot is limited to AIG and Fortis, their troubles can hardly enhance the reputation of companies whose balance sheets remain healthy. The next time anyone tells a client that cover comes from a triple-A rated firm, they may laugh hollowly and point across the ocean or the North Sea to insurers whose once proud credentials have turned into dust.

And, don’t even think of copying companies now telling enquirers that “we are regulated by the FSA which checks our financial strength and probity”. The client answer to that, of course, is “Northern Rock”.

Next is the effect on people’s pockets. Many more will follow the Lehman Brothers’ model and collect their UB40s (now known as a JSAG – or Jobseekers Agreement) and that will mean terminating private medical insurance contracts, either held personally or, more likely, through work.

If financial services firms, which are more likely to offer cover, are hit hard by redundancy, then expect to lose clients. Likewise, customers in financial trouble are likely to ditch protection – what’s the point of critical illness cover if you are about to be repossessed?

Insurers will, rightly enough, suggest long-term protection should be the last thing to abandon. But that exhortation will fall on deaf ears with many out of work folk.

And what about the effect on those still in work and continuing to pay PMI premiums (or have them paid for them)? They may still have their cover but the balmy days of arriving for work in the certain knowledge of still having employment at the end of the day have gone.

This uncertainty must lead to more anxiety. And while most policies generally exclude mental health problems and self-harm, the real problem of economic recession comes from stress-related illnesses or conditions that are made worse by stress.

The result may be more claims – legitimate in themselves but caused by economic circumstances. More claims will mean higher costs leading to enhanced premiums or greater excesses or more stringent underwriting. Whatever combination individual firms adopt, the message is not one policyholders will wish to hear.

So here’s a modest, tentative, suggestion. Insurers should offer premium holidays to the hard-up. They could say that while customers can’t claim if they are not paying, they would be welcome back to the contract with no further underwriting (unless they had actually been treated in hospital) or change of terms once their finances felt better and they could tear up their jobseeking agreement.

Actuaries could come up with a suitable reduction in benefits to compensate. This would help keep the customer base over the longer term – better to cut a deal and keep a client happy than lose a policyholder for ever.