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Leadership debate: Protection

Health Insurance editor David Sawers chaired our inaugural Leadership Debate on protection, where he asked a panel of experts about the major themes that will affect the protection industry over the coming months. There are challenges, he finds, but also an appetite to rise to them.

October 2009 Features

SENTIMENT FOR THIS YEAR – AND NEXT

Most financial advisers for whom protection makes up a significant share of their income stream will, of course, have noticed how challenging it has been over the past twelve months to maintain that business.

Participants at the inaugural Health Insurance Leadership Debate on protection – from both provider and advisory backgrounds – suggested that one major trend has been for advisers to revisit their existing client bank and re-examine their protection needs, especially of those consumers with inadequate – or even no – cover in place.

However, Aviva’s Richard Verdin suggested the protection market could not rely on this alone.

“If what the industry is seeing is the sustaining of the protection market through advisers revisiting their back book, then you have to ask yourself how long can they can do that for,” he said. “When will advisers run out of back book?”

The ABI’s Nick Kirwan was equally cautious.

“There’s nothing wrong with that if the customer’s needs have moved on and they’re replacing it,” he said. “But they are two different things and I just don’t have a sense of how many new customers we’re bringing in at the moment.”

The result, Verdin warned, was competition gone mad, with insurers wasting too much time and effort rubbishing each others’ propositions without focusing on the wider industry – and societal – good.

“Some of the in-fighting that takes place in the market is because it’s a stagnating market,” Verdin explained. “If the market was growing, then everybody would be focusing on fulfilling the growing demand, but because it’s a stagnating market the providers are looking for market share and the only way to grow is to take share off others.”

The panel, agreed, however, that there have been some real positives over the past year, even in the face of challenging conditions.

“The industry has seen a return to doing new things in terms of new product ideas,” said Roger Edwards of Bright Grey. “We went through a bit of a fallow period at the beginning of the 2000s when there was no real new product development. It was very focused on price, but over the last few years we’ve seen severity plans come out, there’s been a lot of work in income protection to try and make that simpler and easier to apply for and so on.”

However, even Edwards’ upbeat assessment carried some caveats – not least the still onerous nature of the protection application process for consumers.

While Edwards acknowledged the shortcomings of payment protection insurance, he conceded that suppliers of that particular product had, in many ways, understood the consumer experience better than critical illness and income protection insurance providers.

“You can’t get away from the fact that a really simple idea – tick a box on an application form when you’ve taken out a mortgage, no underwriting to speak of – is easy to apply for,” he said. Although teleunderwriting has “of course” improved the process, it can still be “incredibly complicated” to apply for something so simple as protection.

A major concern, Edwards continued, was the simple fact that many people have less money to spend.

“Even though there’s a heightened awareness of the need for it, the bottom line is that people still have to find the money to pay for the premiums and we are in a recession and that is an issue for the consumer,” he said.

Nevertheless, Keith Richards, distribution director of Tenet, one of the largest IFA organisations in the UK, sounded a bullish note.

“From a distribution point of view we’ve seen quite a significant increase in protection sales and a greater focus by advisers both in the investment and the non-investment sector,” he said.

INDUSTRY REPUTATION

Aviva’s Richard Verdin confirmed most participants’ fears when he said that recent customer focus groups hosted by the provider suggest that consumers do not distinguish between the banking crisis and the reputation of other financial services firms.

“When discussing large financial institutions they had exactly the same fears about big insurance companies as they did about big banks,” he said. “That shows the extent of misinformation and, misunderstanding we all suffer from in times like these.”

The ABI’s Nick Kirwan conceded that the insurance industry often fails to “get the message across” that the way insurance companies work is “fundamentally different” to the way banks work.

“We have never got that message over that insurance companies have reserves, they’re not highly geared, the money is there, they do get premiums in first and so on,” he said.

Representatives from the intermediary community, however, said that negative consumer attitudes towards insurers do not necessarily mean that they are less likely to take out protection.

“It is quite ironic because from an adviser perspective, the more negativity that there is the more people rely on them to offer them a great service because I can make clear of things happening,” said Tenet’s Keith Richards.

“The trick is capitalising on this positivity across the IFA community at the moment around protection and giving them added confidence to approach it more often with customers,” agreed Phil Jeynes of Direct Life & Pensions.

Richards warned, though, that too many advisers do not feel like this and worry that they are representing an industry that has a negative reputation. He also expressed concern that the actions of some regulatory authorities are damaging consumer confidence.

“The regulator talks about improving consumer confidence and in the same breath issues press statements saying it’s going to triple fines even if it’s going to drive businesses into bankruptcy,” he said. “What does that say to consumers?”

Nevertheless, participants agreed that the industry itself should take more responsibility for generating a positive reputation among consumers and other parties outside of it.

“Politicians, people sitting in Treasury, people sitting in the regulators and other areas – it’s very important that they hear the right messages from us,” said the ABI’s Nick Kirwan. “It’s very important that they hear that we’re behaving in the right sort of ways.”

Tenet’s Richards, though, said that there are parts of the protection industry which seems almost intent on self-destruction.

“As an industry we do air too much of our dirty linen in public,” he said. “Of course no industry’s going to be perfect, but we do love in this industry, whether it’s manufacturers or other distributors, to have a pop and highlight how bad the next man is.”

Richards implored fellow participants in the debate to have confidence in their own industry’s ability to self-regulate, in addition to the role the regulator plays.

“If somebody does something they’re not supposed to do, then appropriate action is taken,” Richards said. “It should be the end of the story there and that’s dealt with then by the industry and the regulator. But we do love to actually tell everyone about it and that causes us a massive problem.”

Aviva’s Verdin, however, said that it was important that the industry dealt with its own internal problems in public.

“I don’t think that you can sweep these things under the carpet. I don’t think you can keep it within an industry,” he said. “Consumers have a right to know what the issues are, particularly in any industry that’s important to their financial wellbeing.”

“If someone’s doing something wrong, we [should] deal with it as an industry and that’s that,” Richards countered. “And people should rely on the confidence that there are effective bodies around and regulators that will deal with that.”

COMPLAINTS AND CLAIMS

Since the debate was held, the Financial Ombudsman Service (FOS) has released aggregated data showing the proportion of consumer complaints about financial services companies it upholds.

It is the first time the FOS has chosen to do this and participants, who were aware of its plans to do so, expressed concern about potential unintended consequences.

The ABI’s Nick Kirwan said that the way the FOS has published details of consumer complaints might lead people into “quite the wrong conclusions about which company to choose, which sectors, which product types, based on how these things are grouped together”.

Aviva’s Richard Verdin warned that the way the information has been published could result in some “inappropriate behaviours” such as insurers paying customers compensation where it is not due.

“If you [an insurer] want to avoid complaints by paying inappropriate claims, then all future customers will have to pay a higher price for their protection than they would otherwise,” Verdin said.

Defaqto’s Ben Heffer pointed out that such behaviour would in fact be “completely against” the Treating Customers Fairly initiative, because if an insurer is paying claims when it should not be then that is not “fair” to the rest of the book.

“It puts us on the back foot again and if we do have providers who are trying to manipulate statistics by paying invalid claims then that also is going to drive up premiums which he will then penalise customers,” agreed LV=’s Chris McFarlane.

Participants in the debate said that while the publication of complaints and claims data can be useful, it also depends on how it is interpreted and who is interpreting it.

Linton Penman of Unum said the difficulty is that it means the protection industry starts from “a defensive position” and that while the vast majority of protection claims are paid, it continues to be the small number that are declined which become the focus.

“Yes, we have got a strong defence but what is actually in the newspaper is the ombudsman says that this company or that company has declined hundreds of claims,” he said.

There was confidence too, however, that the protection industry has enough positive stories to give advisers and their clients’ confidence.

“There is enough good work done by all the providers to say the industry is quite transparent about claims and it tries not to turn down claims that are valid,” said Phil Jeynes of Direct Life & Pensions. “Advisers have got enough ammunition to overcome this.”

“We all have the great new stories, the great case studies, that we can show how much as an industry we cover in death and disability each month and how much we pay out,” agreed AXA’s David McCormack.

THE ROLE OF THE MEDIA

There were mixed views when it came to discussing the consumer and trade media’s attitude to protection. David Hollingworth, head of communications at London & Countrywide, said the consumer media was warming to the positive stories the protection industry generates.

“I talk to lots of journalists in the consumer media and [in the past] lots of them would be more open to discussing the latest declined payout for a critical illness customer than they would be about putting together a more educational piece about protection,” Hollingworth said. “That has started to change a little bit, but there’s a lot to be done in terms of the consumer feeling, so they begin understanding that people actually need it rather than just being sold it.”

Aviva’s Richard Verdin confirmed this trend, noting that the insurer’s one year of free life cover for new parents initiative generated a lot of positive coverage in the consumer press recently. The insurance industry’s own trade press, however, could do more to promote the positives of protection, he claimed.

“I have not seen a single negative comment from any consumer journalist on the subject of offering free life cover to parents when they need it most,” Verdin said. “Yet the trade media have largely ignored this whole initiative. It’s quite surprising to find that consumer journalists are picking up on the positive and not being negative in any aspect. Yet our own trade journalists have largely almost ignored the initiative altogether. Really surprising. You’ll find that the consumer journalists are more than willing to get behind a good news story.”

Negative coverage in the consumer press, though, still remains a fact of life for the protection industry, said Roger Edwards of Bright Grey.

“Even if the industry gets non-disclosure down to a third of a per cent, there’ll still be that third of a per cent that’s left appearing on Watchdog [the BBC’s consumer champion programme],” Edwards said. “But at least we’ve then got the message back to say well actually it’s such a small amount.”

Edwards also said that the industry should accept that the media is not solely to blame for negative perceptions around protection. The competitive nature of the industry itself means that it is guilty of rubbishing itself on occasion.

“Sometimes as an industry we complain when the media focus on declined claims and non-disclosure,” he said. “But then sometimes when something new and innovative comes out, our immediate reaction is to give our consultants as much negative ammunition on this so that they can rubbish it.”

THE RETAIL DISTRIBUTION REVIEW

The impact that the Financial Services Authority’s Retail Distribution Review (RDR) could have on the protection industry generated mixed views among participants in the debate.

Unum’s Linton Penman said it was still too early to tell what the immediate impact would be, whether in terms of the numbers of advisers selling protection or the way they are remunerated.

“Will the business model of an adviser be so focused on conforming to the new RDR regulations that they find protection does not fit into that model and they actually go the opposite way and stop selling protection?” he asked. “Is there a risk of that or is it okay to deal with one customer and charge them a fee for that bit of advice but take commission on the product for that piece of advice?”

One potentially positive outcome of the RDR debate could, Aviva’s Verdin suggested, be an increase in the number of investment customers who have their protection needs met.

“Could savings and investment advice become more available to those who also happen to have a protection need?” he asked. “Could advisers balance their charging structure in terms of reduced fees on investments by managing their overall income through the protection advice? It could actually expand access to investment advice for people who have a protection need.”

The ABI’s Nick Kirwan said it was understandable that the FSA was looking into the issue of how protection could be affected by the RDR.

“The FSA is conscious that there will be two regimes sitting alongside each other in parallel and it has to think how will those two things rub along together,” he said. “Are there any risks for consumers in that? The FSA has to ask that question. It may perceive that there is a risk that advisers may move out of investments and start inappropriately selling protection to people who do not need it to make extra commissions.”

No participant expressed the opinion, however, that the RDR could result in a wholesale increase in the amount of protection being sold by advisers on a fee basis. Aviva’s Richard Verdin explained that recent customer focus groups held by the insurer demonstrated to him that most consumers would be “apoplectic” at the prospect of somebody selling them insurance on a fee, as opposed to a commission, basis.

Tenet’s Keith Richards added: “Customers can understand that when I am investing their money that I am going to charge them a fee for that. When I am arranging insurances there will be a commission generated and I will disclose all of that in detail to them.”

Defaqto’s Ben Heffer, meanwhile, said that the inherent difference between the two product sets was one reason that he doubted the RDR would result in advisers moving away from selling investment products to protection.

“At the moment some advisers seem to regard protection as second class and don’t really want to engage with it,” he said. “I just can’t see how a direct read across of RDR is going to encourage more advisers to want to go and sell protection.”

In any case, a client who is with an adviser for their investment business has a good chance of having their protection needs met within that holistic advice – if they have a good adviser – Heffer added.

Bright Grey’s Roger Edwards agreed that it would be unlikely advisers would stop selling investment products to concentrate on protection.

“The income that you can get from a protection product is pretty low,” he said. “So a relatively modest size investment IFA would presumably have to double its size or even treble its size to stand still if it just depended upon commission from a protection policy replacing that which it might lose on investments.”

Nevertheless, participants were conscious that if more advisers move into protection to boost income, there remains the potential for protection misselling. However, Aviva’s Verdin said that while the FSA has described the RDR as potentially introducing a distortion into the market, it could be argued that there already is an “inappropriate” distortion in the way that advice is dispensed at present.

“You could argue that it’s distorted because of the way that investment advice has been remunerated leading to many advisers not giving advice on protection,” Verdin said. “The fact is you can miss-sell protection but what you should not be doing is ignoring it.”

ADVISER ATTITUDES

In addition to the specific difficulties facing the mortgage market, the wider economic environment has prompted more advisers to look at standalone protection as a valuable income stream – a trend which participants at the debate hoped would continue.

“There are a lot of advisers who are really good at protection but I think there are also probably a lot more who are pretty apprehensive about it, don’t get involved in it that often, and then forget what they learned,” Unum’s Linton Penman said. “It’s to be hoped that if people are doing more protection now, that might instil a few good habits, get them more familiar with something that was previously a little bit alien to them, and just give them that confidence to keep selling income protection in particular.”

Those advisers who have started selling protection again or for the first time recently will find the industry has taken great strides to make the whole underwriting and purchasing process far slicker than in the past.

LV=’s Chris McFarlane said: “There are still advisers who talk about PHI [permanent health insurance] rather than income protection. If they were to actually go through the teleinterviewing process now, they’d find it’s a lot easier than when they last sold protection.”

“The industry has moved on a lot to make the processes for an adviser to apply for protection a lot easier,” agreed AXA’s David McCormack, pointing to the development of teleunderwriting processes and online and back office systems.

McCormack said he hoped that those advisers who are coming back into the protection market now have experience of protection and will build on that confidence.

“So they will keep selling it because they’ll see actually it’s not hard to get a basic term assurance and critical illness policy on risk and earn the commission for it,” he said. “Providers are spending a lot of investment money and development time in making sure that is as easy as possible for them.”

However, Defaqto’s Ben Heffer suggested that adviser behaviour tends to change according to the economic environment.

“Isn’t there a sense in which people find it difficult to sell equities in a bear market?” Heffer asked. “So they tend to go to the safe haven of protection. I suspect that once things pick up again and they find pensions are more attractive propositions to sell, they’ll probably return to that and leave protection behind.

London & Country Mortgage’s David Hollingworth, however, said that in many cases advisers who have invested time and effort in protection training will build on it in the years to come.

“You will find that people will, from the broker point of view, come to value the advice that they’re giving on protection far more,” Hollingworth said. “In the past advisers partly didn’t have time and partly didn’t put enough energy into protection. They’ll very quickly be changing that in order to develop a better income stream from protection and once you’ve got that embedded in the process – it’s something that we’ve certainly been trying to do – you have much more time and more focus from the advisers themselves.”

Aviva’s Richard Verdin agreed that advisers need help and support to give them the confidence to sell protection more regularly.

“There are good examples in the marketplace, but there are also plenty of examples of advisers who need support in the form of training and education to make that step change from slipping some term insurance into the customer’s pocket as they pass through a housing transaction to providing holistic protection planning advice.”

Tenet’s Keith Richards, too, warned, however, that some advisers still remain nervous around some areas to do with providing protection advice.

“For some advisers it’s not about knowledge, it’s about skill and application,” he said. “Advisers often feel comfortable becoming more expert in investment because it’s positive to talk about. Talking about someone’s portfolio and their aspirations for the future or saving the money on their mortgage deal and that sort of thing, that’s really positive news. Talking about protection is a tough one.”

PROTECTION AND THE MORTGAGE MARKET

The difficulties in the mortgage market over recent months have, of course, caused problems for many advisers and insurers selling protection products. However, participants in the debate remained upbeat in spite of the inevitable fall in sales.

Ben Heffer of Defaqto said that divorcing protection from mortgages could in fact be “the best thing” for the protection market in the long run.

“If you’re actually approaching people when they take out a mortgage, when they don’t actually have much money, it’s always going to be price-driven,” he said. “If you could actually get it away from mortgages, you would have the opportunity to approach people when they had more disposable income, when they could afford to actually take out some income protection, for example, as opposed to just covering life with a bit of critical illness on the side.”

The ABI’s Nick Kirwan said he doubted the mortgage market would return to the way it was and that “might be quite good” for protection.

“If lenders insist on not-so-high, lowto-value propositions and people have bigger deposits, then customers that the advisers do see are probably going to be more able to afford the protection products to go alongside their mortgages as well,” he said.

Moreover, it was suggested by Phil Jeynes of Direct Life & Pensions, those mortgage brokers who are now getting into the habit of advising on protection are actually going to keep looking to it to keep their income up in the years to come.

“They’re not just selling basic term assurance as perhaps they used to but actually are looking at income protection more seriously,” Jeynes said. “They recognise that actually if they are just broking the same old products, the risk that their customer can go online and get the thing cheaper just as easily is very real to them.”

According to Jeynes, Direct Life & Pensions has witnessed a “huge” growth in protection business over the past year year.

“It’s not just because we’ve recruited lots of intermediaries who need a new home, it’s actually the existing intermediaries we’ve got who are really putting their nose to the grindstone when it comes to protection,” he said.

Some insurers at the debate were more cautious, however, about the impact that the problems in the mortgage market could have in the longer term.

“It strikes me that there are winners and losers in this market, but the market generally is just remaining pretty flat and stagnant,” said Aviva’s Verdin. “We’ve all seen the flip-flop from mortgage protection into non-mortgage related protection advice, so there’s been almost a balancing of the books in terms of total volume of sales that are being written at the moment.”

“Mortgage sales have gone down and non-mortgage sales have gone up,” said Bright Grey’s Roger Edwards. “But I do think that the recession is creating an environment where the man on the street is thinking about protection more than they’ve ever done.”