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Comment: The downside of self-reliance

What happens to insurers when the public takes risk management into its own hands?

November 2009 News

A few weeks ago, I attended a high level roundtable discussion on how risk management impacts local government – a vital subject given that the sector faces severe cutbacks whoever wins the next election.

Sponsored by Zurich Municipal and attended by local authority chief executives, chief financial officers and others at the heart of the billions spent in our name, participants told how risk is what keeps them awake at night. They said that part of the culture they were trying to end involved risk being internalised and probably buried until something happened to make the media. And if you don’t think these are headlines they all wished to avoid or that there’s no such thing as bad publicity, think child abuse scandals or the way local authorities stuffed cash into Icelandic banks.

So what has this got to with protection? As Zurich Municipal, by far the biggest insurer of local government in the UK, puts it, risk management must be very close to the heart of insurance.

Risk management can be dismissed as one of those buzz phrases.

It could, however, be a concept more understood by the potential customer base – even if unconsciously – which makes a far cannier risk assessment before signing up for a policy. If this is so, it may be that the insurance industry faces the prospect of a long term secular decline that has been seen elsewhere from coal mines to compact disc stores.

Taken broadly – and this will not make me popular in the protection world – local government claims to provide a lot more obvious protection to people than insurers including fire, police and other emergency services and increasingly, thanks to sharing of back office functions (sometimes front office as well), it is involved in primary health delivery. On top of that, there are social services which reach people and offer services which are beyond the insurance scope.

So if it is going either to stem the decline or re-invent itself what can protection learn from a sector where many leading lights would prefer to take an immediate 20% budget cut than suffer ten years worth of 2% cuts?

First, let’s get realistic as local government has been forced to do. It realises it can no longer be all singing all dancing.

But insurance sales have not changed in generations despite massive regulation with an over-emphasis on scares.

Take critical illness (CI). Ever since the product first arrived here 25 years ago, the sales pitch is to frighten with figures such as “a quarter of people will get cancer by the time they are 65” or “strokes will hit one in seven”.

Does it work? New Scottish Provident figures state only 15% has a critical illness (CI) plan. Is that vastly different from a decade ago? Almost certainly not although the large amount of bad press the product has received cannot have helped.

Take income protection. The same survey found that 91% had no cover. Again, this is after decades of spelling out the dangers.

The insurer acknowledges that the “lives we lead these days are very different from those of previous generations”. Yes, there are same sex civil partnerships, “blended families” where children are from separate past relationships, child raising at later ages, and people taking long sabbaticals from work – they’re all covered in Scottish Provident’s “Life Matrix”, a manual to help IFAs target clients and sell product.

But worthy and attractive as Life Matrix is, it fails to address why protection remains a minority taste.

Why are people not more frightened into buying cover by the shock statistics? Is it cost? Probably not. Scottish Provident points out that you can buy a lot of term cover for a tenner a month and even with CI added, it’s less than most mobile phone contracts.

The uncomfortable problem is the target audience increasingly does its own risk management. For all the scare tactics, people look around and fail to see risks becoming real. So they question why they should pay anything to insure against a possibility which they do not see impacting either families or friends – unlike motor insurance where crashes and smashes are part of everyday life.

But on top of that, protection insurers have to contend with the “fat factor”. Leaving aside the mortgage and taxes, much of the disposable income of the social groups that could afford insurance goes on non-essentials. Some now downsize to four or three days work a week knowing that while they will have to give up some fripperies, they make up for that in “quality time”.

They may even discover how many things are free – libraries, museums, music downloads as well as the NHS. They also work out that many items such as expensive holidays or restaurant meals are not that missed. And there’s also the fear that insurers won’t pay out so why bother paying in for a possibility you can cope with.

Many families have calculated that either the feared event won’t happen or that, if it did, they would survive. They have worked out the risks for themselves and decided, effectively, to self-insure. Some even say the very worst could not be as bad as living in parts of Africa.

How does protection cover go forward? Scottish Provident has come up with the Four Ps as the core for marketing pushes. These are “product, promotion, price and proposition”.

These are all inward looking. To succeed in a future where nothing we now take for granted will necessarily remain true, the insurance world has to look outwards.

There needs to another P which stands ahead of the four cited. And that’s “Partnership”. There could be far more two way traffic than the adversarial sales relationship that characterises so much we do. The mainstream could learn from the all too often derided friendly societies (the real ones, not just the tax-break grabbers) some of which can put forward a model of bilateral involvement that might represent a path ahead.

I don’t pretend to have the solution. But until insurers understand how the public now manages risk, the future looks shrinking.