The modern obsession with the price of insurance risks seriously undermining the quality of products, and this is especially the case with budget protection, which has attracted a reputation, unfairly or otherwise, of being a bargain basement offering that cuts too many corners. Peter Carvill reports.
One of the most interesting things to have occurred on the British high street over the last 15 years has been the increase in sales outlets, which have the sole purpose of selling branded goods at discounted prices. Once a rare sight, these shops have become ubiquitous on the streets of the UK. There are even shopping complexes that specialise in discounted products, and the glib jokes about there being more bargain stores than normal stores have gradually become wry observations.
The protection industry has followed suit in what has been described as 'Bargain Britain'; cutting, reducing and slicing the cost of policies in what many observers of the markets have said is an undeclared 'rate war'.
A quick glance around the market speaks for itself. A UK-limited Google search of the word 'insurance' brings up nearly two million results. Of the sponsored links, two of the top three contain the word 'cheapest' and the third sells itself as being able to compare over 300 market prices. Of the secondary table of sponsored links, three of eight contain variations on the word 'cheap' and the other five offer large discounts of between 10% and 65% on a customer's present policy.
A UK-limited search on the term 'life insurance' brings similar results. Of the 11 sponsored links, a derivative of the word 'cheap' is used in four and each link either promises a comparative search of hundreds of providers or sells itself on a low price. The Post Office offers life insurance at just £5 a month with a £100 cashback option, and Moneysupermarket.com offers policies from just nine pence a day.
But, if the prices of policies are being continually lowered, and companies are competing solely on price to attract new business, are budget protection policies still a viable alternative or even an option?
a guiding hand
The products themselves come in many forms and flavours but they are pretty simple at their core: regardless of which type of policy it is, budget protection policies have elements removed or reduced in order to make the product cheaper for both the provider and the purchaser. And the result is what many see as an inferior and weaker product that can leave customers exposed if the worst does happen.
A budget protection product differs from a standard one in one or more ways. There will be a lower level of payout; shorter terms of benefit; earlier retirement in income protection packages; a longer deferment period; and income could be limited to less than half of previous earnings.
But with prices having dropped so much in the last few years and protection having become so much cheaper, how much of a market is there for budget protection products?
Iain Mallon, director of marketing and protection for Axa, believes that there is still a market for budget products but only because a focus on cost is blinding consumers to what these policies contain and what they would actually cover. "The emphasis is on price. You always have to be competitive but these policies are cutting back on things like cancer, heart attack or stroke. I think there have been some attempts that haven't been successful. If you started explaining this at the point of sale, people aren't stupid. They just want stuff explained as simply as possible."
Overall, Mallon does not see budget protection as much of a product, claiming that it is its deficiencies that make it so cheap and he raises doubts about the thoroughness of the assessment process: "With prices so low, I don't see budget protection as a good thing to have. It means that you're compromising the product or the underwriting, which isn't in the best interests of the client."
Agreeing with Mallon, Roger Edwards, Bright Grey's product director, says that the problem is in educating consumers and getting the message across that the cheapest options are not always the best. Edwards compares the insurance market to the sale of sofas, and wonders why the sector does not take a similar approach, highlighting the good deals that a lot of protection products have.
He adds: "This is an interesting time of year because the word 'sale' is plastered across every single shop in the land," he says, "I always think it's interesting that DFS sells double-discounted sofas, and the consumer looks at that and thinks they've saved money when, in actual fact, they've just spent money. Consumers are not aware what a good deal a protection policy is. Life protection can be very good value."
Educating the public
Edwards believes that if consumers are educated properly about the differences between budget and full cover, and the price differences between the two, everyone can be a winner. "If you tap into that sort of mentality, why don't we say 'We're having a life insurance sale.' Most people have been cutting rates all year, which is what DFS have been doing with its sofas."
In conclusion, Edwards believes that education is the key: "We have to communicate strongly about what good value is."
With the advent of Treating Customers Fairly (TCF), it was felt by several industry commentators that the underwriting process that comes with budget protection was, at worst, flirting with falling foul of the new principles-based regulations from the Financial Services Authority (FSA).
Mallon believes that the underwriting process for budget protection is inherently flawed. "In budget options, you have often either got cut-down products or cut-down processes, which mean that the underwriting can't be full enough, and therefore you have non-disclosure issues."
Mallon says that non-disclosure in applications for budget protection is a big issue, and that it would be eradicated easily through a switch from paper-based applications to tele-underwriting. He cites a recent study done by Axa of 10,000 applications as evidence: "We did full medicals to find out levels of non-disclosure. We found that paper processes had five times the level of non-disclosure as tele-underwriting, and electronic applications had three times the levels. That doesn't mean clients are liars, just that the process doesn't extract information in the same way."
Keith Thompson, the director of financial services for Blackadders Financial Services, is critical of budget protection because of the exemptions these policies contain. "Whoever takes out budget critical illness is always going to end up with an illness that isn't covered. That worries me," he says.
Thompson goes further and suggests that the UK's changing demographics will make many policies obsolete in the long run. "In the old days, it just used to be life insurance. Now you have to protect income and against illnesses that prevent you working as well."
Should a customer be seriously considering whether to take out a budget option or opt for a more expensive policy at a higher cost, Thompson will take a close look at his client and seek to understand exactly what they need. "We have to identify if it is life insurance that is required or something else because people are living longer and no longer dying but having their earning potential restricted," he says.
Covering all the bases
In similar circumstances, David Brunning, managing director of Brunning Newman Houghton, would not recommend budget protection in lieu of being fully protected: "If someone has a budget, we will try to do the best job within that, but we will not say they are fully covered if they have the stripped-out policy. They don't understand the limitations nor will it do the job."
Edwards, offering a more pragmatic view, returns to the image of selling a discounted sofa, and reiterates that the public's appetite for a bargain must be met head-on by a drive to educate on what these policies contain and how the interests of their buyers may be better served: "I have always been one of these people who believe the UK population is so uninsured that some protection is better than none. I would be supportive of that [the taking-out of budget policies] if the individual understood what the consequences of that plan were.
"What DFS don't do is discount the sofa and then sell it without the cushions." n
