As analysts search for someone to blame for the persistent focus on policy cost instead of benefit, Clive Waller explains that a different approach is needed to regain consumer trust
It seems like the protection sector has been involved in a price war that has lasted as long as the Cold War.
This is a strategy that, ultimately, benefits no one - neither customers and distributors nor insurers and reinsurers.
So, why is this happening?
Firstly, the manufacturer, the insurer, wishes to charge a premium that will maximise profitability by paying as few claims as possible.
Secondly, the consumer, or policyholder, wishes to pay a reasonable price and be assured that the policy will pay, without question, in the event of a claim.
And thirdly, the distributor expects to be paid for selecting the best deal for the customer.
Obstacles
Some 20 years ago, application forms were one or two pages long and the vast majority of applicants were accepted at standard rates of premium and non-fraudulent claims were paid.
Today, application forms are typically 25 pages long, some advisers claim that less than half of their applicants are rated as standard and 10% of life claims are declined and far higher levels of critical illness (CI) cover and income protection. That is considered progress.
The reason behind this lemming-like journey is the simple fact that post-Financial Services Authority (FSA) 1986, many advisers have brokered protection business on price only. Consumers, in their ignorance, have not helped either. Now they are able to compare products, read prices, on the Internet. But this is hardly surprising as this is what the industry tells them to do. Some examples from various providers are as follows:
n "If you take out a policy with us and then find a like-for-like policy from a competitor at a lower cost, we'll give you £50."
n "If you apply for Tesco Life Insurance or Tesco Mortgage Life Insurance and then get a cheaper policy elsewhere, we'll give you 1,000 Clubcard Points."
n "Compare over 300 life insurance plans - get our cheapest quote now!"
n "Five ways to obtain the cheapest life assurance."
Now one may think that the customer benefits in a price war. The reality is that some do - but by very little.
To be quite clear, sales will not increase if prices are cut. It is not a price-sensitive market. Indeed, in recent research conducted by CWC Research in association with Scottish Re, advisers stated that sales would not increase one iota if rates were cut by 10%.
The problem with cheap insurance is that claims are to be avoided as there is less available in the claims pot.
Insurers deal with this in a number of ways:
n They go through a great deal more effort to avoid poor risks by asking for much more information, resulting in magazine-like application forms.
n Standard rates are limited to so-called preferred lives.
n They are much tougher when assessing claims.
n Reinsurance contracts are negotiated with tough conditions on claims payment.
Apart from vegan camomile tea drinkers, who benefits?
Well, most applicants do not. In fact, many lose out badly. It is bad enough that nearly a quarter of CI claims fail, but it is staggering that 10% of life claims are declined.
Most insurers do not benefit from a price war and, furthermore, distributors do not, as they have a great deal more paperwork and are, or should be, concerned that they could be implicated should a claim be declined for non-disclosure.
How can the industry stop it? With a great deal of difficulty.
It is unlikely that an insurer can, or will, go it alone. The consumer is blissfully unaware. Only the distributor can make a difference - and should.
The role of the intermediary distributor is to find the best deal for their client. The whole of life market intermediary is expected to look across all providers; while the multi-tied intermediary selects the best from a range. Presumably, the single tied intermediary has a duty of care to ensure that the provider meets all important criteria.
The reality is that protection business, especially term life, is brokered purely on price.
Advisers typically state that bad service is not an excuse to exclude a provider, as they expect to take the pain on the customers' behalf. This argument will not survive a move to fees.
A prominent accountancy-based IFA told us that commission is essential on large key person and loan protection cases, as the cost of processing is far more than a client would ever be willing to pay on a commercial-fee basis.
The other key issue is claims. It seems the nature of reinsurance is a relevant issue. Reinsurance treaties can be changed during the life of a policy. The terms and conditions could well be tighter under a new contract as rates are being cut. Declinatures where there is non-related non-disclosure are usually as a result of the reinsurance contract. In such instances, some providers will pay even if the reinsurer does not, others do not.
Most advisers are not aware of the intricacies of reinsurance. Moreover, the vast majority do not have experience of claims to the degree that they can compare one company against another. This is not conjecture, it is based on the aforementioned research on a sample of distributors including the majority of protection specialists together with representatives of all sectors.
Change
The time has come for change. The FSA have made it quite clear that the Treating Customers Fairly principle will be ignored at a high cost. We also live in an increasingly litigious society. The majority of insurers and reinsurers believe that advisers are at risk of being sued where a claim is declined and where they help advise the proposer when completing the application, or cannot prove that they did not.
By most measures, commission on protection business is high. The customer has a right to expect the adviser to ensure all purchase criteria are researched adequately. A move to a fee-based model will ensure that adequate service is a criterion for selection.
The only way change will occur is for all parties to buy into it. Distributors will have to demand change. The trade associations, the Association of British Insurers (ABI) and Association of IFAs, should work together in the interest of all of their members. The ABI has already expressed the view that declinatures are too high.
The FSA in the Insurance Conduct of Business interim review expresses concern over claims handling and referred to the Law Commission review. The possible imposition of a five-year non-contestability period has had a mixed reception from the industry. While some are against, many appreciate that it could have been a lot worse. Many in the audience at the Protection Review Conference in July were amused by the number of insurers saying that non-related non-disclosure must be ignored, thinking "You are the insurers - just get on and do it".
It would be better for all if the industry changes willingly rather than have a solution imposed.
Protection is the core component of any financial plan. It does not matter if someone defers decisions on investment or retirement planning for a few months. Disability and death do not give notice. However, there is little point in protection policies that do not pay out where fraud has not taken place. The consumer will lose faith completely and everyone loses.
Clive Waller is senior partner at CWC Research and co-founder of the Income Protection Task Force
