Affordable premiums, customer-friendly sales processes and complete confidence that valid claims will be paid. Warren Copp ponders a utopian protection industry
Critical self-reflection has been one of the catalysts for positive change in the life industry in recent years and should remain so in the future as the sector faces major challenges.
There is a risk, however, that if the industry's successes are not reflected upon and communicated, this could contribute to a negative perception of protection in some key areas.
Life premiums, having halved in cost over the last 10 years, currently offer excellent value to the customer. Affordable guaranteed critical illness (CI) rates are now available from most protection offices and increasing interest in income protection (IP) from providers will drive price competition in this market.
Excessively fierce competition can, however, be a double-edged sword for the consumer. In particular, the upside of attractive prices has been offset to some extent by higher claims declinature rates over the last five years.
The recent Association of British Insurers' (ABI) publication on non-disclosure and Treating Customers Fairly (TCF), developed following dialogue with the Financial Ombudsman Service (FOS), is a significant step towards resolving this issue. Concessions made under these guidelines will give customers the benefit of the doubt and reduce the number of declined claims to an acceptable and sustainable level. Assuming the industry is supported by sensible interpretation of the FOS guidelines, pricing adjustments will be marginal and worth the cost to the customer because of the added confidence and security they will bring.
Importantly, the guidelines demonstrate the willingness and ability of the industry to take positive action in response to a key issue without external intervention.
The change in claims practices makes particular sense against the emergence of point-of-sale underwriting as motivation for insurers to reduce non-disclosure at underwriting stage will be higher following the changes and process design to draw out disclosures will move increasingly to the fore.
Accusations of transferring risk to consumers through underwriting at claims stage should be much less common and easier to defend in future, partly due to gradually improving disclosure levels and partly due to the positive impact of the new claims management guidelines.
Protection products should be staple purchases for most of the adult population. Assuming the industry is paying the right claims, offering access to protection products is tremendously important for all stakeholders, not least the end customer.
The UK life market is already one of the most successful in the world at reaching its population with protection products through the combination of individual and employer-sponsored markets. Measuring premiums as a percentage of gross domestic product and by a premium volume per capita measure, the latest Swiss Re sigma publication World insurance in 2006, shows the UK as number one globally for life business, excluding cross-border business.
Further development of underwriting processes has to be one of the key priorities in building on this position and protecting more of the UK population.
The life market has invested heavily in making protection simpler to purchase and the UK leads the way worldwide in point-of-sale underwriting of "proper" protection cover.
Software packages developed in the UK dominate international markets for 'expert' underwriting systems. The UK remains the only major life insurance market where interactive electronic underwriting is integrated into web-based offerings across a wide spectrum of providers.
Tele-interviewing expertise is also developing fast and the service offers complete outsourcing of the application process which is attractive to the intermediary.
Focused tele-interviewing is beginning to significantly reduce reliance on medical evidence and improve customer service. A recent initiative by Pioneer Friendly Society, in conjunction with Morgan Ash, identified targeted tele-interviews delivering very comparable information on the same lives and turnaround times approximately four times faster than general practitioners' reports. In addition, each interview serves as an opportunity to review the key information submitted on the original application form.
Insurers should be encouraged to continue striving to find the optimum balance between managing risk and making protection easy to buy in an environment that treats customers fairly. While more development is still possible, the industry has built a solid foundation.
Industry focus has not just been on moving business quickly - over the last five years the clarity of the underwriting process has been incrementally improved.
Insurers now work within ABI guidelines relating to clarity of application form wordings and design of electronic- and telephone-based underwriting processes. Warnings to customers are given much greater emphasis. Insurers are expected to ask clear, specific, questions about individual risk areas. This development has had the knock-on effect of making the questioning process more time consuming which is an ongoing challenge for insurers looking to develop their propositions.
Extended use of confirmation schedules has enabled more customers to reflect on the answers submitted on their application away from the sale environment. This has been a key development against the background of intermediaries utilising electronic underwriting systems on behalf of the customer.
Use of the telephone in the process will, in time, contribute towards improved rates of disclosure. Various studies by different providers show material non-disclosure in excess of 15% being reduced to negligible levels through the use of tele-interviews. The use of recorded telephone conversations should further improve the underwriting process through absolute transparency of any failures.
From a product perspective, perhaps the key reflection should be that consumers have access to competitive markets in all product lines.
The UK market has developed a risk management framework which supports the widespread writing of disability products on guaranteed rates such as CI and IP. This is not always the case across the globe, and, in particular, differs significantly from other large sophisticated markets such as the US.
Industry best practice guidelines have improved CI products in terms of consistency and clarity. The ABI has been given the go-ahead to carry out a similar review of temporary partial disability benefits given the clear issues with claim rejection rates and consumer understanding of the product. Best practice guidelines exist for IP covers but there remains great potential to develop product consistency further in this area.
Developing new generation payment protection policies represents an urgent challenge for the industry. Well-designed solutions in this area offering valuable benefits to a large number of customers presents a massive opportunity for protection providers.
Product design has been a major area of potential differentiation for insurers. The good news is that activity has progressed somewhat, from the seemingly interminable race to see who could include the greatest number of CI in their product towards an increased focus on interpreting what consumers may value, or benefit from, in new products.
This has ranged from a complete rethink of product design to changes or product pilots which address areas such as continuing duty of disclosure, benefit limitation on IP and contestability limits. Hybrid products which blur the clear demarcation between product lines have also begun to emerge.
Product development activity has become more diverse and insurers should be encouraged to continue this free thinking. Not all ideas will succeed, but at least insurers are trying to construct products closer to meeting true customer needs. Ultimately, the market, intermediaries in particular, will decide which developments are successful and these will become mainstream in time and further improve the industry's products.
There have been many positive aspects of recent or planned activity in a number of key protection areas, but we have not come far enough yet to indulge in mutual backslapping although positive developments should be recognised on the grounds that these may inspire future success.
Some of the most marked improvements have been in the area of raising standards and confidence in ensuring the fair treatment of customers. Their interests have rightly become an integral influence in developments active within the industry. However, there is a potential danger that TCF becomes the perceived mandatory justification for everything the industry does and it should be remembered that providers are still allowed to be commercial entities.
Insurers have been innovative in their approach to point-of-sale acceptance and in reducing underwriting times, these developments should be encouraged. Assuming insurers write and manage business fairly, improving access to protection cover should sit just about as high on the TCF chart as anything else the sector can contribute.
- Warren Copp is chief underwriter for Scottish Re.
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