With the current economic crisis adding to a widening protection gap Linton Penman says consumers need to see the need for critical illness and advisers must embrace new products
According to Swiss Re's Term and Health Watch 2008 report, protection sales in recent years have been in steady decline. The protection gap stands at an impossibly huge magnitude that would not appear out of place in the non-stop commentary about the state of the US economy.
So what is the protection industry doing wrong? Why is it that arguably the most developed insurance market in the world leaves so many of its consumers with wholly inadequate levels of financial protection in the event of adverse life events? In plain speaking, how is it possible that so many people in this country lack basic financial provision enabling them to look after loved ones or repay debts in the event of their death? Or perhaps more importantly, lack the cover they would need if they become unable to work due to illness or injury and have insufficient income to live on?
The report quite rightly points out the link between protection sales and mortgages, in which case there is little doubt that the recent crises in the banking world will have a deeper impact on waning sales. But arguably, there is a more fundamental reason: people just do not see the need for protection.
Naturally, faced with an alarming drop in mortgage fee income, mortgage advisers will fall back on protection sales to support their earnings. They will have access to existing clients, many of whom will understandably have put off the decision to sort out their life, critical illness (CI) and income protection (IP) cover for another day with the intention to later review their needs when they have settled into their new home. For many, that day is now dawning - unless of course, it is the day their fixed rate or discount has run out and they are desperately trying to re-mortgage.
There are always winners and losers in any market and one of the more important changes in distribution trends has been the emergence of the online, non-advice, and largely price-led, intermediaries.
Cheapest option
Consumers, in the main, see no real difference in the wide range of products available in the market; increasingly, they are being tempted to make their decisions based solely on price, via the internet, from the privacy of their own home or office. They do not appear to see much value in seeking professional advice. This is bad news for financial advisers.
And here lies the problem with CI cover: providers have turned the product into a commodity and have been driven by the market to compete on price. But what about the changes made to CI definitions over the years? Advisers may argue they make a choice on the quality of cover not just price.
This is the second mistake: the industry has turned to product-led, rather than customer-led, product development. In other words, it has lost sight of what the customer really wants and instead relies on fairly small, internally driven technical improvements to gain market share.
In the case of CI, it has fallen into the trap of competing on the basis of which provider has the longer list of conditions, or which will pay out for angioplasty if only two arteries are blocked rather than three. That may make one provider's cover slightly wider than another's and, of course, this has led to product improvements, but is it really going to make more people buy it in the first place or buy the amount they really need?
Arguably, this kind of innovation does not make a difference in the overall scheme of things. In fact, it may lead to precisely the opposite: financial advisers faced with making a choice between competing products - based on medical technicalities that they simply do not understand - often do nothing for fear of recommending the 'wrong' product.
Advisers and providers must think much more about what their customers really want or they will end up confusing them too. No wonder comparison sites such as confused.com attract such a keen response to their adverts.
What do consumers really need? What is the cover actually for? What financial predicament is trying to be solved? If advisers' only intentions are to treat CI and IP as add-ons to mortgage sales, then no wonder the industry is in trouble.
So what is the solution for CI? The problem here could be that it focuses on diagnosis. In one sense, it is the simplicity of the concept that is its attraction: if someone is diagnosed with any of the conditions on the list they get paid a significant cash lump sum. In fact, it has come to be regarded almost like a lottery win.
Working out costs
But what is the money actually for? It may be to enable the customer to pay off their mortgage, or to pay for treatment or nursing care. It could be used to buy special equipment, to go on a cruise of a lifetime, or to replace loss of income.
This, of course, is where its use starts to get a bit woolly. People generally know how much their mortgage is, but would they know how much these other things cost and indeed which would be required? The question is how much income would they need and for how long?
If a client's concern is to provide money in the event of an incapacity that results in a loss of income, a better solution can usually be found in IP. Forget the requirement to meet technical definitions of specified medical conditions. Instead, take cover in a product that provides a regular income in the event of any incapacity that prevents a person from earning a living. And unlike CI, there is none of the headache of having to invest a lump sum to provide that much needed alternative income.
Bear in mind that the biggest single cause of long-term incapacity is stress, depression and other forms of mental illness, followed by musculo-skeletal conditions such as back pain. None of which would be covered under a CI policy unless they had manifested themselves into one of the listed conditions.
Therefore, the diagnosis is not really the issue, but it is the financial impact of the medical condition that really counts.
Severity lacking
The industry needs a CI product based on the financial impact of the event - one with severity based definitions and corresponding payouts. Large payments are crucial for major illnesses that are likely to seriously impact life expectancy and have major financial repercussions, such as invasive cancer.
A much smaller payout would be made for events like a minor heart attack or angioplasty that, while serious, a good recovery is likely and would probably lead to only a short period of absence from work meaning reduced financial implications.
There are some conditions - multiple sclerosis perhaps or loss of limbs - which are not immediately life threatening but are disabling and will have serious financial implications over the long term.
If products with a benefit linked to severity are such a good idea, where are they? Unum and Pru Protect have been acclaimed in various product reviews but are yet to deliver the volume of new sales the industry would like to see. So, what is the problem?
Unfortunately, quotation portals like The Exchange where products can be compared with each other do not help. With no similar benefit linked to severity products with which to compare, these new brainchildren cannot go on the system, or at least not in a format that shows products off to their best advantage. And since most CI product definitions follow the Association of British Insurers' new standards, the only easy comparison to make is one based on price, which has led to the emerging success of the online distribution model.
But advisers must share some of the responsibility too. Often providers deliver new products designed to meet customers' needs, or provide opportunities in new markets, only to be told the problem is they are unlike anything advisers already know, or that they fall outside the market they operate in. But as far as Treating Customers Fairly and best advice are concerned, how can advisers make a soundly based recommendation if they have not taken a proper look at whether their usual recommendation really fits the customer's specific needs or whether something new may do a better job?
- Linton Penman is head of retail marketing at Unum.
