The ABI's Nick Kirwan takes a broad view of the individual IP market and investigates whether the Protection Committee can save the lagging product from its current state of limbo.
For the last 20 years at least, people have been asking when there will be a breakthrough in the individual income protection (IP) market. Now, the industry seems determined to sort out the position once and for all. But is individual IP actually broken? And if it is, does it require an industry-led solution to fix it.
It is important to be able to answer these questions because without the answers competition law prevents competitors getting together to produce industry-wide solutions. For the industry to be able to work on solutions together, it has to be able to persuade the Financial Services Authority (FSA) and the Office of Fair Trading (OFT) that it is in the interests of consumers for it to do so, that there is consumer detriment and that industry intervention is required to address this.
These questions are difficult to answer so it is perhaps worth exploring some of the arguments on both sides, starting with the question about whether consumer detriment exists in relation to IP at a market level.
One argument is that IP is more suitable for meeting consumer protection needs than payment protection insurance (PPI) or critical illness (CI). This could point to some market failure resulting in consumers getting a sub-optimal solution to their protection needs. But can the argument be proved?
Once starting to analyse the market, a much more complex picture starts to emerge. For example, there may be other reasons why PPI and CI outsell individual IP that have nothing to do with any market failure. One possible explanation is that the market for individual IP is just a lot smaller than that for PPI or CI. For example, CI could, in principle, be suitable for any adult who could afford it, while it could be argued that IP is only likely to be the most suitable protection product for a subset of the adult population.
Others point to the imbalance of sales between IP and PPI as evidence of consumer detriment, arguing that IP can pay out for as long as required whereas PPI is usually limited to a maximum of a year. On the other side of this argument is the fact that whether people should choose IP or PPI also depends on what event the buyer is most concerned about covering, ill health or redundancy.
What all this adds up to is that it is not clear whether the market is causing detriment to consumers evidenced by lower sales of IP than PPI or CI. To help answer this question, the Association of British Insurers (ABI) has commissioned some consumer research. The results should be available soon but until then, the industry is unlikely to be able to set out a compelling case for industry intervention.
It is also possible that there is consumer detriment through some kind of product failure. But this is not straightforward. On one hand, why does individual IP generate more complaints at the Financial Ombudsman Service (FOS) than CI, despite only covering around one sixth the number of people? Does this point to some failing in the product?
To answer this, the cause of the complaints that go to the FOS need to be understood. For example, if a significant proportion of complaints are about people who end up with less benefit being paid than they were expecting as a result of having more than one income replacement-type policy, it may be possible to build an argument for introducing an industry-wide co-insurance clause.
While this would make it easier for consumers to understand this aspect of IP, it would hardly lead to consumers suddenly clammering to take out IP.
Clearly, the reasons why IP is not selling as much as the industry would like are much more fundamental than this. At an industry workshop, the great and the good of the industry sat down for a day to brainstorm the reasons for the lack of individual IP sales and it was collectively agreed that the problems lay in five specific areas, including:
n Raising awareness of the need.
n Simplifying the transactional aspects of IP.
n Clarifying the proposition.
n Ensuring that the wider environment supports IP as a proposition including the Government and the FSA.
n Raising standards of advice and ensuring advisers always give a high standard of advice to their clients, and are rewarding for it.
However, the questions about competition law remain. Unless the industry can show that there really is quantifiable consumer detriment, and that industry intervention is required, it has no mandate for working together for generic solutions. It looks as though everything hangs on the ABI research that will soon be published. No doubt many in the industry will hope it reveals the answers required to work towards some positive solutions. n
Nick Kirwan is head of health and protection at the ABI
