By way of a Christmas present, the FSA and the OFT are consulting on guidance about new post PPI products, such as short-term IP (STIP).
This is new and welcome. Normally they act after the event.
On the other hand, it is strange that the consultation contains no mention of the HMT work on simple products – a threesome was too much for them. And no mention of the FOS either.
Although the product range covered is narrow, the paper is especially interesting because it covers themes that may be applied to new product development more generally. The deadline for comments is 13 January 2012.
A theme that comes up repeatedly for providers and distributors is that new products should reflect the needs of the consumers they are targeting.
For example, a STIP product is inherently unlikely to meet the needs of consumers who do not have an income to protect, or those who would have sufficient alternative sources of income if they were unable to work (for example, through existing insurance cover, or savings or pensions).
Nothing new there from what happened with PPI, but it goes on to talk about providers seeking to widen target markets by increasing the events covered by the policy to include secondary features which cause a consumer to buy on the basis of the secondary feature only. It also mentions the need for providers to inform distributors of the target market.
Finally, it says that providers may reduce this risk by designing products which offer flexibility around the events covered – for example, where the consumer can choose separately whether to include cover for accident or sickness, unemployment and any secondary features.
Where product design is flexible the consumer can make active decisions about which elements of cover they want. This may also improve consumer engagement with product features and so improve consumer outcomes. For IFAs, exploration of consumer need and engaging with them to help in choices is bread and butter stuff.
But what of increasing numbers of tied distributors who cannot offer full choice post RDR? And what does this do for the concept of vanilla or white label products traded between providers or aimed at no market in particular? This will be an interesting debate as market change unfolds.
Another linked theme is exclusions. Here, an insurer’s discretion to limit the scope of cover is constrained by the need to align the events covered by the protection with the needs of the target market.
For example, in the case of accident or sickness cover, the provider should not exclude some of the most common causes of claim, such as stress or back pain. These restrictions were common for PPI, but what of IP with payment limited to ADLs?
Finally, what about caps on benefits expressed as a percentage of gross income or deferred periods before payment.
Here, we have that old conundrum – guaranteed payouts that people can understand but that may not meet their income needs vs higher potential payouts that may result in over-insurance vs cost of policies.
Here the paper is patronising towards lower income groups – worried that people might not have the money to live at the same level as when working, they effectively say that they should be sold more expensive products (that they cannot afford of course) so they get income exactly when they need it and at exactly the right amount (whether or not they end up being over-insured). For this theme the consultation is seriously out of line with simple products.
Richard Walsh is a director and fellow of SAMI Consulting, www.samiconsulting.co.uk
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