With a sizeable cultural gap between the US and UK, it would be fair to assume the protection markets are as divergent. However, the reality is quite different, writes Michelle Finlay
As with almost everything across the other side of the pond, things are "same, same but different". The same can be said for protection insurance.
Term and whole of life are the main traditional life products sold in the US. Term life tends to come with distinct terms, typically 10, 20 or 30 years, and a guaranteed insurability (conversion) option for whole of life. Disability income and accelerated death are also offered, however, the scope of coverage provided by these riders can be quite limited in comparison to that offered in the UK. For example, the accelerated death benefit pays out on diagnosis of five to 10 conditions. Disability income riders may only provide accidental death, or accident and sickness benefits, and, where total disability is covered, benefits are typically limited to two years.
Unlike the UK market, critical illness (CI) and disability income cover are primarily sold as stand-alone products, and more often in the group market, with much lower sums assured - typically $20,000. However, there have been disability income sales struggle over recent years, and CI has failed to take off, principally due to the litigation risk over interpretation of definitions. There is no Ombudsman in the US.
Term assurance is predominantly sold through affiliated (45%) or independent (51%) agents, face-to-face to high-net-worth individuals for high sums assured; with an average death benefit of $450,000 across all term sales. The US market does not experience the same link to mortgage sales as in the UK. Currently, only around 1% of total term assurance sales are sold through the bancassurance channel, with a small amount sold through direct marketing and worksite channels. The internet is largely used as a source of information and a marketing tool. There is the unrealised belief that there is a huge potential to tap into the middle or mass market where individuals are either uninsured or under-insured. The question is how to reach this market in a cost-effective way.
Simplification
Recent product development in the US aims to access the middle market through bancassurance and direct marketing channels, with a simplified sales process. However, no previous ventures have been successful. Additionally, the return of premium (ROP) option offered as a rider benefit to the basic term assurance product has grown in popularity more recently, particularly in the middle-income markets. ROP, as it suggests, allows for the return of premiums to be paid if the policy reaches the end of the level premium period and the policy has not lapsed or a death benefit been paid. A smaller proportion of premiums may be returned at durations prior to the expiry of the level term period. This feature allows individuals to get a return from their policy, providing an incentive to those who do not see the need for protection and believe they will not need it. ROP sales in 2006 accounted for 10% to 15% of total term assurance sales.
With so much of life insurance sales linked to mortgage sales in the UK and 55% of total term assurance sales sold through bancassurance and direct sales channels, this is an area where the US can potentially learn from the experience in the UK; to help bridge the protection gap within the middle income market. The positioning of the simplified term product alongside its full underwriting compatriot is of key importance; how to make life insurance affordable to the mass market and not discourage individuals from buying life insurance. Simplicity and clarity of the cover being provided is imperative to avoid consumer complaints and disgruntlement at the claims stage. Equally non-intrusive and clear health and medical questions at point of sale, along with an understanding of the importance of disclosure of material facts helps avoid consumer dissatisfaction. The problem with this theory is that US life insurance is heavily underwritten with multiple preferred classes offering significant discounts to simplified products. Therefore, simplified products tied to mortgages are much more expensive than otherwise, leading to anti-selection by those who do not qualify for preferred.
Consumer dissatisfaction once embedded as distrust is detrimental to the core of the industry and only acts to widen the protection gap; the key element the industry is trying to address. Over recent years, the UK protection market has been tarred by unprecedented declinature rates and an underlying distrust in the industry, such as not making good on claims payments. Many initiatives have been introduced in the UK market, ranging from the introduction of standard CI definitions, the introduction of tele-underwriting, clearer medical and health-related questionnaires to help address the issues faced around non-disclosure and declinature rates. Is the introduction of a non-contestability period for claims, as proposed by the Law Commission, just a different way of solving the same problem? On the flip side, what can the UK learn from the US experience?
Non-contestability has been around in the US for many years - since 1864. Claims incurred after a period of two years inforce since issue cannot be contested. Some states allow claims to be contested for fraud, however, often it is difficult to prove and many insurers will waive the right to contest the claim. A medical information bureau (MIB) has been established to check against fraud, providing a database of information on applications made for insurance across its member companies. Almost all US companies contribute to the MIB, being a key element of the US non-contestability model.
Underwriting
Underwriting is a thriving business, with full underwriting for sums assured as low as $100,000. Blood tests are standard for most policies with a sum assured of $100,000 or more. The number and type of medical tests varies with age and sum assured, based on the initial medical disclosure. Much effort is focused on improving underwriting efficiencies and costs, with the introduction of tele-interviewing first in the US. Other initiatives include the pharmaceutical databases, providing details of medications for potential insured lives. With all the medical information collected at the underwriting stage and sophisticated risk selection tools available, this has led to greater segmentation of the risk market in the US. Providers most commonly offer five classes with one super preferred, a smoker and non-smoker preferred, and a smoker and non-smoker standard class.
The UK market has already gone some way in improving the efficiency and costs of underwriting, with tele-underwriting taking off more recently. This is helping to reduce levels of non-disclosure across the industry. However, is there still more the UK can take away from the US? Why not treat customers fairly and introduce more rating classes? Why not reward individuals for what, essentially, is a lifestyle choice, offering healthier lives a discount? There is no reason why the industry should wait for the introduction of non-contestability to drive the development of "preferred lives". Why not take the reigns and offer something new and innovative to the UK market? The core of "preferred lives" is about acceptance of risk for the appropriate award. This is the business of life insurance.
While there are differences in how the US and UK protection markets have evolved, the core fundamentals and issues are the same. The question remains how to bridge the protection gap. There is a real need to offer and distribute simple products to the middle-income market through simplified sales and underwriting processes that will pay out when the policyholder most needs the protection. Additionally, individuals should be rewarded appropriately, both for their lifestyle choices and honesty. Healthier lives should not have to subsidise the obese, and honest individuals should not be penalised for the few fraudulent policyholders among them. This would be treating customers fairly.
Michelle Finlay is product development actuary at RGA
