In the final part of our regulation series, Nick Kirwan takes a speculative look five years into the future to see how the market shapes up under the FSA
Please board here for a journey into the future where regulation of the protection market is a reality, critical illness (CI) policies are selling fast and insurance applications are completed like a switch transaction with one simple swipe. This is a snapshot of just some of the possible impact of regulatory and other changes for advisers and insurers.
The year is 2010; the place is post-regulation UK; and the climate is prosperous.
The protection market consolidated in the years following Financial Services Authority (FSA) regulation, but it wasn't the bad news story that some commentators had feared.
Around three-quarters of intermediaries chose to become appointed representatives of a network, because of the costs of regulation, the potential exposure to complaints and feeling pressure from the FSA for non-compliance. However, this transition took longer than predicted with many smaller firms trying out the directly authorised route first. Rather than advisers losing their individuality, as predicted, the strength of these networks resulted in greater success for the majority.
Many intermediaries who remained directly authorised started the now popular trend of specialisation in particular business areas, striking various strategic alliances with other, smaller firms. With mortgages and protection being regulated almost simultaneously, the typical pattern was for mortgage/protection firms and investment/pension firms to have a mutual arrangement for introducing clients to each other. This system is now well established.
Litigation costs
Consolidation wasn't limited to intermediaries. The choice of insurers was also much more extensive pre-regulation. Increased expenses and potential litigation costs meant insurers needed scale in order to survive. There are only six big insurers in each sector of the market today.
As smaller insurers withdrew from the market they struggled to find buyers, while intermediaries increasingly placed business with larger firms. The key players eventually swallowed up all the available business.
Individual income protection (IP) cover has fared extremely well in the last five years, helped in part by the continued erosion of State benefits, a rapid increase in people becoming self-employed and an increasing trend for employees to have to make their own financial arrangements - many through the now popular worksite marketing arrangements that were still in their infancy back in 2004.
Product developers have also played their role. IP is now much simpler and is easier for consumers to understand. This redesign of products was triggered partly by the introduction of the new disclosure regime back in January 2005. This meant that the market moved away from complex products and those underwritten at the point of claim. Accordingly, there has been a shift towards selling the new simplified long-term IP products, often with short-term unemployment cover bolted on.
As far back as 2004, a number of commentators had been predicting the CI claims explosion. Back then, commentators were asking whether this would make or break the reputation of the product. Now that the claims explosion has well and truly happened we can see that it has had a hugely positive effect on the protection market. Nowadays, almost everyone knows someone who has had a payout on a CI policy and the best form of advertising has always been word of mouth through advocates.
This has contributed hugely to establish CI as a mainstream protection product, although there have been some challenges along the way. As the number of policies in force grew, so too did the number of claims. However, along with successful claims there were inevitably a number of declined claims, which attracted significant media coverage.
Non-disclosure
The most common reasons for claims being declined were traditionally non-disclosure and not meeting the definition. However, the work done by the Association of British Insurers in producing clear guidance on the scope of the cover, as well as their initiatives for better disclosure, has prompted greater public awareness of what is and isn't covered and the importance of accuracy when making an application. The overall result has been fewer declined claims and less negative publicity.
The presence of the Financial Ombudsman Service (FOS) is more evident in 2010 than ever before, due to the continuing rise of consumerism. Intermediaries are now well aware that advice needs to be documented and fully reflect the FSA guidelines. This message finally hit home after some high profile rulings where the FOS awarded £100,000 against intermediaries.
Intermediaries who made changes to work smarter in 2004 updated their sales process, by sending each client a copy of their completed application form with a covering letter. This reminded clients about the need to answer all questions in the application form to the best of their knowledge and belief and to report changes up until the policy goes on risk. This gave the client the opportunity to report anything that had previously slipped their mind and helped ensure clients could fully rely on their policy in the event of a claim.
Polished process
This also helped protect the intermediary from the accusation, founded or otherwise, that the intermediary had advised the client that a particular fact need not be disclosed.
Many intermediaries saw regulation as an opportunity to take the FSA's recommendations and exploit the opportunities presented to them. The demands and needs statement, with detailed accounts of what the client has covered as well as any unmet needs, was to be a powerful tool for conducting client reviews. Not only did it enable advisers to identify future sales opportunities, it helped establish long-term relationships with clients.
Over the last five years since regulation came into effect, premiums have risen significantly. A number of factors have contributed to this, perhaps the most significant being the ever-increasing cost of litigation and compensation.
On the bright side, intermediaries and insurers have now both fully embraced new procedures aimed at protecting their interests. Costs for both intermediaries and insurers initially went up after the regulations came into effect, partly as a result of significant investments in technology. However, these investments quickly paid off and costs were restored to their pre-regulation levels with a big improvement on the customer experience.
Premium increases are also expected soon from changes to the law on gender discrimination. After much debate back in 2004 and 2005, insurers were given six years to equalise premiums for men and women for all types of pensions and insurance from the start of 2012.
As a result, insurers will have to make an allowance in their pricing for the gender mix resulting in net premium increases for both sexes. With less than two years to go, women are starting to buy life cover ahead of the expected increase but there are early signs that they are putting off retirement to get a better annuity rate. In the meantime, men are throwing in the towel early as it's expected that the changes might be equivalent to a man taking out an annuity two years younger.
The impact of regulation in the protection market has been significant. However, without the regulatory guidelines, it's unlikely so many advisers would have embraced technology as fully as they have, leading to the whole industry enjoying a far more polished process today.
The margin for error is a great deal less than in the pre-regulated market. The use of mobile phone technology to record client interviews and transfer the data straight into an online application form is highly effective. It is saving advisers time and effort in processing and it also means digital recordings of client conversations can be stored electronically. This is useful for checks on record-keeping by the FSA and, of course, in case the FOS comes knocking with a potential complaint.
The use of electronic GP reports is a way of life for insurers in 2010. Few will remember a seemingly archaic system of writing to doctors and sending out forms in the post.
Advisers back in 2004 could hardly have imagined that we are now impatient for the impending introduction of chipped ID cards. The cards carry the holder's medical history, with details of every doctor's visit and medicine prescribed. Cards are swiped at every consultation, which will mean that non-disclosure is set to become a thing of the past.
Back to reality
Returning to 2004, most intermediaries will be trying to consider exactly what will happen once the regulatory dust settles and their businesses adjust. This speculative glimpse into the year 2010 looks at just some of the possibilities, but in a market undergoing so much change, it's difficult to accurately see beyond the next year.
However, one thing remains certain - consumers need protection like never before. With a falling savings ration and escalating levels of personal debt - set to top £1 trillion in 2004 - people have no savings to fall back on if the worst happens. As these trends escalate, the future of the protection market looks set to bring a very bright future indeed to intermediaries who embrace the new regulations.
Nick Kirwan is head of protection proposition development and marketing at Abbey for Intermediaries
Cover notes
FSA regulation is likely to bring many changes to the protection market. What these changes will be and whether they will have a positive impact remains to be seen.
