Keep It Simple Stupid: The Review of Simple Financial Products is a significant strategic development in the protection sector. Richard Walsh highlights some key issues and a few problems in the making.
Fixed simple products or space for competition over and above simple product features?
It is worth remembering that the OFT report on critical illness insurance strengthened the ABI statement of best practice so as to reduce the complexity of differentiation between critical illness (CI) offerings for different companies.
In essence, this provided a baseline product which all companies had to comply with, yet allowed them to give additional add-ons and compete on these as well as price and service etc.
The end result was that you did not need to be a consultant oncologist to decide which cancer cover to purchase and the market expanded rapidly. This leads us to ask: should the recent Carol Sergeant Review of Simple Financial Products rigidly set the product offering? Or should it allow companies to offer consumers add-ons provided they meet some basic criteria – eg based on consumer benefit to cost + simplicity of the add-on?
The report suggests no add-ons will be allowed. It mentions a similar initiative in South Africa (Zimele products) but does not go into these in much detail. Although it is a different market, this is a pity.
In October 2011 The Centre for Financial Regulation and Inclusion (CFRI) published a very detailed report on the introduction of simple products there – reflecting on lessons learnt. Initially, the industry adopted the same approach as suggested in the Sergeant report but this was subject to challenge by the Competition Commission. The end result was that banning add-ons was declared illegal and companies were allowed to compete on these too – provided they fitted the simple product concept.
This also chimes with what the OFT decided for CI. The accreditation body for simple products will need to engage with the Competition Commission proactively to decide which approach to adopt.
The report contains an excellent analysis of the potential markets for simple products. For life, the target market is segmented using three criteria; income (£15,000/year to £50,000/year); having dependents; and not currently holding a policy.
For income replacement, dependants is replaced by working status. In addition, there is impressive material on behavioural economics (building trust and engagement) and raising awareness and financial capability.
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