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.
Here we have a double whammy. Not only have we got consumer detriment for a number of vulnerable people but we have replicated a bust system from abroad. As for waiver of premium – lower income people tend to lapse their policies more than the rich when they face hard times, often brought on by ill health.
This product guarantees that large numbers of working people will face severe consequences at their time of need through no fault of their own.
Turning from consumer detriment to cost – it would have been good to have seen an approximate analysis of the average cost of these two add-ons for a typical policyholder to see how big an issue of affordability it would generate – no doubt readers of this article could provide this information.
Moving to income replacement, there was not sufficient consensus to come up with a firm recommendation but the report is very explicit on the value of progress on this as soon as possible. The debate so far has mainly centred on the following issues:
- Should there be simplification/standardisation of occupational classes?
- What choice should there be of deferred periods?
- How much cover can you buy? For example, up to £1,000/month or 50% of salary? This point relates to financial underwriting at point of claim – and being paid less than you expect
- What choice should you have on how long you will be paid for? Cover beyond five years is ruled out
As with life, because the group restricted itself solely to the remit of simplicity – although “affordability” is mentioned in an unquantified way – it had no way of narrowing down to what is important and what is not.
So what next? The thinking on simple products needs a broader assessment process that prioritises aspects of cover, addresses potential consumer detriment, analyses costs and benefits to consumers of what the eventual offering may look like, and moves away from a rigid product with no add-ons available.
All of this could be done within the principles of simplicity. Learn from South Africa.
Accreditation and governance
The report sets out an independent governance and accreditation structure. In essence, there would be an independent accreditation body that would issue a “badge” for products that passed its tests and this body would be supported by the Money Advice Service. Various other options were explored and rightly rejected.
The future – what if simple products dominate?
When you are in the trenches you are not interested in the next war. Earlier, the unintended consequences of excluding terminal illness from life policies was raised.
Once the stakes are in the ground for simple products it is essential that a medium to long-term strategic exercise is undertaken to look at the potential impact of a successful scheme on the industry and society and to look at the potential impacts on the scheme of external drivers and uncertainties.
Whatever we come up with should be fit for the future.
Richard Walsh is director and Fellow of SAMI Consulting
