IT IS HARD to imagine a time before direct debits. This simple, low-cost facility has easily become ...
IT IS HARD to imagine a time before direct debits. This simple, low-cost facility has easily become the most popular method of payment for life assurance policyholders. But as the world of electronic services tightens its grip on society, many potential customers have been pushed out of the market, simply because they do not have a bank account.
According to data from the Joseph Rowntree Foundation, around one in 14 households in the UK does not have access to a basic current account. This means that a substantial sector of society can not use a direct debit facility. With so many people falling into this category, are life offices offering a choice of payment methods to cater for the financially excluded, or is a potential market being ignored?
In the not so distant past, premiums for life assurance were collected door-to-door. But due to the additional administration costs and the growing pressure to keep premiums down, this tradition has virtually faded into extinction in favour of the faceless, but cost effective, electronic methods.
A handful of companies still offer the service to existing policyholders, but as Stephen Humphreys, head of corporate communications at Royal London, explains, for new customers it is no longer an option. He says: "We still collect payments door-to-door from old customers, but we decided last summer not to take on any new business using this facility. Due to the large administrative cost in paying this way, we found it was not delivering the best value for policyholders."
The industry's decision to eliminate home payments may make both economic and logistical sense, but has resulted in many people being left without any means to pay premiums. By servicing existing customers, insurers have felt they have covered their tracks, but in reality no replacement facilities have been put in place where customers are given the option to pay by cash.
Heather Armstrong, marketing manager at Scottish Equitable Protect, says: "Although we do not have any products that are particularly aimed at this group, we would not like to exclude anyone from getting cover. Our minimum premium is £5 a month and we try to make products as flexible as possible in order to accommodate customers."
Payment options
The emphasis on treating customers as individuals, but not actually providing a cash payment facility, is a familiar story with insurers, as Rosalind Pearson, research and planning manager at Swiss Life, says: "We try to treat each customer individually and offer a facility to pay cover annually by cheque, but we do not offer the choice of paying by cash at the moment."
Indeed, some insurers seem to have overlooked the potential market completely. Ronnie Martin, protection event director at Legal and General, says: "We have not targeted this sector before and do not have a facility for customers who do not have a bank account to pay by cash."
Although many companies offer low minimum premiums and a cheque facility in a bid to cater for the lower end of the market, they still do not have a facility for people who do not, or choose not to have, a bank account.
With some of the industry's main players failing to tap into this market, it is no wonder that niche broker Fairplay Insurance Services has grabbed the opportunity, claiming to be the first in the industry to offer a cash payment facility for life assurance customers.
The product, underwritten by Crowe Life, has been on a six month pilot and is due for launch in March. Instead of adopting the traditional home payment or direct debit facilities, it gives customers the option of paying for monthly premiums at the Post Office by cash.
Marc Osman, client services manager at Crowe Life, says: "We have been working with Fairplay to design a life product aimed at the lower end of the market, with the emphasis on attracting people without a bank account to provide life assurance at a relatively low cost. Customers answer only six questions and they can then pay their premiums by cheque, direct debit or by cash at a Post Office through a swipe card system that acts as a paying-in book."
The launch of the life assurance product came about through the involvement of Fairplay's managing director, Chris Jordan, in research being conducted by the Joseph Rowntree Foundation. The research was concerned with the number of people who do not have basic home contents insurance. Jordan explains: "It was not that people did not want to buy insurance, but it was simply not available to them due to having a criminal record or not having a bank account.
"We first launched home, motor and household policies aimed at people with a criminal record and are now launching a life assurance policy aimed at people without bank accounts."
Improving access
With the demise of the traditional home payment service, Jordan believes that there is a great demand for the new facility. He says: "Products such as life assurance have suddenly become inaccessible to a large number of people simply because the man from the Pru has stopped knocking on doors.
"This enormous minority poses no higher risk than other customers and generally has a higher demand for insurance services as they may not have been able to access them before."
Minimum monthly premiums for the new policy stand at £8 and, Jordan insists, the administration costs will not suffer due to the new facility. "There is little difference between the administration cost of a direct debit and the small charge we absorb by using the Post Office," he says.
So, could the new swipe card system be the shape of things to come? Mike Fry, director of Cheshire-based Halton Insurance Services, is wary of the new development and believes that not only is the direct debit facility a hard act to follow, but that the targeted sector may not deliver the anticipated levels of business. He says: "Paying by cash means that it is up to the customer to pay the premium, whereas with direct debits the onus is on the insurer. I think a lot of people who do not have a bank account do so by choice as they prefer to deal with cash.
"In my experience, people without bank accounts are less interested in financial services and are less likely to want to buy insurance anyway. We have no plans to adopt a cash payment facility as direct debits work so well."
The majority of people who do not have bank accounts may not represent the most lucrative sector of society, but do they really deserve to be eliminated from the market altogether? Malcolm Tarling, assistant media manager at the Association of British Insurers, claims that the industry should be making every effort to ensure everyone has access to life assurance products: "The issue of financial exclusion is high on our agenda, as it is on the Government's, shown in its recent efforts to promote Stakeholder pensions. There is also a growing recognition in the industry that responsibility has to be undertaken to provide the widest possible range of products to all sectors of society.
"There is a large sector of society that does not consider purchasing life and pension products as it feels it has been priced out of the market, but we would encourage companies to follow Fairplay's lead and come up with new ways to ensure the market is open to everyone," he says.
It seems that the only way of opening up the market will be for others to adopt similar systems to that introduced by Fairplay, enabling new policyholders to pay by cash.
Kirstie Redford is senior staff writer
