The choice is yours

Flexibility seems to have pervaded much of our daily lives, from students with flexible learning, to employees with flexible working. But it has also had a big impact within financial services.

We have flexible savings accounts, flexible credit, flexible pension arrangements and of course flexible mortgages which, according to the Council of Mortgage Lenders, now account for more than one in six new mortgages and which Datamonitor expects to reach two-thirds of new mortgages by 2004.

Such phenomenal growth is not going to surprise many in the industry ' people simply want flexibility and, as any marketeer will tell you, linking any product, financial or otherwise, with lifestyles will make it more attractive to customers.

Flexible products first came on the market in the late 1990s. These menu products allowed the customer to select a range of benefits from the menu of protection options at outset. However, there was often minimal opportunity to vary your choice once the policy had been issued. This was far from ideal, as any protection portfolio is at its most effective the day it is taken out.

Moving with the times

Over time, the individual's protection requirements will change and products need to be able to change with them. It was a natural step, therefore, for more innovative product designs, combining different protection elements under one policy, but with real flexibility, to be made available. Scottish Provident's Self Assurance Plan was one of the first to provide this.

Modern day plans such as this allow the policyholder to change practically the whole make-up of the plan to suit their needs as they move through different life cycles. Protection might be arranged as multiple policies to cover different needs (family protection, mortgage cover, Inheritance Tax and so on). Core cover options are life, critical illness (CI) and income protection (IP) with unemployment, total permanent disability (TPD), terminal illness, accidental death ' and many more options besides. Need to extend the policy term? No problem. Reduce it? Fine. Increase or decrease sums assured, add another life (or two) ' all this is possible under the flexible product banner. The benefits offered dovetail each other much better than separately purchased elements.

The message such products carry is a strong one ' it says 'we are customer focused, we have a range of benefits which are geared to provide you with the maximum flexibility to ensure we find an exact match in cover for your individual protection needs, on an ongoing basis.' And the message is getting through.

The sky's the limit

The product's success is driving protections sales up across the board and is undoubtedly in part due to the buoyant mortgage market, where it is helping to fill the protection gap left by endowments.

The consumer's flight from investment-linked contracts to pure mortality-based term assurance is evidenced in GE Frankona Re's annual protection survey, which showed 25% growth in new business sales in 2001. Furthermore, our survey also showed mortgage-related IP sales took a whopping 90% of the budget IP market and mortgage-related accelerated CI over 65% of total sales.

This demonstrates another strength of the flexible plan. When the customer sits down with the broker to review the protection options under one plan, they are far more likely to take out term, IP, or CI options than if they were asked to look at separate plans. We would expect to see something in the region of 25% of mortgage customers' take the three options. This has to be good news as we endeavour to boost protection levels in the underinsured UK.

Since its launch, Self Assurance has been joined by a number of other plans from the likes of Bupa, Friends Provident, Liverpool Victoria, Scottish Equitable and Skandia Life. As with the growth seen in the CI market in the 1990s, flexible products have a core set of benefits from which a provider cannot stray without failing to cover fundamental protection needs.

But there has been some innovation both in terms of what cover options are available and how they may be used. Skandia Life's long term care (LTC) option, which allows the replacement of life cover with LTC at a rate of 2% a month under claim, with any life cover balance being payable upon death, and Friends Provident's waiver option for Stakeholder pensions, are two good examples.

The plans present a cost-effective proposition for the customer, as they only pay for the benefits they need. Plans can be put together to cover the customer within their current budget, and these may be added to or sums insured increased as the customer's finances allow. They then have the flexibility to alter these as required and, for many changes, no further medical evidence will be required. However, increases in sums assured, adding additional lives or effecting health product options may attract some underwriting.

Overlaps in cover are also reduced when compared with taking out three or four plans with different providers, so this too will cut costs in setting plans up. Some overlap does still exist (typically with CI and IP) but providers are making changes. Liverpool Victoria, for example, has removed overlaps of cover from its mortgage-focused flexible plan MIMI. Should a customer claim under the CI element and the mortgage is paid off, they reduce the IP cover, and the associated premiums, as less post-incapacity income would be required to maintain lifestyle. Under its plan involuntary unemployment is also offered, but it has been stripped out of its usual wrapping which includes accident and sickness benefits, as this element is available under IP.

Removing such overlaps delivers a more cost-effective and therefore more attractive product proposition.

Early days

The challenge facing the industry is to ensure these products are used as a tool to manage the individual's ongoing risk profile. Although no firm statistical data is readily available, anecdotally providers admit that guaranteed insurability options (GIOs) are still hugely under-utilised, with customers seemingly unaware or forgetting the options exist.

It is still early days for the new breed of flexible products and most policyholders will not yet have come to a stage where they are looking to alter their benefit structure. However, this design will hopefully mean that more policyholders will understand the product better and regular reviews with their adviser will mean they make better use of the options available to them.

This in turn will provide the adviser with cross and up-selling opportunities within the plans framework and for other products. For example, a customer may move company and lose existing employer-sponsored IP cover. The adviser could include this under the flexible product, increase the death benefit based on their new salary, and review retirement planning at the same time. This will also provide a value- for-money, feel-good factor for the customer, as they will see their protection needs being managed within one plan rather than intermittently having to cancel and re-effect cover with yet more application forms, direct debits and medical evidence.

The market undoubtedly has a bright future, with current product offerings continuing to evolve and new providers entering the market. Currently, providers only allow GIOs on standard rate cases, but this may change as market experience increases and IT systems become more flexible. Buy-back options and second event cover will become more commonplace and, to cater for our ageing population, so will LTC. Tiered benefits, where the customer cannot only choose the benefit type, but how much benefit would be paid under different circumstances, is also likely to be seen.

And it will not stop there. The drive to provide a solution to all your customers' life needs and build brand loyalty with it, will see cover options being extended to other lines.

Bluesure has started the ball rolling with its plan which covers combinations of motor, household, contents, health and travel insurance, personal accident and extended warranty coverage, all within one contract with one payment.

The consumer will welcome this flexibility with reduced cost and one-stop service. Product providers' enthusiasm for these products is also clear with the number of new entrants in recent years and more to come.

According to research undertaken by GE Frankona Re at the recent Manchester COVER Protection Forum, advisers want more of them too, with 49% voting flexibility their number one area for providers to improve upon. The market seems set for growth.

Peter Elliott is head of sales and marketing at GE Frankona Re

• A quarter of menu customers take out life cover, critical illness and income protection.

• Guaranteed insurability options are rarely used and it is expected flexible products will encourage policyholders to update their cover.

• Second event cover and buy-back options are set to become more commonplace.