ProtectionMay 9 2013

Unprotected view of our industry

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

I am going to be a little bit critical of the industry. But the reason I am doing it is because the criticisms are not mine but those of some wealth management colleagues who I asked to give me a no holds barred view of the protection industry. Sadly they did and in some respects it did not make easy listening, but their criticisms were constructive and they were largely true and relevant.

My first correspondent cited “systemic barriers to innovation”. I will elaborate on this shortly but another interesting feature was the feeling that there was absence of real consideration of protection in the financial planning process, which means that it is easy to forget about it. Tell me whether the British population at large’s biggest priority is wealth management or protection. There you have a real point of contention that I believe should be a focus of regulatory concern.

My colleagues also cited the fact that those advisers who do address protection needs have low expectations of the customer and adviser journey, which is lengthy, unpredictable and frustrating.

Added to this is the maintenance of indemnity or upfronting of commission, which means that protection has become a mass-market offering that is churned frequently – or it was until G-Day came along.

Others thought it was fair to say that the protection market had not kept pace with technology and service changes in the same way as other parts of the financial industry. They suspected that a person completing an application for a protection policy in 2013 would have a very similar experience to the person who did so in 2003 – just with more questions to deal with. Certainly we have not been as bold in developing the underwriting models of the future as I hoped we might be, but I do think that the ‘customer journey’ (as everyone calls it nowadays) is a little more enlightened. Having recently been to the US (where admittedly levels of cover tend to be, on average, higher than the UK) I detected virtually no attention being paid to this area. Far too much attention is paid in the US to the technical niceties of underwriting but this is not a piece about the defects of the US system but about perceived deficiencies of the UK protection market.

My colleagues felt that the increased sophistication of underwriting we have built into our systems in the UK in the past decade means that the purchase experience for a customer is becoming even more intrusive and pricing differentials between risk types is becoming greater. While this may be good for underwriting returns, it will lead to a narrowing of the market and a reluctance for customers to subject themselves to what can seem like a very judgemental experience.

This is a very subtle point. It implies, quite rightly in my view, that emphasis in underwriting should be on easing the stress of the process rather than endeavouring to reflect very slight nuances in risk exposure. An actuary or underwriter might counter that the level of rates we now sell business at require sophistication in detecting quite small differences in extra mortality. Actuaries have told me this for the past 40 years and I retrospectively discovered we have always had real margins in our premiums with the massive improvements in mortality in the past 50 years. Have we really reached the stage where this is no longer the case?

My colleagues’ final observation was that the insurance industry is weighed down by its legacy – policies with a long life are on old systems that were designed for stability and not for the ability to change in a rapidly-evolving market and that lack of real change suits the incumbents.

This is a point well made and is perhaps the greatest bar to innovation in the current protection market. Certainly the incredible legacy problem that IT departments and their vendors have failed to address in any meaningful way is a salutary lesson that the industry should look to its laurels in technological terms.

I like change that is nearly always initiated by new or revamped operations. There are many barriers to entry in the UK protection market that discourage potential new entrants. One will be the less worthy reason that more money can be made in wealth management. The bigger issue for me is that new propositions in almost every other industry are transformational. That has not been the case for customers in protection — and, if my friends are right, it is unlikely to change anytime soon.

Peter Le Beau is co-chairman of the Income Protection Taskforce