There is still hope that a simplified version of individual IP will be included in a subsequent suite of products that carries a Treasury seal of approval to boost consumer confidence. The Association of British Insurers is due to report back to the Treasury in the autumn on work it has been undertaking to this end. But I do not think anyone should be holding their breath; we need to make sure the final product is fit for purpose, providing simple cover that can be understood by the masses and therefore can genuinely provide confidence in financial services.
In my view, if the government is to maximise the potential benefit that IP has to offer in terms of reducing the burden on the welfare state, it will have to be prepared to indulge in a little give and take. In particular it needs to address the thorny issue of some people having their means-tested benefits chopped back as a result of receiving IP payouts.
The fact that you can lose out in this way at the claims stage is clearly not a great sales angle and, disappointingly, did not seem to be something that the Sergeant Review of Simple Financial Products was able to influence. The idea of the simple products regime is to enable consumers to make an informed choice without advice but we need to consider how they can do this for IP if it involves having to factor in a state benefit system they may have little understanding of?
Anyone who saw Greg Clark, financial secretary to the Treasury, speaking at the Insurance Day Summit in May would have been left in no doubt as to the importance that the government purports to place on the insurance sector in terms of its part in the UK’s social fabric and its contribution to our long-term economic prosperity.
Mr Clark said: “In the same way that the insurance industry has risen to meet the key challenges of the past, I am encouraged to see the industry playing its part in addressing the important challenges of our own time.
“If we can collectively find the best ways to maximise this contribution, it will be good for insurers, good for consumers and good for Britain.”
Nevertheless, despite rousing references to working together to drive forward meaningful change and delivering outcomes which can advance the wider public good, I could not help noticing that this speech did not appear to contain much about what the government could itself do to help the insurance industry.
Partnerships need to be two way and, even if the government falls short of granting consumers the tax relief or other such incentive they should be entitled to, surely finding a way in which IP policyholders are not penalised by means testing could prove an effective concessionary starting point?
Even if it does oblige in this respect, however, the fact remains that the initial proposals for a simplified IP product appeared in the Sergeant Review’s interim report published in July 2012
For example, policyholders were to be able to choose from a wide range of deferred periods, there was to be no reduction in the number of occupational classes and for cover of more than £1000 a month applicants would have to verify that cover did not exceed 50 per cent of their earnings at the time of applying. This does not really feel that much different from the current products in the advised market space today.
One of the only simple proposals made was that IP products should be short term in nature, with a choice of one, three and five-year payout periods suggested as a starting point. But even this will cause confusion with the recent evolution of short-term IP alternatives. The term short-term IP, or ‘Stip’, is now being bandied about to mean anything from a fully-underwritten IP product that will pay out for only a limited term to a payment protection insurance contract. The two have little more in common than apples and pineapples as the latter is annually renewable, tends to offer far less clarity on exclusions and may delay underwriting to claims stage.
Opting for a shorter-term benefit option can be appropriate in some cases when client budgets are tight but advisers have certainly not had their lives made any simpler by this muddying of the waters. So it is at least welcome that they are benefiting from another trend which has seen a bit of a push towards insurers offering ‘own occupation’ cover and away from offering the alternative task-based definitions
Own occupation cover, which pays out if the policyholder is unable to pursue their own occupation, is clearly what most policyholders ideally want as it minimises the chances of being let down at the claims stage. Tasks-based cover, on the other hand, will typically only pay out if, for example, the policyholder is unable to perform three out of six stated daily activities, such as walking, communicating and exercising manual dexterity. Just being unable to perform one of these could easily result in a payout under own occupation cover.
A task-based definition has had a valuable place in the adviser’s armoury due to its ability to provide at least some cover to individuals who were not able to qualify for superior cover definitions, which can be particularly the case for those in riskier jobs. But the fact that it can lead to disappointment at the claims stage as a result of people automatically assuming they will get a payout if they are unable to do their job has certainly been an issue.
Nevertheless, task-based definitions should not be a problem if explained by advisers at the outset in a way that adequately manages client expectations. This is also true of many other aspects of IP, from the length of the deferred period to any exclusions that may be imposed at outset by underwriters. So I will be watching with interest when a Treasury-approved simplified version of IP designed to be sold without advice comes to life. IP and professional advice have up until now gone hand in hand, from the need to establish whether someone is already in an employer-paid scheme to selecting a suitable cover level and provider and, if the government remains unwilling to play the game, explaining the state benefits situation.
Ultimate simplification today comes from the provision of excellent professional advice provided with IP products. Mr da Vinci’s musings took place centuries before IP was invented but if he had been more contemporary, maybe he would have conceded that ultimate sophistication can come from the new simplified IP product as well. Let us wait and see.
Jennifer Gilchrist is senior product development manager for Bright Grey and Scottish Provident
Key Points
There is still hope that a simplified version of individual IP will be included in a subsequent suite of products that carries a Treasury seal of approval
The initial proposals for a simplified IP product appeared in the Sergeant Review’s interim report published in July 2012
Task-based definitions should not be a problem if explained by advisers at outset in a way that adequately manages client expectations
Simply put
The first set of simple financial products from the Sergeant Review of Simple Financial Products
• Easy access savings account.
• 30-day notice savings account.
• Regular savings account.
• Fixed-term life insurance.
