The complexity of some protection products mean consumers do not understand them and advisers "shy away" from recommending them, a consumer panel has said.
A discussion paper published today (6 September) by the Financial Services Consumer Panel, which advises the Financial Conduct Authority, called for cooperation between regulators, product providers, reinsurers, lenders and intermediaries to provide better outcomes to their customers.
It found there was no "silver bullet" to address the protection gap but warned the benefits of products like income protection were hidden behind "complex choices and caveats in the small print" which put people off.
The panel found lessons could be learned from critical illness products - which it found were easier for consumers to understand - and used to address the confusion associated with income protection and long-term sickness.
It attributed the more widespread understanding of critical illness products to their often predefined conditions and one-off lump sum payments offering consumers "peace of mind".
We hope the industry, regulators, and other stakeholders will join in the debate about how this market can be improved for consumers -more of the same is not an optionSue LewisWhile the panel admitted the market had seen some product innovation, it found progress had not been translated into widespread take up and little change had taken place in the past three decades - leaving consumers vulnerable to life events.
The panel’s consumer research also identified an "over-confidence" in employer’s sick pay, with the majority of participants believing employers would provide sick pay, without any knowledge as to the details of the cover.
In its recommendations, the panel called on product providers to explore whether critical illness cover could be extended to include musculoskeletal injuries and mental health - two aspects it found to be lacking from current products - and said the FCA should convene a working group to develop a hybrid of income protection and critical illness.
The panel also urged the government to consider allowing all income protection and critical illness pay-outs to be exempt from means-tested benefit assessments - having identified pay-outs for rent and other essential bills were not included in the Department for Work & Pensions’ income clarification earlier this year.
It is far too easy to criticise products for being too complex or difficult to understand rather than taking a closer look as to why advisers may struggle to advise on protectionRoy McLoughlinSue Lewis, the panel's chairman, said protection products had not kept pace with the needs of today’s workforce - with people more likely to be self-employed or have insecure employment, with volatile incomes.
She said: "Our research shows that people want value for money products that suit their lifestyles, and that they understand - the industry needs to respond to this, rather than just selling the same products as it did 30 years ago.
"We hope the industry, regulators, and other stakeholders will join in the debate about how this market can be improved for consumers. More of the same is not an option."
Following consultation with intermediaries who had voluntarily implemented a process to discuss protection products with mortgage customers, the panel recommended the FCA tailor its mortgage market study to consider if affordability assessments should consider a borrower’s ability to withstand a prolonged drop in income.
Roy McLoughlin, associate director at Cavendish Ware and chairman of the Income Protection Task Force, said the discussion paper was welcome and the lack of education both from a consumer and adviser standpoint was particularly relevant.
He said: "We need a joined effort between the manufacturer and distributor to help solve this issue. It is far too easy to criticise products for being too complex or difficult to understand rather than taking a closer look as to why advisers may struggle to advise on protection."
Mr McLoughlin said the industry must also call upon employers to explain to staff exactly what benefits they are entitled to in the workplace and make clear what they are and are not covered for.
He added: "We also need to make sure people with existing protection policies understand what they are covered for, including the effects of inflation - once again we call upon all insurers to provide annual protection statements to help facilitate this."
rachel.addison@ft.com
