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The Actuary The magazine of the Institute & Faculty of Actuaries
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Life insurers failing the customer?

The Life Insurance industry has created three successful products. Products that protect the consumer against three different types of life event: the individual dying, not being well enough to work or suffering a serious illness. What we have not been as good at is providing the holistic solution, cover that protects not against just one of these strands but against life’s uncertainties both at outset and as the individuals circumstances change over time. Customers do not think of products as we do, they think of needs and arguably we have not catered for their overall needs.

Compare the provision of motor insurance and the bundled approach of theft, fire or damage to others’ vehicles. Consumers are not required to pick coverage to protect against these individually but thankfully, even though third party is on the only minimum required by the legislation, individuals recognise they should have these hazards covered and therefore most buy the ‘comprehensive’ cover as it is packaged in a convenient and appropriate form.

Perhaps we within the Life industry should be doing more and offering the consumers the protection they really need, coverage they would willingly purchase and develop products accordingly. This will help us as an industry overcome the protection shortfall, and increase the market size for all of us.

As an aside there has been talk of a protection gap in this regard but perhaps we should refer to this as a ‘protection opportunity’. This could give something for the industry to be motivated by and to help realise the immense possibility that remains untapped. The large figures being quoted as a ‘gap’ may in fact endorse and legitimise in the public’s mind the acceptance that they are not alone in being inadequately insured. Surely it is far better to focus the public message on the amount of cover that others have and make this protection an achievable normality rather than an acceptable shortcoming.

Unifying product
We know the type of combined product we believe is theoretically best for people. It needs a combination of life protection, critical illness cover for the severest conditions and an income for when people are too ill to work. A product that can be flexed for increasing and varying amounts of cover throughout life without additional underwriting or the expense and hassle of taking out new policies when circumstances change. But how do we achieve this?

Obstacles
Product solutions that are new have historically struggled to sell in the dominant IFA channel. Insurers need to provide cover that meets a general market minimum, as otherwise how can advisers recommend without the risk of mis-selling? This makes it harder for simpler products to be successful. At the other end of the innovation spectrum are products that provide significantly more coverage. These can appear too expensive and may struggle to gain traction in the market, without a significant amount of adviser training and education. PruProtects’ Serious Illness product has taken a while to gain this acceptance and may not have been given the time to develop if backed by a smaller company.

Because of these obstacles products have tended to herd together, the result of which has been incremental ‘plussing’ of Critical Illness coverage and general feature tweaks rather than breaking away from the norm.

An example of a highly innovative product is Ageas’ Real Life Cover. The concept was designed to fulfil real customer need. However, without a peer group to compare the product against, it has yet to live up to its potential within the general IFA market. The hurdles to overcome are very difficult.
>> Why sell a product with only three instead of forty critical illness conditions
>> Why sell a product that would only pay income for eight years instead of the ideal ‘to- retirement’. Ironically there is less risk for the adviser in selling “perfect” cover to protect against just one of life’s events than providing some level of coverage against each risk.

Real Life Cover is an excellent product that tries to meet people’s needs and one the industry should be proud of. However, it could be even more successful if presented to the consumer as the one stop shop solution. Distribution for a similar type of product within the bank or tied distribution would seem an obvious next step.

Tipping point
I believe that we have now reached a tipping point. The IFA market has become so well developed that the products as well as sales and underwriting processes are arguably too sophisticated for other channels. Within the IFA channel both anti selection and niche product differentiation are hugely important. However, these points are less of an issue within the bank or tied channels and as such we are starting to see a tipping point where a different approach to product development is being adopted for the other distribution channels.

For example, HSBC has developed its LifeChoices product that has broader coverage and a far simpler underwriting process than a typical IFA product. The benefits of this for the bank are a greater penetration into the market than would otherwise be possible with the IFA product and its attending processes.

Summary
The divergence in approach by channel that I describe will help facilitate real innovation within our industry by enabling us to develop products that are not constrained by the current IFA distribution obstacles. This will hopefully help all us to move beyond our current silo approach and develop a broader product solution to fulfil the customers’ wider needs.

There will always be a place for IFA’s to provide the tailored solution and this will continue in the future. However, the IFA distribution channel on its own will not be able to fulfil the Protection Opportunity that exists today. Alternative distribution channels such as banks, single ties, work site marketing and other sales outlets are vital to successfully providing the products needed and helping create a society that can look after itself.

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Nick Rendle is a marketing actuary at SCOR Global Life

This article first appeared in Redmayne Consulting’s 2010 Reinsurance Overview