Loaded question

The panel
Peter Chadborn
, director, CBK Colchester
Owen Wintersgill, director, Axxis Financial Planning
Colin Last, director, Tamar IFA

The protection industry is divided on the issue of loaded premiums. Is it right for a provider to charge higher premiums based on the distribution channel of a product or is this an excuse for providers and networks to earn more from clients?

Chadborn: This loadedpremium issue is un-TCF and it flies in the face of what the retail distribution review is trying to achieve. If the protection industry wants close attention from the FSA and wants to encourage read-across rules then it should carry on loading premiums. It is inviting attention and I cannot see any reason why it is justified.

Wintersgill: It is not fair to load a product due to distribution. The only reason is to pay the distributor more commission and that is wrong, it is uncompetitive and it hurts clients and IFAs. This is classic commission bias and it quite simply bribery. Everyone should be on a level playing field. Why should a distributor be paid more for doing exactly the same job as another provider? It is not treating customers fairly.

Last: It is just a way to cream more money off the top for distributors and providers. Other financial products are working through a wholesale process, the same should apply to protection so as to keep it uniform, what with the RDR around the corner.

Defaqto Insight analyst for life and protection Ben Heffer recently argued that only a buoyant direct channel will close the UK’s protection gap. Is this the case or can the IFA lead the charge to close the gap?

Chadborn: To most IFAs, the only protection gap they are concerned about is the client in front of them. The only way the gap will be reduced is for make it easier to buy protection all round and it is up for us advisers not to be King Canute about it and understand this is the way the industry is moving.

The more routes open to consumers to get protection are a good thing, it encourages choice and it makes us as IFAs question what we do and makes sure we add value.

Wintersgill: IFAs and the direct salesforces combined are the only agencies that have any hope of closing the gap because these products are generally sold and not bought. Life cover is bought sometimes but the rarer forms of protection like critical-illness cover and income protection are absolutely sold. But I do not think the protection gap will ever narrow, it is just too enormous.

Last: I think both direct and intermediary avenues are needed. There is a truly massive gap, so if people choose to go down the Tesco, route then it might not be accurate but people will be covered, hopefully in the right place.

Yes, there is more chance of the wrong product being sold direct but does that make direct distribution wrong? It is difficult to say but people should have advice.

Do you agree with the sentiments of Friends Provident head of protection Ed Stuart-Brown, who has said people will be forced to take on more personal responsibility with regard to their health in the future as public welfare dries up? How does this relate to the protection sector?

Chadborn: The message will only get through due to bad experience because there is this sense that the state will look after us and until someone has a bad experience it is difficult to change that sense. The problem is if someone has not had the help from the state or does have a scare, then it is often too late to go and buy protection, so this is a perfect example where there needs to be a concerted effort from the industry at large to get this message across.

Wintersgill: People should take responsibility but these things are always governed by affordability. The problem is when clients need protection the most, like when they first take out a mortgage, it is usually the point in their lives when monthly costs are most tight. So really good protection, which does not come cheap, is put to one side while people concentrate on sustainability. So yes individual responsibility should happen but the need for advice will still prevail.

Last: The short answer is yes but at the same time advisers in general must look more at protection and must be pushing it more. Right now they are too geared towards pensions and investment. So they should be pointing people in the right direction and after that point has been made, the adviser is covered and it is down to the individual.

A study by Defaqto last month revealed that UK insurers are now competing to offer the most ABI+ definitions on their critical-illness cover. Is this a benefit to clients as insurers offer more generous definitions or is this just moving away from the Association of British Insurers’ attempts to provide clarity with CI products?

Chadborn: The better the definition in a plan the better and we will pick products on this basis. But we have had the conditions’ race and now we have the ABI+ race, so it is nonsense. The problem, and Defaqto are as much to blame here, is ABI+ becomes an exclusive factor when researching critical-illness policies, or example, and then it becomes a scoring system on Defaqto’s platform when picking providers.

Wintersgill: If you have completely comprehensive cover clients cannot afford the policies and it ends up being so precise no one can take it out. We had a massive tightening of qualifying conditions and criteria that would lead to a payout previously because the monthly costs were becoming unaffordable in light of claim experience. So we have seen less generous policies and that had to happen because CI was priced out the market. It is better to have simple critical-illness policies than none at all.

Last: I talk about CI cover generically rather than the specifics because the clients do not go through those because they don’t know what they do not know yet. It is right providers offered more definitions but they should encompass them more because the client is only concerned with the generic areas that are covered. At the same time, the provider does not want a person having their claim rejected on a technicality, that is very bad publicity, so they need to be clearer as to what is covered.

The Financial Ombudsman Service recently said it expects payment protection insurance complaints to continue to rise in 2010/11. How damaging is this continuing saga to the protection industry?

Chadborn: It will continue to be damaging. One of the biggest barriers that advisers face is the perception from the client that it will not pay out. Any type of insurance that is closely linked to PPI as a whole will suffer. The sad thing is the Financial Ombudsman Service is seeing now what many of us were saying was going to happen years ago. It could have been avoided.

Wintersgill: I think it has completely tarnished payment protection insurance but it endorses the fact to people that protection should be sold by IFAs and when banks trespass into these products they do so with disastrous results. The level of complaints are unacceptable and frightening, so this scandal has been more damaging to the banks than to protection in general.

Last: The payment protection insurance scandal is increasingly damaging because people generally assume providers do not want to pay out claims. If they feel they have been sold something wrong they are going to put in a claim.

The culture is wrong and that is what is damaging but I do not know how that came be changed, aside from stopping selling all types of PPI products completely but I do not think that would work.