Could compulsion cover protection gap?
When PruProtect actuarial and product director Deepak Jobanputra (pictured) said protection should become mandatory last month, he was unaware of the reaction this would provoke. Practical difficulties, the impact on IFAs and what level protection is set at are all issues that have been raised in objection.
Jobanputra says: “I did not mean this in terms of hard compulsion in a dictatorial fashion. My point was to get across to people what will happen if they do not take action. In the current economic environment, they may not fully appreciate the financial impact of an untimely death.”
Highclere Financial Services partner Alan Lakey believes a mandatory system would help solve this problem. He says: “The people who do get cover do it begrudgingly at the moment. It is a bit like going to the dentist. Compulsion would help insure more people.”
Association of British Insurers assistant director of health and protection Nick Kirwan says: “Maybe we do need something stronger than advertising but I do not accept the argument that you cannot persuade people to buy protection through adverts.”
LV= head of protection Mark Jones agrees mandatory cover may not be necessary just yet. He says: “It is early days for the latest round of adverts.”
But Lakey feels the industry needs to be more forceful in raising the profile of protection. He says: “Other tactics have not worked. I do not think there is an advert that will ever work because it comes down to three things - apathy, the ’it will not happen to me’ mindset and the belief that protection is unaffordable. That is a pretty heady mix and compulsion might be the only answer.”
Jobanputra thinks mandatory cover could solve the question of affordability. He says: “The market is too focused on price, which has eroded the value of protection. If people have cover, they will value it.”
Lakey agrees price is an issue. “There is a lack of understanding but that is very difficult to fight against. How many people want to talk about the cost of life insurance?”
Kirwan says: “Life insurance is getting cheaper all the time. People might believe it is expensive but I am not sure they know how much it actually costs. However, making it mandatory could be seen as an extra tax and some people just cannot afford it.”
Funding compulsory cover is one of the main problems with Jobanputra’s proposition.
Lakey says: “Is Jobanputra saying the Government will provide? Will it be a flat sum or a percentage of income? It will either have to be some form of tax or a spending reduction somewhere.”
Jones says: “There would be many challenges, such as a need for a minimum level of earnings before it was mandatory. Could the very wealthy opt out? Will there be some actuarial formula that mechanistically links ability to pay with need?
“Also, does any Government have the political will to require people to pay for an appropriate level of cover or is there the danger of a fudge that results in token levels of cover for small cost?”
Introducing compulsory cover with only token levels of cover would be another considerable problem for compulsion.
Lakey says: “Say you have a £100,000 mortgage over 25 years and the Government says you must have £30,000 of life cover. What problem has that solved? We have to have individual solutions to individual problems or you could end up with a silly outcome.”
He points out that protection requirements change over the course of a lifetime as a person accumulates liabilities such as a mortgage.
But if general cover from the Government would be unwelcome, equally unpopular is the prospect of private funding.
Lakey says: “If it is privately funded, people are basically being told to go and spend their money on this whether they like it or not, which is not going to go down well.”
But Jobanputra believes private funding could remove the danger of the one-size-fits-all approach that a Government system might engender.
He says: “Car insurance is compulsory and the private sector successfully provides a wide range of cover. There is third-party cover, fire, theft, comprehensive. The case for innovation is much stronger with private funding.”
He also says privately funded mandatory cover would mean more work for IFAs. “It offers them a massive opportunity. If protection is compulsory, the only people that can really fulfil that are intermediaries.”
Other product providers and advisers are not so sure on that point.
Jones says: “Compulsion at an appropriate level would require no IFAs and only one provider. Although there may be a role for IFAs if mandatory cover does not reach an appropriate level, it will be a lot harder if people are already paying for a base layer. My guess would be that far fewer IFAs would be able to make a reasonable living from protection.”
Lakey says: “It removes the need for someone like me. The aggregator companies will clean up. That cannot be good because they focus on price rather than service.”
A comprise could be the option of soft compulsion, such as the system being rolled out for pensions next year.
Kirwan says: “People could automatically enrol into something as long as it is in an environment where the product is fit for purpose and at least 95 per cent of the people getting enrolled will benefit. That might be feasible.”
Jobanputra admits that a less rigid route could see more success. “Something situation-specific, where someone taking out a mortgage has to get cover, for example. Mandatory might be too strong but the corner-stone of any financial plan has got to be protection.”