Segmentation of the fittest
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The concept of preferred lives seems to send shivers down peoples’ spines and have them running for cover, and yet it seems that there is a general acceptance they are already here.
The protection industry prides itself on accepting 80 per cent of people as standard rates, and that this is a noble and ethical value the industry provides to the public. I believe this is nonsense. I agree it is noble and ethical, but the consumer does not understand this and if they don’t understand or appreciate this then it has no value to them. We cannot claim the ethical stance if our customers don’t appreciate this.
The real reason that we maintain the 80 per cent ordinary rates is that we sell the product at this price, and then have a poor process for managing changes for those who do not fit into this category. Advisers have the burden of having to tell their customer they have to pay more than originally quoted.
Now in a large controlled distribution channel it is possible to increase the proportion of ordinary rates, increase the price to accommodate this and collect less information hence carrying out less underwriting on these consumers.
This is practised in banks and group schemes but in the individual market, however, price is certainly king and so there is a clear opportunity to provide a lower priced product for those who are fitter than the norm. There are several angles here – firstly the obvious one of a lower price, but secondly, and maybe more importantly, there is potentially a whole section of the market who believe themselves to be fitter than the average, hence more inclined to take up the product if it is specifically for them.
In the majority of our purchasing experiences we are faced with products to fit our individual needs, be it clothes, banking or car insurance. All these industries have cottoned on to the fact that consumers like to be treated as individuals and like to have products tailored just for them – be it car insurance for women, breakfast cereals for the healthy or cars for a young family. Most industries thrive on segmentation and providing products focused on these consumer segments.
Consumers purchase their insurance from the same brands for car and household on an annual basis, and more and more expect individual pricing for their individual circumstance. I believe we need to start doing the same – differentiating our products by consumer segments, rather than by product features that no one understands. Life insurance for the fit and healthy, income protection for the young family and so on.
With the old methods of application forms and high levels of non-disclosure, companies were scared of segmentation as this may inadvertently include anti-selection. But with proper full tele-interviewing, the minimisation of non-disclosure means this segmentation becomes feasible.
To adopt segmentation, we would need to change the way we advise and sell, maybe giving estimates or ranges of price first and giving an exact quote after underwriting.
In a commoditised and price driven market, market dynamics would normally dictate that greater differentiation and segmentation will appear. The question is just who and when it will occur, and who will be the first to take the strategic advantage.
Andrew Gething is managing director of MorganAsh
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Readers' comments (12)
Phil Castle | 3 Nov 2009 3:53 pm
The articel makes sense, but I can't help thinking of how annuity rates get worse as we see segmentation occurring and remove impaired lives. I suppose to be fair, that is a balance in itself as those who may start to get worse life rates as a result of healthier lives removed from the life assurance standard pool would be the same people who later in life might qualify for impaired life annuities.
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John Blackmore | 3 Nov 2009 4:40 pm
of course we could also just give up on the free market approach which bye and large has been fairly unsuccessful at protecting the population and opt instead for a uk group protection scheme without underwriting, individual applications and other expensive and unnecessaries.
Unless I am mistaken no one is born with a hole in the heart or purpose, no one actually goes looking for poor health and very few die just for the fun of it.
National Insurance based protection makes more sense than profit driven market segmentation.
Don't panic anyone. The FSA may well talk about TCF but would not go so far as to advocating it in any real sense.
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Peter Maynard | 3 Nov 2009 7:11 pm
I've been saying this for years. The current system of pricing is outdated and unfair - today there are so many more lives who are fitter than the 'average' than in days gone by.
But stop thinking in terms of 'preferred lives'; that's missing the point.
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David Arthur | 3 Nov 2009 10:07 pm
The 80 per cent standard rates profile does analogously confirm that we are ‘...robbing Peter (fit & healthy) to pay Paul (less so)...’ however, the thought of a private sector taking this type of segmentation to it's extreme sends shudders down my spine….of the anti-selection variety.
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Phil Castle | 4 Nov 2009 8:23 am
John B - You do have a good point and I have thought the same on many occassion with regard a National Insurance Scheme which was truly that, but then I keep returning to the fact I don't agree with a nanny state on principle and agree with the principle of freedom of choice and will and if someone would rather spend every penny on today and not saving or protect for the future, that is their choice. I have seen instancies where clients who did this actually got better value for money (i.e. the man who didn't save anything for retirement, looked obestnsively healthy and died at 65)
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David James | 4 Nov 2009 4:00 pm
When reading articles such as this I am always interested in the background of the author. From a basic background check this chap appears to have never worked in a life office or practised as an IFA and appears to be a typical "entrepreneur" clearly looking to sell his services. What the article does not give insight into is the difficulties associated with this approach not just morally but with the vast amount of additional information and tests required to underwrite in this manner (just look at the states). Nothing in this article to excite just an age old discussion from a chap selling his wares. (p.s. he looks a bit like Christopher Biggins with that Dickie Bow)
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John Blackmore | 4 Nov 2009 7:43 pm
Phil Castle - Sorry "if someone would rather spend every penny on today and not saving or protect for the future, that is their choice" it is not their choice in the modern western world.
In the days of Adam Smith it was normal to let "women and children starve" as a way of regulating the economy. Today this is frowned upon. Basic services like retirement and protection are too important to be left to the likes of the Market Segment brigade.
The solution is not to point out the faults in the NI system but to fix them. Any talk by the FSA of best advice and TCF is pure hypocrisy otherwise.
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Peter Maynard | 5 Nov 2009 11:26 am
I really don't understand the doubters and 'antis' on this issue. Who doesn't accept that someone who has coronary heart disease or is a diabetic should pay more for their life cover? Thought so... So if a particularly fit person has half the mortality risk of someone who just scrapes into the traditional 'standard rates' category, why should the two pay the same premium?
And thinking of 'retirement', why should someone in relative ill-health not get a better annuity rate than someone in good health?
Three further points. One, many of the incipient health problems of our fat, unfit population are down to lifestyle choice; they haven't just 'happened'. Two, you don't need a battery of tests and reports to do a decent job of risk categorisation. Three, surely you'd be unhappy if motor insurers didn't take into account all the factors that make you a better risk than the bloke - or woman - down the road?
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Phil Castle | 5 Nov 2009 1:32 pm
To Peter - Hopefully I didn't come across as being negative as my point was that there are issues which need to be debated and considered carefully here and elsewhere.
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Jerry Brown | 5 Nov 2009 2:15 pm
David James - your comments are spot on both about the author and the potential issues.
The US life market now has preferred, super preferred and, very likely in the future, "immortal" pricing classes. Preferred brings more work around the selection process for the intermediary and less clarity for both the intermediary/consumer resulting from complexity when comparing across product providers (it moves Term business closer to CI in terms of product comparison).
A greater number of customers expectations are failed when they do not get the price they are quoted because they don't quite qualify for the preferred or super preferred class. And then there are the anti-selection/non-disclosure issues around employment, lifestyle, smoking status etc.
Oh, and that other little fact that few people mention i.e. for many customers the basic premium rate goes up irrespective of their health status because their weight isn't optimal, they don't work in professional classes, they live in the wrong place etc etc.
Preferred does benefit a small but significant proportion of consumers who are in good health, from the upper socio-economic classes, have a white collar job and live in the right part of the country. And perhaps it has a place where the sum insured being applied for is larger than average.
But for the average consumer applying for the average size policy it adds cost, time, complications and benefits the minority of applicants. The market needs this like a hole in the head...
My background - I used to head the Underwriting and Claims function for a very large reinsurer.
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