Anyone flicking through the executive summary of Defaqto’s excellent Review of Income Protection will notice the rather strong attack on the protection industry’s record with this product.
Defaqto quite rightly notes that “income protection insurance has a crucial role to play in financial planning. It is the only product that comprehensively protects against the consequences of incapacity.”
But the product consistently underperforms and Defaqto believes there are a number of reasons for this lethargy. It believes that IPI does not treat customers fairly, that products are complex and inconsistent and are combined with intrusive and unnecessary rules.
The conclusion of the report is that it is time to look positively to the future of income protection. But it laments that while there are massive opportunities for simplification and innovation, “provider apathy is the biggest threat to the income protection market and the principal cause of its stupor”.
Is Defaqto’s conclusion fair? Is the industry apathetic and uncommitted to developing this part of the market?
Well, if the industry is apathetic then it is certainly doing a great deal of talking about income protection and how to fix its problems.
In late 2006, the Association of British Insurers’ protection committee ran a workshop in London and invited providers, reinsurers and advisers. The aim was to gain agreement about the product issues that need addressing and to map out a plan for moving the industry forward.
At the same time, the income protection taskforce, led by Peter le Beau and Clive Waller, was putting together a White Paper on the future of income protection – detailing in particular the product problems that need to be solved in order to allow the product to achieve mass market appeal. Now the Defaqto report completes this trilogy of good advice for the industry on how to make this under-performer perform.
These three initiatives show that there is certainly no lack of good ideas about how the product could either be tweaked at one extreme or completely reinvented at the other.
Taking the simplicity of MPPI and marrying this with the longer-term benefit of IPI is one idea. Making the focus of the product more about rehabilitation and helping the claimant return to work is another very worthwhile suggestion.
Another area in which these reports concur is in their analysis of the reasons why IPI does not sell in volume and why life cover and critical-illness insurance continue to do better – despite the fact that critical cover, in particular, does not meet as important a client need.
The problem is that there is nothing new here that has not been discussed ad nauseum in similar reports during the past 15 years and at industry conferences.
We know that the product is complicated, with its array of disability definitions, deferred periods and options.
Most agree that the differences in occupational databases used across the industry means it can be almost impossible to prepare an accurate quotation.
Advisers and clients do not like the fact that they do not know what they will get in payment until claim stage, because a whole host of factors, such as salary, state benefits and other insurance, may have affected the amount covered – and, in the worst cases, the client receives a much lower benefit than the one they have paid for.
Financial underwriting is lengthy and timeconsuming, especially if the applicant is self-employed, and is conducted both at the start and at claim stage as well. Medical underwriting and the evidence required can be extensive and again time-consuming to obtain.
Potential solutions to these problems have been well documented and discussed over the years. Having one definition of disability for all applicants, for example, introducing industry-standard and much simpler occupational classifications, guaranteeing to pay the benefit applied for, standardising income factors and whether state benefits are included – the list goes on.
These well recognised solutions, combined with some of the good ideas over rehabilitation, would certainly create the wave of innovation that Defaqto is calling for.
But the industry is not making these changes, so is Defaqto’s accusation of apathy a correct one?
I am not convinced it is apathy per se because I have shared many conversations with like-minded people who desperately believe that IPI as a concept is a first-rate product, which really does meet a recognisable consumer need.
The problem is that, for most providers, it is a marginal product, accounting for less than 10 per cent of their overall protection annual sales.
With the constant need to achieve ever-increasing targets in a protection market that is not growing, it is difficult to make a business case stack up – even if it promised to double volumes of IPI – when a critical illness or life insurance rate cut might achieve the same thing.
Without the longer-term view required to make such a move, providers may find it difficult to spread the additional risk some of the changes, such as guaranteeing the payment for example, might bring to that pool of business.
It is not just investment in new product ideas that is needed to solve the current problems. A total revamp would require taking salesforces off the road for training while marketing material and PR and advertising would also be required. Any new product is unlikely to succeed without advisers warming to it, which means getting to know the new product with additional support from providers.
Again, this would be difficult to justify in a marginal product when there are so many other more immediate alternatives for business growth.
So the industry is not necessarily apathetic but it is short-termist in its thinking. Interestingly enough, the ABI recently obtained the blessing of the Office of Fair Trading to look at an industrywide solution to the problems faced by another protection cover, total and permanent disability. This was obtained on the grounds that market forces alone were not sufficient to force change in the industry.
After nearly two decades of acknowledging and debating the problems surrounding IPI, it is time to admit that, despite good intentions, market forces are being ineffective here as well. Perhaps what is needed is the collaborative power of a group of like-minded people working on behalf of the industry for the long-term future of the industry, with OFT understanding and endorsement.