There is something fundamentally wrong about the way most companies write protection today.
For the last six years, I have been fortunate enough to work with some of the UK's foremost experts on protection. I have worked with some of the brightest actuaries, the most experienced underwriters, the cleverest IT professionals, the best distribution strategists in the business and the market-leading entrepreneurs.
All of which means I have been standing next to the best brains in the market has to offer as they ponder the big issues in protection. To a man (and woman), they understand that policies are packages of risk, with each package of risk having a correct price and if you get a mismatch between price and risk, then it hurts. In the first instance, it hurts the insurer and reinsurer through a higher number of claims than anticipated but, of course, their approach to pain is to pass it on to us and/or our customers through changes in pricing and commission. It is, therefore, in all our interests to ensure that the insurers receive packages of risk properly put together.
To help ensure that each new risk is properly packaged, insurers and reinsurers have been looking at their practices. They have refined their pricing strategies and introduced more targeted pricing through greater segmentation of the population. A lot of effort has also been put into improving underwriting.
Having upgraded their understanding and management of risk, insurers and reinsurers have turned their attention to the practices of the adviser and, guess what?, change is needed. The modus operandi of the typical adviser can have such a significant affect on the fine balance of pricing and risk that, in order to achieve real improvements, a radical overhaul is due.
Having spent so much of my time, with others, looking at the end-to-end process, I believe that there is something fundamentally wrong with the way most companies write protection business today. The education, training, level of understanding and the practices employed by the vast majority of insurance firms and protection IFAs today are flawed and are having a material effect on customer pricing and adviser commission.
IFAs are qualified holding FPC or AFPC and have a comprehensive knowledge of the market together with an excellent understanding of how to match customers to products and appropriate sums insured. If the IFA's role stopped there, I would find it difficult to improve on but it does not and the reason is because insurers use IFAs to undertake an initial underwriting screening of clients.
They do this by asking IFAs to collect clients' detailed medical history information. So have IFAs received a sufficient level of training in medical terminology and underwriting principles to pass them as competent to guide every customer through the maze of medical questions now asked? The answer, of course, is no.
Today, IFAs give advice to customers who are different to them in any number of ways, for example, age, sex, sexual orientation or cultural background, none of which needs to be an issue but they often are when it comes to completing the personal medical history sections of a protection form. Of course the results are deliberate or unintentional non-disclosure of important underwriting information, which in turn leads to one of two things:
The client hopes that the truth never has to come out and they proceed with the application. This will, of course, become an issue in the event of a claim.
The client worries that the policy is worthless because they know they have not disclosed everything and they find a way of cancelling the cover during the application process or soon after the policy starts.
The solution? Well, this is something that my colleagues and I at Direct Life have worked hard on for the last 14 months. We call it express underwriting and it breaks the application process in two. First, the financial adviser completes a product-based application, second, a highly trained and skilled individual contacts the customer at a time and place agreed in advance and, using intuitive underwriting techniques and tools, works through a full set of medical history questions.
Express underwriting works on many levels and for many reasons, not least because our staff are not financial advisers and have never been. They are equipped with the right knowledge through experience and training and they are recruited in a way that ensures we achieve a good mix of ages, sex and cultural backgrounds.
They talk to customers at a time and place convenient for them to disclose personal medical information. All the feedback we have had from advisers, customers, insurers and reinsurers tells us we now have a model to lead the way in which protection business is written in the future.
Richard Verdin is sales and marketing director of Direct Life & Pension Services