Kevin Carr – Chief executive, Protection Review
Alan Lakey – Partner Highclere, Financial Services
Roy McLoughlin – Senior partner, Master Adviser
Earlier this month, the ABI proposed that the term total permanent disability should be changed to irreversible life-changing disability. Do you agree that the description needs changing? What is your opinion of the new term?
Carr: My initial reaction is very positive. While a relatively small number of claims are made under TPD, around half of these were being declined, which simply is not sustainable so I agree that a change needed to be made to improve both adviser and consumer understanding of the benefit. In the past, claims were made for reasons such as stress, depression and even broken legs, which are rarely, if ever, permanent.
So the new wording should add clarity, which should improve the consumer’s understand at both the point of sale and the point of claim. I doubt it will impact either way on sales but the number of declined claims should definitely fall.
Lakey: The existing wording is ineffective and misleading. The word total is incongruous because the extent of any disability is measured by inability to follow some occupation or a failure to accomplish certain activities.
Any revision must be precise yet easily understood by consumers. The suggested term is rather lengthy and while descriptively acceptable, the revised word irreversible is simply a synonym of permanent and adds nothing to the clarity.
I believe that the definition should be named permanent disability with the precise terms bracketed, for example, (based on your own occupation). I also believe that the ABI is missing a great opportunity by not combining this and loss of independent existence. Even advisers suffer confusion in understanding the differences.
McLoughlin: The problem with the old term is that if you ask 10 different advisers you would receive 10 diverse answers. The new name is clearer but, more importantly, we need to have consistency of definition. This must be conveyed in a clear and coherent educational message so that the same answer emerges from our imaginary panel above. This must include an easy-tounderstand guide to when this benefit would not pay out.
The Competition Commission has been forced to re-examine its proposals for tackling the misselling of PPI. The new consultation includes its original proposals for a ban on selling PPI at point of sale and a prohibition on singlepremium PPI. In addition, it has also included several new remedies, such as reminding customers of their cancellation rights, introducing a requirement for annual renewals and price caps. Which option would you prefer to see to tackle the problems in the sale of PPI?
Carr: None of the above as I am not convinced the real issues are being properly addressed. A product itself does not cause consumer detriment – it is how it is sold, including the literature and communications, that set the customer’s expectation. The truth about PPI is that if people were told all the facts at the point of sale, hardly anyone would buy it in the first place, whether at the point of claim or otherwise. What I would rather see is the introduction of compulsory “short-term” and “long-term” tags being applied to all kinds of income protection products.
This would lead to an immediate improvement in the customer’s knowledge and understanding of the situation and would encourage many to consider income protection instead, which in turn would encourage manufacturers to develop better and simpler products.
Lakey: I am against a point of sale ban because this often precludes any later purchase. The aim must be to assist the sale of appropriate protection while minimising the abuses that have occurred. There is a great danger that providing too many warnings will deter consumers from making the right decision. It is too easy to use the baby and the bathwater solution and a better solution would be to ensure that the PPI design is robust and that accompanying literature is clearly worded with full details of the plan limitations.
McLoughlin: For many advisers, the obvious misselling of such a product in such huge numbers causes a rye smile. Surely we have evidence (yet again) as to why regulation of advisers is so important, no matter what industry they are in. Our advice process is quite rightly tightly scrutinised yet we consistently come across clients who have been sold policies with little or no fact-finding. Unless a level playing field is introduced, these inconsistencies will drag the correct and comprehensive products into the mire of those inferior ones.
Just 1 per cent of Financial Ombudsman Service complaints last year were about critical-illness cover and income protection. Is this proof of well-designed products, good protection advice or a lack of CI and IP sales?
Carr: Perhaps all the above although such percentages also depend on the other areas of complaint such as PPI and endowments, without which the proportion about CI and IP would be higher. That said, I think the industry has improved its communications, products and sales process significantly in recent years, which has led to more claims being paid. The next misselling scandal in protection could well be based around non-advised sales, where the customer was not given enough information to make a suitable decision and was not told about the potential implications of not taking advice.
Lakey: There were 1,374 complaints about these products, which compares well with their pension and investment counterparts. However, the bulk of these complaints are likely to be driven by unsuccessful claims and every rejected claim will have a knock-on effect deterring potential buyers.
While applauding the low numbers, we need to accept that some plans have fundamental design flaws which invite rejected claims. If the industry can find an answer to the lottery aspect of activity-based definitions and other matters such as the down-sizing of income protection claims, it is likely that complaints would halve.
McLoughlin: This is welcome but dare I suggest not surprising news. If sold correctly, these two comprehensive protection policies should not have complaints alongside them. Yes, they should have greater sales figures and many more of these should be sold alongside their protection cousin of life cover. The life companies have a huge role to play here alongside advisers to help achieve this utopia.
Both Fortis and Legal & General have recently improved their CI offerings. Is this evidence of increasing competition in the market?
Carr: I firmly believe that all CI providers should be covering early stage cancers, which is something I wholly welcome and is further evidence of the industry’s gradual move towards severity-based products. But sometimes IFAs wonder if the “illness race” is all about marketing materials and securing good product ratings rather than adding things that people genuinely need. Some are beginning to call for less expensive, stripped down products, where additional conditions can be added if required – like third party and fully comprehensive. I have always said that if all else was the same, including issues such as underwriting and price, I would prefer the product that covers the most conditions but rarely are things always the same.
Lakey: There is clearly an appetite among some insurers to aim for quality rather than relying on past reputation or playing the premium game. Pricing can only go so far and protection specialists will not be overly interested in whether company A is £1.25 cheaper than company B. Recent years have seen a realisation that previous plan designs were missing out on areas that consumers clearly valued – early-stage prostate cancer, mastectomy, etc. It is gratifying that, unlike 10 years ago, insurers are incorporating adviser feedback and concerns into their product designs. Additionally, it is evidence that not all providers are premium obsessed.
McLoughlin: More competition is very welcome. This is a continually evolving subject so it is great that more companies are joining and developing the market. The caveat here is let us not be swayed by the conditions race that we sometimes seem to fall into. CI is a lifesaving and changing product, as any adviser who has a claim will tell you. It is very important that sales of such a great product are encouraged.
Aifa recently called on the Government action to tackle the protection gap. What is the very first thing that the coalition needs to do to take on such a huge task?
Carr: First, I doubt the Government will do anything to directly address the protection gap. That said, I am supportive about educating children on the basics of financial services in schools. The benefits won’t happen overnight but the seeds will be sown. Further to that, funding an independent Government-backed Consumer Protection Insurance Education Campaign-style advertising campaign would be great, along with tax-incentives for those who insure against the financial impact of ill health and thus reduce the burden on the state. However, the last time the Government played around with tax relief on protection products, they ignored warnings from the industry and ended up pulling the product within a year.
In other parts of the globe, such as Australia, a percentage of salary is deducted at source, part of which goes towards providing protection benefits. Such a system could also work well here.
Lakey: Talk is cheap and generic cries to tackle the protection gap have been echoing for years. There has to be an appetite within Government to understand why the gap exists and is ever-widening. This appetite needs to extend to areas such as the RDR which while not directly impacting on protection, will serve to massively reduce adviser numbers and subsequently cause the gap to stretch still wider. Previous governments have not taken personal finance seriously – successive regulators bear witness to this – and the coalition needs to recognise two realities – that protection is sold and not bought and that whole of market advice is better than restricted.
McLoughlin: Absolutely. The protection gap is far too big and also, without a shadow of a doubt, is not fully understood by many in but, more importantly, outside our industry. It is no good us continually moaning to ourselves though. We need to ensure that this message gets through to important people in the real world. We are just about to go through some very tough times in terms of cuts but that is no reason not to engage the support of those who can help and not at any significant expense. Now is the time to bang this drum and very loud it needs to be!
Fifty-eight per cent of protection firms predict there will be far fewer intermediaries selling protection products by 2020, according to research undertaken by the protection review. How would such a consolidation impact on the protection gap?
Carr: The results of the survey were very interesting and any significant reduction in the number of intermediaries selling protection is unlikely to help improve the situation. But the number of intermediaries selling protection does not really alter the consumer’s need for cover, so people will continue to buy protection products albeit potentially through other sources, such as their bank, online or via retailers, as well as IFAs. Whether or not they end up with the most appropriate and comprehensive cover, however, is another matter.
Lakey: Protection is considered wimpish by comparison with glitzier matters such as investment planning. This is borne out by the fall in protection awards and rise in investment accolades.
The RDR cull is additional to this trend and protection sales are set to fall and the protection chasm widen. Is it that protection is viewed as a commodity like baked beans or is it that some advisers consider the proliferation of plans as a jungle to entangled to manoeuvre within?
We are at the edge of a preci-pice and the next two years will determined whether protection becomes the province of bancassurers and bucketshops or whether IFAs can dominate as in the investment field.
McLoughlin: First, I am not sure I agree with this stat. Why should protection numbers be reduced? If anything, if certain advisers can be convinced of the merits of holistic advice, then protection should actually increase.
I fully understand that some advisers may wish to stay specialists in their chosen fields but there is no reason why strategic alliances between different advisers should not take place. It works perfectly well with solicitors and accountants. Our industry can be its own worst enemy when it comes to gloom and doom predictions. On protection, why not focus on a positive outcome which will see the gradual erosion of the protection gap due to all of us reminding everyone concerned just what such an important subject protection is?