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The easy option

Many years ago, a good friend of mine became very seriously ill and had to take time off work. His employer’s sick scheme was a decent one but months ticked away and it became obvious that although his illness was not life-threatening, it would be impossible for my friend to return to work in the near future, perhaps for years.

Luckily for him, his employer had taken out a group PHI policy on behalf of the staff. My friend’s total income, including long-term benefits, was not as generous as his previous salary but it was enough for him to live on as he slowly regained his health.

I was reminded of my friend’s predicament last week as I read a report by financial research company Defaqto into why sales of PHI or income-replacement policies do not appear to be anywhere as successful as other products on the market.

Defaqto quotes some sobering statistics to back up its view. Among a working population of up to 30 million, just 147,285 income- replacement policies were sold last year. Critical-illness cover, a far less competitive product, sold four times as many policies, even though its sales are barely half what they were three or four years ago, while mortgage payment protection – incredibly expensive in many cases – sold five-and-a-half times as many.

IFAs I have spoken to over the years have repeatedly made the point that while a critical-illness policy can be very useful for many people, there is a strong argument to suggest that being able to look after yourself and your family in the years that follow the onset of a debilitating illness is much more important.

So why is it that critical-illness cover outsells PHI on a scale of four to one? Defaqto makes the point that “sales of income protection insurance are suffering from “mutual mistrust”, with consumers not trusting insurers to pay out and underwriters believing that consumers prefer being ill to being at work.

There is obviously a lot of truth in that. If you think your insurer will use the small- print of a policy in order to deny you a payment that ought to be yours, why bother taking out the policy in the first place? Conversely, if an insurer thinks it is going to be conned by some of its prospective policyholders, it is bound to want to investigate their claim fully.

Yet it strikes me that it is not the entire answer. Indeed, Defaqto’s report makes the same point. It argues, quite persuasively, that a major additional part of the problem is the huge confusion affecting this market.

For example, if there are 32,000 different standardised common occupation descriptions, as Defaqto claims, which help determine the premium payable, how long you might have to wait to be paid, even the definition of disability, how is the adviser, never mind the client, going to make any sense of what is going on?

If, to take another example from the report, 12 different methods are used to calculate maximum benefits payable to people unable to work, how does that make it easier to compare one product with another with any degree of certainty?

Defaqto’s solution is to come up with a six- point plan, which it believes would make PHI easier to comprehend and, it follows, to sell to consumers. They include standardising maximum benefit percentages, “other sources of income” and common occupation descriptions, refunding premiums if people are overinsured and publishing data to “reassure consumers” that companies really do pay out on claims.

All this is fine but it also begs the question of why is it that such steps have not been carried out in relation to PHI when so much attention has been paid by the industry to the same standardising approach in relation to critical illness?

Intriguingly, part of the answer comes from Lifesearch head of protection strategy Kevin Carr, who is quoted in the report as saying: “If we sold as much income protection as we do critical illness and as much critical illness as income protection, we would go bust as it is far more time-consuming both at point of sale and in getting it on the books.”

Meanwhile, if you are an insurer and are given the choice of revamping a relatively “easy” product typically linked to another “essential” buy, namely a mortgage, or one that is even harder to understand and also needs a lot of attention, which one are you going to devote more of your attention to?

These obvious facts help explain why it is that while the ABI moved relatively swiftly recently, in industry terms, to arrive at a common approach for critical illness, progress on achieving the same objectives for PHI has been glacially slow.

In other words, ensuring you revise a product offering an easy, if potentially inferior, sale takes precedence before a tougher to understand but arguably more beneficial product for your clients.

Journalists are sometimes accused of focusing too much on misselling and the shenanigans of individual life offices and a minority of IFAs. We are too prone to miss the “real story” or so we are told.

Maybe that is true, especially when that “real story”, so often submerged and unnoticed, just like this one, reveals far more fundamental problems at the very core of an industry which, yet again, appears to be putting profits at the expense of real consumer needs.


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