Rereading annual surveys of the PHI market, it is sad to see how past optimism has not borne fruit.
Practitioners have always believed that the holy grail of increased demand, more sensible pricing and improved experience was just round the next financial year. The outcomes were usually disappointing.
However, in the words of the great football song, This Time More Than Any Other Time, the signs are looking good. When the front page of the Financial Times can include an article about the social security advisory committee's call for compulsory disability insurance, then public awareness really is on the way up. In addition, insurers are considering innovative product design, pricing and claims' management techniques.
So, what are the new developments in the market and what will they mean for IFAs?
Changes to pricing methods
Disability insurance has lagged behind the sophisticated pricing of some other insurance policies, in particular, motor insurance, partly as a result of a low volume of business and a low claim frequency.
But as PHI becomes a must-have policy and more and more people take out policies, the first of these problems will disappear.
The second will still exist but is being addressed through statistical techniques. These aim to determine an individual price for each contract by identifying the individual factors that affect claims – the probability of a claim and its duration.
Such a move contrasts with the current approach, which involves the construction of a standard table of prices for the expected overall experience for a main target group. Simple global adjustments for factors such as sex or occupational category are then applied to this table.
But this will have to change. As consumers demand greater choice and tailor-made solutions, the risks will need to be underwritten and priced carefully on an individual basis. Insurers will be forced to introduce new technology that will allow them to underwrite, impose special terms and calculate rates online.
These tech niques exist in other lines of business and, with some further development, they could be used for disability insurance contracts.
Insurers with banking and mortgage connections may also have access to alternative data. This could include accident, sickness and unemployment statistics and credit-scoring data from mortgages and other loans. This data is already being used for some lines of business and it can also be used to refine the pricing of PHI contracts.
These changes will mean that IFAs will be increasingly unable to rely on published tables of sample quotes. Instead, they will need to understand how companies are determining prices. They can then advise the client on any potential action that could reduce the cost, for example, increasing the deferred period or accepting a weaker eligibility criterion.
Improved underwriting techniques should also reduce the proportion of applicants who require additional medical information. IFAs should benefit from the speedier process from enquiry to firm offer.
Changes in product design
The market is already characterised by a wide variety of premium structures (guaranteed, reviewable, unit-linked, etc) deferred periods, maximum benefit ages, indexation offers and other policy features. This is likely to expand as insurers seek to develop the market. Budget versions, for instance, will become available, where the benefit is payable for a certain maximum period. But product variety is only one factor. The current framework may also change – disability cover may be sold as part of a pack age with other forms of insurance such as medical expenses or critical-illness cover. Already, there are some contracts which add long-term care insurance to a basic PHI policy.
Changes in work patterns, which have seen more and more people become self-employed or working on short-term contracts, will also have an impact. As a result, traditional definitions of benefit eligibility will be less relevant. That includes both the uses of an own-occupation definition and a maximum benefit age that is not related to any employment package.
With such a variety of products, many clients are going to need good independent advice. The client must understand what is available from the state, an employer and from self-insurance and how these relate to the strains caused by a prolonged period of disability.
It is unlikely that an off-the-peg product from the friendly supermarket or a tied salesman will be the best solution.
Increased contact with clients
Successful PHI needs mutual trust and respect between client, intermediary and insurer. The market is slowly recognising the need for this trust and is developing ways to improve communication with clients.
Some companies, notably Permanent, have introduced ways of ensuring regular contact with the client in an attempt to ensure that the product continues to be appropriate, avoiding potential problems with any claim.
IFAs should welcome these developments, since they have always prided themselves on their ability to know their client and to review insurance cover regularly.
The importance of good communication increases in the event of a claim. While many insurers already offer assessment visits and retraining programmes for claimants, they are expected to go further in their management of claims by setting procedures and tracking progress with reference to norms for the treatment and progress of different disabilities.
These healthcare management guidelines are used extensively in the US – and increasingly in the UK – for evaluating medical treatment in private medical insurance.
The scope for this type of claims' management should increase as disability insur ance policies are increasingly sold on an any-occupation basis as opposed to own-occupation basis.
Independent advisers can play an important, pivotal role by helping their client to understand what the insurer is trying to achieve. They can also help the insurer to understand the particular circumstances of the claim.