On the supply side, sales are being driven up slightly but from a low base and with limited upside potential because this success is likely to be marred by longer underwriting periods and increased ratios of business that is not proceeded with.
Happily, the cure for this problem overlaps with the best way to improve consumer demand. To do the latter, we must develop an income protection product that it is easier to understand, underwrite and therefore buy. Simplicity sells.
Once that is done, we need to market this product so that it enters the consumer zeitgeist.
My colleague Richard Verdin was spot on when he noted in this space that term insurance outsells income protection by miles because many of us believe (however wrongly) that we have a strategy for coping with the loss of our income through disability whereas we know we have no strategy for our dependants’ finances if we die. Marketing can overcome that fallacy but only when it is promoting a policy that consumers find easy to buy and grow to trust. That will be one that insurers find easy to underwrite and pay out on.
Current income protection is not that policy because the potential sums assured are often huge and, worse, the risk of fraudulent claims is high because the medical profession struggles to be definitive in cases related to spinal and mental stress, the chief causes of prolonged time off work.
Worst of all, the consumer does not know this as well as we do, so does not understand insurer behaviour. That is the nub of the problem. Any contract that is not clearly understood by all parties is sure to cause trouble and the insurers’ key issues are not understood by their customers.
In the old days, we sellers used to total the maximum potential sum assured so that the consumer could be amazed at its size but this was deemed unfair, as clearly it was only that size for a day. I can see the point but the result is that insurers now behave in a way that the consumer finds draconian because he thinks in terms of £100s a month worth of benefit while insurers underwrite possible £100,000s of risk.
This gap in perception would be ended if income protection could be presented fairly in the lump-sum format that all consumers best understand. I can feel the ombudsman shiver at that but income protection can be redesigned so that we can fairly say: “I offer you £100,000 of income protection, which will be paid out in monthly payments of £1,000 while you cannot work due to disability. You will be paid this for up to 100 months.”
Given a product redesign that allows that statement to be true, we reach a position where our risk is capped and the consumer understands it very clearly.
The real gain here is the reinsurance one. There is a capped risk and we can therefore actuarially price in reduced underwriting and claims investigation. If an insurer knows that its liability is capped at, say, £100,000, it can price in easier new business procedures and more reasonable claims management for those claimants who might just possibly be able to workSuch a situation would make the contract one that all parties could see as fair and that would please the ombudsman and marketers alike. A rare triumph.
Tom Baigrie is chief executive at Baigrie Davies Lifesearch