So what issues should the FSA consider with regards to improving access to protection products in the work environment? Looking to adapt best practice from other countries is a logical step, and Australia’s superannuation scheme certainly contains some interesting aspects.
In 2012, in addition to the RDR, we will see the introduction of personal accounts on a phased basis. The end result will depend on the current consultation and, probably, the result of the general election. But there can be no doubt that personal accounts can create greater engagement, awareness and interest among those who have largely been outside the system. If the models work successfully, personal accounts could become important access points to a wider range of financial products.
This could be important if predictions about the outcome of the RDR are correct. Some commentators forecast that up to half of the existing advice sector could disappear.
Finding a solution, at least in part, via the employer route may help to address this. The consumer research Swiss Re carried out for its latest Insurance Report shows that 41 per cent of employed consumers would be “very likely” or “fairly likely” to consider buying insurance through their employer. For people with children under 18, this rises to 54 per cent.
The superannuation market in Australia has addressed this with protection being an integral part of the member offering. In 2008, legislative change introduced a mandatory requirement that all superannuation funds in Australia must offer a minimum level of life cover.
Insurance offerings are now used by superannuation funds to differentiate themselves, with cover being a key part of the financial security for members and their dependants. Through their purchasing power and economies of scale, superannuation funds are able to provide death, permanent disability and income protection cover at competitive prices.
When selecting a superannuation vehicle, each employer has the option to select a basis or level of cover that is relevant to the needs of its employees. If the employer makes no selection, a default level of cover kicks in. Eligibility for cover is simple, based on the employee being actively at work.
Overall, the key is simplicity – exactly what the UK consumers tell us they are looking for.
Swiss Re’s research illustrates very clearly that the insurance-buying public values simple propositions which meet their needs and they can understand. They demand clarity as to what is, and what is not, covered. Ease of access and ease of application are a key part of this simplicity.
Some commentators forecast that up to half of the existing advice sector could disappear
Can we move insurance from a ‘sold’ product to a solution that is bought? Time will tell and the FSA’s financial capability work will be an important component of this. Making it simple does help – for example, take up rates for critical illness cover through flexible benefit schemes continue to rise as the proposition’s appeal is matched by the simple application process.
Employer involvement will be one of the keys to improving financial capability, but the risk is that the greater awareness does not lead to action. Linking access to pensions to a simple purchasing mechanism for protection products could be just the way to re-engage consumers.
A business model to deliver these benefits should include prompt payment of claims to beneficiaries when death claims occur, in the way that registered pension arrangements and excepted group life arrangements allow now. Excepted group life schemes provide a good mechanism for life cover, although the requirement to have a common benefit formula for all scheme members can add a level of complexity in practice. It is not really clear that this requirement serves any intended purpose in stopping tax leakage. Removing this particular restriction would simplify excepted schemes immediately.
The Australian model provides the UK with some excellent ideas for rethinking our distribution models. We should be cautious about taking ideas directly but needn’t shy away from considering and adapting good ideas when it is appropriate to do so. There is considerable potential opportunity to be tapped if the industry can work with employers to extend access to protection products.