A government seal of approval for simple risk products would be welcome, but nobody is expecting silver bullets from the impending government response to the Sergeant Review. Just as it would be unreasonable to complain about the taste of a pie that is only half baked, we should not dismiss the Government’s desire to develop simple protection products as pie in the sky wishful thinking. There are plenty more chapters in this story to be written and they could throw up significant opportunities for the group risk market.
But group risk professionals have found it hard to get excited about the contents of the interim report published by the Sergeant Review of Simple Financial Products in August 2012 – more than two years after the Treasury announced plans for a new range of simple financial products that would help people take responsibility for their finances and make better choices.
The interim report proposed that life cover should be one of the first three simple financial products to be launched – along with an easy access savings account and 30 day notice savings account – and invited comment on a simple income protection product. Significantly, it focused only on individual protection products and made no real mention of the group risk market.
The idea is that simple products, which are to be sold without advice and without needing any changes in regulation or legislation, should attract those who wouldn’t normally buy protection to do so. The key is to make them
simple enough to avoid the type of confusion that has traditionally reduced the consumer’s ability to make clear decisions and to have confidence in the market.
The proposals for a simplified life product are not controversial. It is intended that it should take the form of a single-life term assurance policy that pays a lump sum on death and has guaranteed premiums. Terminal illness cover, guaranteed insurability options and waiver of premium are all to be stripped out, and the only exclusion permitted will be suicide within the first 12 months of the outset of the policy.
But the initial proposals for a simplified income protection product (see Box) are not simple at all. Having guaranteed premiums and benefit pay-outs limited to under five years is all very well but retaining so many complicating factors is not going to make the product significantly different to some options already available.
Not surprisingly, Aviva protection director Richard Verdin, who chairs the Protection Working Group for the Sergeant Review of Simple Financial Products, acknowledges there is a possibility that the design of a simple income protection product will not have been completed by the time the Review’s final report is published some time in February 2013 and that a conclusion may have to be reached in a second phase of the work.
He says: “To make an informed purchase of income protection without advice, consumers must understand both what products their employer provides and the State benefits system. But State benefits are provided on the basis of household income and savings whereas individual income protection only takes into account individual circumstances, so marrying these up is almost impossible. My personal opinion is that this probably rules out individual income protection as a simple product.”
Consequently, a significant proportion of the Protection Working Group’s energy during recent months has focused on the group market, and opportunities are being considered involving voluntary and flex schemes, affinity groups and even company-paid schemes.
Katharine Moxham, spokesperson for Group Risk Development (Grid), says: “The dialogue that has gone on since the interim report was issued has reached the conclusion that group risk is probably best placed to deliver this. We have the ideal expertise to bring this to market, and there are opportunities in employers moving to a facilitator role.”
There is clearly already some momentum in the direction of both limited-payment and voluntary income protection. According to Swiss Re, limited-payment schemes that pay out for between one and five years already account for 26 per cent of all lives covered under employer-sponsored group income protection, and the number of people buying flex or voluntary income protection in the workplace increased by 85 per cent between 2008 and 2011.
Nevertheless, Unum’s attempt to push the voluntary approach as an option via its Select product has met with muted demand. It reports that the lion’s share of Select business has come from mixed employer and employee contributions. Employer-paid cover has come second, with voluntary cover slightly behind this.
The fact that Unum Select could not be incorporated within flex or used in conjunction with salary sacrifice certainly didn’t help, nor did the fact that brokers have traditionally been more comfortable looking at employer-paid business. But simple products would only be sold directly and, most importantly of all according to their supporters, would benefit from having a Government badge and from the fact that the Money Advice Service is likely to promote them via an advertising campaign.
Bearing in mind that Unum itself has spent around £10m in educational promotion during the last couple of years and that not everyone is necessarily impressed by a Government seal of approval, it would be easy to be underwhelmed by these two supposed key selling points.
Dave Kay, commercial product manager at Unum, says: “I think a lot of lobby-type groups would also support the simple products initiative, so it’s got a chance and I wouldn’t rule it out. It would have a better chance on a voluntary basis than Select on its own, especially if it benefited from the type of energy being injected into pensions auto-enrolment. But there is a lot more work to do on what the actual product looks like.”
Because success within the SME sector is crucial if simple products are to reach the masses, voluntary schemes, which can be viable for only a handful of employees, appear to offer more potential than flex – which tends to need well over 100 scheme members.
Will McNaughton, senior consultant at Lorica Employee Benefits, says: “If administration can be sorted out and medical underwriting can be streamlined, I think that voluntary income protection could have mileage. Although we can offer basic flex schemes for as few as 50 people, set up costs are still a barrier to entry and some insurers won’t offer terms for less than a few hundred members.”
However, the prospect of ending up with some form of employer-paid simple income protection product is possibly the most exciting. There seems a much greater chance of developing an income protection product that is simple enough for employers to understand than one that is simple enough for consumers to understand, and a Government badge would give employers doing a procurement exercise an extra layer of comfort and security about the purchase.
James Walker, group protection technical manager at Legal & General, says: “In my view a simple income protection product may have a place offered by employers and it doesn’t necessarily have to be voluntary. I personally think it would be nice if we could also simplify group life assurance and once and for all make the break from old pension legislation.”
But all the product simplicity in the world is unlikely to result in any significant breakthroughs unless more employers can start to see the business case for offering income protection.
Paul Avis, marketing director at Canada Life, says: “Until there is a proactive appetite from employers for this product there won’t be any change and this key challenge will remain the same, whether we have simple products or not.”
Realistically, if such an employer appetite ever emerges it is likely to come primarily as a result of State welfare reform around disability benefits or on the back of a significant upturn in the economy.
Should this happen the positive role that any simple products play will probably be hard to monitor but the mere fact that the Government is already willing to engage with the industry to talk about protection products is surely a positive sign.nw