Regulatory intervention may be the only way to advance protection

It’s good to talk...and we need an appropriate distribution framework that allows that to happen.

‘If life assurance was free, how much would you have?’

‘You don’t buy life assurance because you’re going to die, but because those you love are going to live’

‘If you had a money-making machine in the corner of your room, would you insure it?

These ideas featured in life insurance training courses I attended 40 years or so ago – maybe some still use them.

They’re a reflection of the adage that ‘life assurance is sold and not bought’.

Since then, we’ve seen a very material switch in the way general insurance is bought, but the same cannot be said for life insurance.

General insurance is increasingly bought direct – latest Association of British Insurers figures suggest 51 per cent of personal lines business was direct and within that 63 per cent of motor business. And that proportion would be inflated when all the comparison sites are included.

For years people have suggested life assurance will go the same way, and yet, as the Financial Conduct Authority's new terms of reference for a market study into the distribution of pure protection products makes clear, protection remains stubbornly intermediated.

The main distribution channel for pure protection products is via intermediaries, it said. In 2023, around 92 per cent of income protection and 82 per cent of critical illness premiums from new sales were generated through intermediaries.

Why the difference?

The law says we have to insure our car, we regularly see the impact of huge vets’ bills, lenders encourage us to insure our house, but few like to think about the impact of death or long-term disability.

One of the most obvious changes in the protection market in the past 40 years is the actual number of advisers involved.

In the 1980s, adviser numbers were measured in the hundreds of thousands – insurers and banks all had large sales forces, most of which have now disappeared.

Now adviser numbers are in the small tens of thousands, and those talking regularly about protection will be nearer five thousand.

We’ve seen the rise of the specialist firms who focus solely on protection and it is to their credit that sales have not fallen over the years in proportion to the decline in adviser numbers.

There’s a big opportunity for those that are left, and for those advisers who may focus on other areas such as wealth or mortgages, it has never been easier to signpost customers to specialist protection advice.

Trusted relationships

The direct sales forces have gone, so too the idea of ‘home service’, where advisers walking up the garden path to collect the premiums were seen as family friends and were often invited to the weddings and funerals of clients they had served for many years.

Long before the days of big data, these agents accumulated a wealth of insight into the lives of their customers that could inform how to nurture and grow that relationship.

The successful advisers today, I think, are looking to replicate that kind of ongoing, strong, and trusted engagement. The core client needs arguably haven’t changed dramatically. Without protection, customers or their dependants still face the risk of loss of income and an inability to pay rent or mortgage payments or to maintain their lifestyles.

That said, people’s lives have become more complicated and the need to review a client’s circumstances (and the need for flexible products that can cope with changes) is more important than ever.

We’ve seen greater compliance oversight of the sales process, ‘reasons for recommendation’ reports, and increasing and better use of technology (think personalised risk reports and more).

The market study

Looking at the FCA's draft terms of reference, it has concerns in relation to the design of commission arrangements and whether they always support delivery of fair value.

It is looking at some specific products as well as how well competition is working in the market, noting the recent exit of several insurers.

It has said: "We are starting the market study with an open mind as to whether we will find evidence of harm", and elsewhere that: "When commissions are designed well, they can be an effective tool for remunerating intermediaries for providing valuable services to consumers."

It has outlined 4 broad themes:

• consumer needs, engagement and understanding;
• competitive constraints on insurers and intermediaries;
• commission incentives and potential conflicts of interest; and
• firms’ behaviour and practices: how firms’ incentives impact their conduct in relation to products, the market and their treatment of consumers.

What might change? The regulator might conceivably ban commission, as it did for investment business in the Retail Distribution Review.

I think this is unlikely. The unintended but entirely predictable consequence would be a huge reduction in the number of families covered.

I’ve never seen any research that suggests customers are prepared to pay a meaningful fee to buy something they’re not sure they need until someone highlights the consequences of doing nothing.

The protection market in Australia, where low caps on commission have been imposed, has seen a very large fall in the number of active advisers, as they now believe it is economically impossible to engage.

But we should welcome the market study.

Intervention needed

There will be few who think the market is working perfectly, and yet, on areas such as commission in particular, it is hugely difficult for the industry to have a meaningful conversation as to what might be changed and how because of the implications of competition law.

There are plenty of things the industry has collaborated on to improve over the years, but this is one where regulatory intervention may be the only way to advance.

One area I hope the regulators will look at is the role that lead generators play.

There are too many rogue outfits misrepresenting their identity, encouraging inappropriate re-broking of good policies.

How can we share more readily examples of poor practice and poor practitioners?

Over the past 40 years, insurance payouts have supported customers and their dependants at what is often the most difficult point in their lives, helping them immeasurably.

There have been new technical developments, innovations, more personalisation of products and propositions, alliances, education, leavers and new entrants.

What hasn’t changed is the need to have those potentially difficult conversations – it’s still good to talk and we need an appropriate distribution framework that allows that to happen.

Peter Hamilton is head of market engagement at Zurich UK