"The insurers will argue that adding these benefits to millions of existing policies will expose them to much greater risk without a corresponding premium increase. That’s true, but is it fair?"
A key consideration for the Financial Conduct Authority’s (FCA) pure protection market study is fair value, and what constitutes fair value within products.
On one hand, in a market dominated by price and price comparison, you’d expect a review of fair value as defined by cost versus benefit to be unnecessary – providers know that they have to offer competitive prices. However, I think there are other factors to consider.
Firstly, the cost of over-50s guaranteed acceptance plans is significantly higher than underwritten Whole of Life (WOL) plans for the same sums assured.
“The reason, of course, is that insurers have no idea what risk they’re taking on.”
There’s a survival period of one or two years during which, if death occurs (unless caused by an accident), the premium will be returned but with a declined claim, which is the only risk mitigation factor for the insurer.
The policyholder can pay more into a guaranteed acceptance plan than what the cash payout will be upon their death, even though premiums usually stop at 90-95 years old. That can’t be considered fair value, and maybe something the FCA will want to explore and expose.
What is more pressing, in my view, is the promotion of over-50s plans by providers. One of the ‘benefits’ of these plans is that there aren’t [intrusive] medical questions during application – isn’t that great?
“I don’t think so, because that’s why the price is relatively high, and how policyholders can end up paying more than is paid out.”
Guaranteed plans have a place, and for someone who has suffered a serious condition and wouldn’t have access to an underwritten WOL policy, these plans are a lifeline. But for many people who have bought one, however, an underwritten policy would have been far better value.
Protection providers are constantly upgrading their propositions and, when they do, new customers are usually the only people to benefit. The insurers will argue that adding these benefits to millions of existing policies will expose them to much greater risk without a corresponding premium increase. That’s true, but is it fair?
Guardian Financial Services (Guardian) applies its cover upgrade promise, but that’s more possible because it's relatively new to the market and doesn’t have a very large back book of Critical Illness (CI) policyholders compared to the more established protection providers.
“It can absorb the additional risk, but there will come a point where it’s much more difficult to maintain that position.”
An unfortunate consequence of the inability – or reluctance – of protection providers to give existing customers access to upgraded propositions is that advisers may legitimately encourage customers to replace existing cover with the shiny new model.
When this happens, not only is the price likely to be higher because they’re now older (and the upgraded proposition is better, by definition), but, usually, new commission is payable to the adviser, which is ultimately paid for by the customer.
This brings us back to one of the issues under the FCA’s microscope: commission. It’s very easy to justify a replacement policy if the provider doesn’t have mechanisms to amend existing policies to include any new risks that have been added.
“Will the FCA conclude that protection providers should make it possible to upgrade existing policies to capture new benefits? That wouldn’t surprise me.”
Most providers include a package of added-value benefits within products. These include services such as virtual 24/7 GP, second medical opinions, mental health support, and bereavement counselling.
Most of the time, the cost of these benefits isn’t explicit but built into the price of the contract. That doesn’t necessarily make them ‘free’.
Could the FCA be concerned that customers often don’t have the choice of turning down the offer of these benefits in exchange for a lower price? Maybe.
