Martin Shaw discusses the important role of mutuals in growing the income protection market.
Still relevant in today’s market
A mutual is an organisation without shareholders, which is owned by, and solely responsible to, its customers. Traditional mutuals, such as building societies and friendly societies have been joined in recent years by mutuals in a wide range of sectors, and today you are just as likely to see a mutual on the high street, in the public sector, your NHS Trust or at a football ground. Mutuals now employ one million people in the UK, and account for annual turnover, according to the think-tank Mutuo, of £112 billion.
At its heart, any insurance is built around a mutual concept: a group of people coming together to solve a shared problem. In the case of insurance the problem being of an uncertain risk of a large loss occurring in specified circumstances, which insurance helps to solve by exchanging the potential of that large loss for a (comparatively) small premium.
The roots of mutual income protection
The first National Insurance Act, in 1911, recognised the strong credentials of mutuals. The Act gave the British working classes the first formal contributory system of insurance, providing cover against illness and unemployment. Before that time, workers had to rely on the provisions of the Poor Law, unless they were a member of a friendly society or protected via their trade union. The Act itself formalised the role of friendly societies, by making them the providers of sick pay arrangements, and between the wars, over 20,000 friendly societies operated in the UK. The prominent role of the sector continued up to the creation of the Welfare State in 1948.
Perhaps the most significant development in mutual income protection was the “Prize Essay on Superannuation and Old Age Pensions”, written in 1878 by a Member of Parliament called George Holloway. His vision was of:
“securing to members of friendly societies an income during sickness or temporary disability, a sum of money at death, and especially to provide them with an annuity in their old age”.
This led to the emergence of Holloway friendly societies, to provide a form of income protection that as well as providing an income on illness, also accrues bonuses that provide a tax-free lump sum on retirement. As you might expect, this proved to be a very popular model, especially when the alternative was destitution or the workhouse.
So it would be true to say that mutuals were a dominant force in insurance in the first half of the last century, just as they were in the savings and mortgage market. It is very different today of course – though even as recently as 1995 over half the UK insurance sector was mutual. Today, members of the Association of Financial Mutuals account for around eight per cent of the UK insurance market. But it would be wrong to dismiss the relevance of the mutuals for today, and that is as true for income protection as it is anywhere else.
Freedom to innovate
An insurer that is owned by its policyholders, does not have the obvious potential for conflict of interest between holders of equity and customers. That means that securing good outcomes for customers tends to coincide with the best interests of owners, allowing the organisation to explore ways of delivering a better deal. Put another way, AFM research indicates that the cost of paying a dividend to shareholders in PLC insurers equates to an average of three pence for every £1 of premiums: money paid by customers but extracted directly from the business. The extra three per cent gives a mutual a significant advantage, and the flexibility to pursue the interests of customers: either by reducing charges, enhancing customer benefits, or delivering superior service. It also means that the mutual can take a longer term view, and design innovative products with the customer’s needs in mind.
In income protection that is manifest in several ways. Some examples from across the sector are:
• Protection is offered by British Friendly without complex differences in premiums according to the job someone does;
• Holloway societies such as Exeter Friendly generally offer day-one cover, so that if someone has to make a claim, there is not an extended waiting period before their policy pays out: particularly valuable for the self-employed;
• Scottish Provident, part of the Royal London Group, recently relaunched its income protection product, designed to make it easier for intermediaries to recommend the product, and for customers to make a claim;
• Long before the rest of the market caught up, mutuals such as Cirencester Friendly have been offering ‘own occupation’ cover, as a basic point of fairness to policyholders;
• The 2012 Gender Directive made little or no impact on Shepherds Friendly Society, as they already offered the same premium for men and women, and DG Mutual does not load premiums for smokers;
• Liverpool Victoria indicates that its average claim for income protection lasts seven years – longer than many PLC insurers existed independently!
• Mutuals like Wesleyan Assurance, PG Mutual and Dentists’ Provident work with specific professions to provide a bespoke service and unique standard of service;
• Original Holloway’s “member assistance programme” is part of a range of extra-contractual benefits offered to its members;
• Wiltshire Friendly Society’s policy for professional rugby players offers a targeted solution to a career where income protection is vital but previously difficult to obtain;
• CUNA Mutual’s new ‘debt waiver’ product spans the gap between income protection and the largely discredited PPI, and has been hailed by many MPs as a way of unlocking lending to consumers and small businesses.
Most of those examples are not unique to one mutual, and indeed many are not unique to mutuals. But the challenge for the income protection sector is to develop products that have meaning for consumers, and mutuals – free from the dividend drag – appear to be at the forefront on such initiatives.
Publishing claims data
Take publishing claims data as an example. The Financial Conduct Authority is to be applauded for putting new pressure on big IP providers to publish claims data, and the action from the Association of British Insurers to develop a common template is welcomed. However, this mirrors work by mutuals over many years now: back in 2009 we published the first sector data showing the proportion of claims paid by Holloways – a full five years ahead of the industry as a whole. There were a number of reasons why:
• We believe that the ‘moment of truth’ in any insurance policy is different from most products: it is not the point where you buy it, but when you make a claim: and that can be many years later. Consumers must know their insurer is committed to treating claims fairly when they buy the product;
• We found that publishing claims data was welcomed by intermediaries in particular, who used the data to explain to consumers the value of the product, and the benefit of selecting a compassionate (mutual) provider; and
• We have a good story to tell on claims-handling: because of the care mutuals take in underwriting the product, and because there are so few exclusions built into the product, the proportion of claims paid is incredibly high for mutuals: well over 90% for most.
Simple income protection
Another recent initiative is the Treasury’s project on simple financial products. It was interesting to be involved in the project: there was a real will across the industry to develop a form of income protection product that was simply designed and suitable for almost everyone.
The problem with income protection was that it seemed very difficult to develop a solution: partly because of the inherent complexity of the product, but moreso due to the need to establish first the state benefits someone might achieve if they were incapacitated. The solution appeared to be to focus on developing only a group IP product, at least for now.
Thankfully the project work appears to have created a more commonly agreed understanding of what a simple income protection product would look like. In the tail end of 2013 we have seen a number of mutuals re-launch products with simplicity at their core. That seems to be a very positive development, and one which will help create new interest in a much-needed product.
New selling rules – via the Retail Distribution Review – are changing distribution: whilst the FCA provided a welcome exemption for Holloway products from the full investment selling rules, this is only a limited exclusion. Evidence in the first half of 2013 was that intermediaries were moving to products with no investment content. The sector has followed suit, with a number of Holloways providing pure protection products, whilst retaining the inherent simplicity of their contracts.
According to Swiss Re, the market for income protection in the UK has been relatively static over the last five years. Mutuals however have been growing market share over that period, and now account for 25% of the market. In addition, it is pleasing to see the number of industry awards now secured by the mutual sector, with even small suppliers being recognised by intermediaries for product innovation and quality of service. This is a great platform for the sector to expand from.
Returning to George Holloway’s Prize Essay, he envisaged that with the proper public support by ‘leading gentlemen’, there would be:
“so great an increase of subscribing members, that ere long a working man who did not avail himself of these advantages would be an unenviable exception to the general rule. There would soon be a perceptible decrease of the pauperism which so disgraces this prosperous country.”
Language aside, that feels like a very contemporary message, and given recent announcements to create the Family Support Initiative, that must make Peter Le Beau a very leading gentleman. It is to be hoped that mutuals can actively support initiatives such as this, designed to raise awareness of the need for, and benefits of, income protection.
Chief Executive, Association of Financial Mutuals
The Association of Financial Mutuals (AFM) represents 53 member companies, most of which are owned by their customers. Between them, AFM members manage the savings, protection and healthcare needs of over 20 million people, and have total funds under management of £120 billion. The nature of their ownership and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion.