Helen White of the ABI discusses the background, aims and progress of this government-led initiative.
The ‘simple products’ project continues to attract mixed views. Some see it as an opportunity to reach out to a wider audience of potential customers. Others see it as too risky, or the wrong answer to the challenges of engaging more consumers in using protection insurance. I fall into the opportunity camp, while recognising that it is not without risk (what is?) and cannot alone address the challenges. No one has ever suggested that the creation of standardised ‘simple product’ versions of existing products will solve all of the challenges. The development of simple product standards and a logo is intended only as one of a range of actions needed to chip away at the challenges. So we should not judge the project on its potential to solve everything. ‘Simple products’ is a working name. It is unlikely to be used when the logo and product standards are launched. The Association of British Insurers (ABI) is working with the British Bankers Association (BBA), the Building Societies Association (BSA) and the Money Advice Service (MAS) to undertake consumer testing to identify what name and logo will be most effective in communicating simple products to consumers and creating an accurate interpretation of what ‘simple products’ are, and are not. But for the time being I will stick with using the term ‘simple products’. The objective of the simple products project is to help and encourage consumers who have a need that could be met by a financial product – but who are not addressing that need and will not go to a financial adviser – to easily and confidently buy a standardised ‘simple’ version of a product without advice and thereby meet that need. Ultimately the objective is to get more people using financial products to manage their financial risks and needs, and for our society to become more financially secure and resilient as a result. The desire to develop standardised simple products is based on a belief that one of the factors that contributes to some people not using a type of financial product, when they would benefit from doing so, is that they are put off by the difficulties they encounter in understanding and comparing products across the market. Industry approaches to differentiating products from those of competitors have created greater choice in types and levels of cover available to people with different needs…but they have also made it more difficult for consumers to compare products and confidently identify those that will meet their needs. A ‘simple’ version of a product might not be the best version of the product on the market for an individual, but they are intended to provide a basic level of cover that is better than no cover at all. Not everyone has the time, confidence or inclination to hunt around the market to work out which product is best for them. Not everyone will use a financial adviser. Many people just want to be able to quickly and easily buy a product, through a non-advised transaction, that they can be confident will give them enough cover to protect them against the most likely and severe risks. Those who are willing to put a lot of time and effort into shopping around are already doing so. They do not need ‘simple products’, although some might find them appealing. As a society we need to do more to help and encourage people to protect their financial security beyond the basic safety net available through Welfare benefits. The creation of simple products offers an opportunity to build not only wider consumer engagement with and use of protection insurance, but also increased trust in protection insurance. But there is a risk of damaging trust further if we do not consider very carefully how to communicate and sell simple protection products. Every organisation that decides to offer a simple product should ensure that customer communications and sales practices are designed carefully to ensure that those who buy a simple product receive very clear, easy to understand, jargon free information that will enable them to make an informed decision, without advice. It will be important to make clear to customers considering a simple product that if they shop around, or use a financial adviser, they might find another non- ‘simple’ version of the product that more closely matches their individual circumstances. Good communication with customers after they buy a simple product also offers an opportunity to build trust. For those people for whom a simple product will be their first purchase of protection insurance, I hope that having that simple product will build their comfort and confidence in using protection insurance. If they later move to a non- ‘simple’ protection product, I would consider the simple product to have been successful. That customer will have moved from having no cover to having cover. But the personal circumstances of those who buy simple products are likely to change over time, meaning their risks and needs will also change. There is a great opportunity to keep in touch with customers after purchase, to ask them if their circumstances have changed, and to offer information or guidance (or signpost them to a financial adviser) to help them consider whether they would prefer to move to a product that more closely meets their changing needs. This is, of course, not limited to customers who buy a simple product. But for customers for whom a simple product is their first purchase of a product type, it does present a particular opportunity to build their trust and confidence in using protection insurance to meet their changing needs as they go through life. I have heard many people ask “but who will create the distribution or the demand for simple products?” Product providers and distributors will need to create the distribution and demand, in the same way they do for existing products. However, based on conversations with the Money Advice Service, Government, and other organisations that provide information to consumers about financial products, I am confident that those organisations will contribute to raising public awareness of simple products as a new option, once they become available. Of course the ABI – and no doubt other industry bodies such as the Income Protection Task Force (IPTF) – will also play our part in promoting widespread and positive media coverage to raise awareness. But we will all need to be careful in our communication, making clear that ‘simple products’ are different from – not better than – existing products. We will need to be clear about what they are, what they are not, and help consumers understand the trade-offs they will need to consider in deciding whether to buy a ‘simple product’. We must take care not to be interpreted as encouraging consumers to buy a ‘simple product’ instead of a non-simple version of a product. But we do want to use the creation of simple protection products to encourage those who do not currently use protection insurance to think about their risks and needs, and about using protection insurance to meet them. If few customers end up buying a simple protection product, but more customers are prompted by the availability of simple products to use protection insurance, again I would consider the simple products project a success. Since publication of the final Sergeant Review Report in March 2013, the ABI has worked closely with the BBA and BSA to build on the recommendations in the report. We have made progress in defining what kind of delivery framework and body is needed and how to create them. Both will need strong credibility, transparency, flexibility and governance to create confidence in simple products, and to enable the range of product standards to evolve over time. We will need a process for firms to use the logo for each product they wish to put on the market that meets the product standards. We will also need monitoring and reporting, to produce evidence and analysis on how the market and consumers are using simple products, to measure take-up, and to identify any issues that require attention. It is very encouraging that Which?, the Financial Services Consumer Panel, the Money Advice Service, and Citizens Advice have agreed in principle to sit on a steering board for a simple products delivery body. The ABI has led cross-industry and stakeholder work to develop simple product standards for term life insurance and income protection insurance. We have brought together experts from across the individual and group protection markets to consider all options for developing income protection standards. We are starting to consider product standards for whole of life assurance and critical illness. We continue to work with GRiD (Group Risk Development) to develop a product standard for group income protection. A simple version of group income protection insurance has the potential to widen employee access to protection insurance, increase confidence in protection insurance, and ultimately increase the number of households that have an adequate financial safety net providing enough income to pay the bills, repay loans and save for retirement if they become unable to work due to illness or injury. Some have criticised the decision to focus on group income protection rather than an individual retail income protection product. This was dictated by a combination of the Sergeant Report criteria for simple products and the way the Welfare system treats income from individual protection insurance. The Sergeant Report requires that every product to be badged as a simple product must be ‘better than nothing’ for everyone who buys it. The Welfare system treats claims payments from individual income protection insurance in the same way as unearned income, so people entitled to means tested benefits when also claiming on income protection insurance lose £1 of Welfare benefits for every £1 from an insurance claim. There will always be some households for whom Welfare benefits provide a relatively good level of income replacement, and these households would not be better off buying income protection insurance. IPTF efforts to develop a quick and easy set of questions that can be used to identify which families would be most likely to benefit from income protection insurance, and those least likely to benefit, are welcome. This approach is helpful in predicting eligibility for benefits based only on current circumstances, but it cannot predict future eligibility for benefits. It is not possible to guarantee that the outcome from using income protection insurance will be better than nothing for everyone. Circumstances can change unpredictably between purchase and claim, making it impossible to predict at purchase what a household’s entitlement to means tested benefits might be at the time they claim, perhaps many years later. This means it is not possible to guarantee that a retail simple income replacement product would be ‘better than nothing’ for every person who might buy it, so would not meet the Sergeant criteria. Using income protection insurance provides certainty about the level of income replacement the customer will receive if and when they claim, as opposed to the uncertainty of relying on unpredictable entitlement to Welfare benefits. For people who already use income protection insurance that certainty, and the level of income replacement they can secure through insurance, outweigh the risk that income from a claim might largely replace Welfare benefits to which they would otherwise be entitled. Through 2014 and beyond, the ABI will continue to develop and promote policy thinking and supporting evidence to inform and stimulate debate about increasing access to, and use of, protection insurance through the workplace. We will also continue to press Government and others to work with us to change the interaction between Welfare and protection insurance to motivate and reward households for using insurance, while also contributing to making our Welfare system financially sustainable for the future. Such changes could enable a simple product standard for retail income protection insurance in the future. Finally, it is important to highlight that the creation of a simple products framework, and product standards, leaves the decision to each individual company as to whether they offer a ‘simple product’. I hope that there will be enough providers and distributors who will view simple products as an opportunity to reach out to and engage a wider consumer audience, and to help many more households use protection insurance to build their financial security and resilience against the challenges that life throws at us.
Helen White is Head of Protection Insurance at the Association of British Insurers. She has 18 years public affairs experience in developing, influencing and delivering strategic objectives for industry, Government and EU organisations. https://www.abi.org.uk