Protection grows up: advisers finally get the full picture

After years of campaigning for full transparency of providers’ protection pay-out figures, financial advisers are now in a position to make a fully informed decision on which policies to recommend to clients.

Or are they? Friends Life last week became the last major provider to publish the proportion of income protection (IP) claims it pays out annually, meaning rates for IP, critical illness (CI) and life cover are all publicly available. But could providers do more with the statistics they collect?

Pressure has been growing on life companies to reveal their IP pay-out rates, but recent weeks have seen a “tipping point” in terms of the number of companies happy to do so, according to Kevin Carr, the chief executive of Protection Review and an advocate of transparency in protection.

This battle, fought by Carr himself as well as industry bodies including the Income Protection Task Force (IPTF), has finally been won, with Friends Life following in the footsteps of Aegon and others by publishing its 2012 IP pay-out figures last week.

A similar battle on CI was fought and won six years ago. Separately, the publication of life insurance statistics has always been less controversial because pay-outs depend on a simple binary analysis – as protection adviser Peter Chadborn, director of Plan Money, said: “You’re either dead or you’re not”.

Carr explained that, though a number of providers have published their IP stats for years, many, including Zurich and Bright Grey, held out until recently.

But what were the arguments for publication, and why were companies so reluctant to publish? Similarly, now life companies are providing statistics in the form of pay-out percentages, is a further breakdown necessary?

Like-for-like

A major concern among providers was that full publication of IP statistics would herald “league table” comparisons that would be unfair without further breakdown.

But Chadborn said this was in many ways a moot point as advisers would not make like-for-like comparisons when selecting providers. He said that, since life companies began producing CI statistics six years ago, most companies now pay out about 90% of claims, so pay-out rates were not an effective way to differentiate between companies.

For Chadborn, it is the issue of trust, both among advisers and their clients, that has been addressed by the publication of claims rates. “[We are] more likely to trust a company, particularly if the figures are released willingly,” he said. “The stats demonstrate openness in line with the Treating Customers Fairly (TCF) initiative, and producing these numbers when there is no rule requiring them to is a great indicator of TCF.”

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Another argument for publication is that they illustrate insurance companies pay out far more often than consumers expect, which will also bolster consumer confidence. “When you ask ordinary people what percentage of policies they think providers meet, answers range from anything between 10% and 50%, but the real rate is closer to 90%,” said Kevin Carr. “This is good news for life companies.”

Similarly, Carr argued publication of statistics can effectively improve them. He said CI pay-out rates have increased by almost 10% in the six years since their publication became standard, thanks to work done between the Association of British Insurers (ABI), Financial Ombudsman Service and the Office of Fair Trading, among others, to reduce non-disclosure.

They have also made product applications simpler and provided more specific definitions of illnesses. For example, as Carr explained, there are early-stage cancers which are not considered life threatening and so therefore don’t count as a CI.

Years ago, these claims may have counted as unpaid, but forms have since been modified to include cancer ‘excluding less advanced cases’, meaning that customers are more aware of how likely and under what circumstances their policy will be honoured.

Caveats

Though there was a groundswell of opinion that IP rates should be made public, some smaller providers felt doing so could be detrimental to sales and confidence. As their books were small, a single declined claim could skew their figures, they argued.

But some advisers, including Master Adviser’s Roy McLoughlin, a co-founder of the IPTF, said those concerns were always trumped by the benefits of transparency. “As long as financial advisers do not use the data for like-for-like comparisons, and insurance companies play their part in explaining the reasons for declining claims, everyone wins,” he said.

Additionally, as Chadborn explained, it is advisers’ jobs to know which company’s figures are going to be affected by a small book: “An adviser should be familiar with the circumstances of all the firms he or she considers on behalf of clients,” he said.

There are, however, some good reasons for not publishing figures, according to Carr, such as in the case of new companies. He said: “CI, IP and life insurance policies tend to be set up for 25 years or so – a new company, or a company that has just moved in to the protection space, may not pay anything at all out over the first five years. During those early years, it makes no sense to publish statistics.”

Another outstanding issue is that different companies pay out differently (see box above), and the call for standardisation across the industry is loud and being made by the IPTF and the Protection Review, as well as the life companies themselves.

Head of underwriting, claims and operations for Friends Life Individual Protection, Chris Pollard, echoed many insurers when he said: “We remain concerned there is no consistent basis on which the industry discloses its IP claims statistics, other than via the ABI.”

Peter Hamilton, head of retail propositions at Zurich, added: “Clearer definitions and uniformity on how claims are calculated is necessary. There have been ABI meetings to say that we should do this, but as yet nothing more advanced.

However, now all companies have published their statistics, there is a more compelling case to begin work on this.”

Though the ABI was unwilling to say how advanced its talks on the issue of standardisation across protection claims were, it said it “was aware this is an issue” and would consider consulting members.

Whatever happens, the wider publication of protection claims statistics has made for a more informed adviser, and a more trusting consumer.