Despite the regulatory obstacles that have been placed in its way the grubby caterpillar that was accident, sickness and unemployment cover must now emerge a butterfly because your clients need it
In the past 12 months accident, sickness and unemployment insurance in its many guises has come in for a lot of criticism, some of it justified and some resulting from a lack of understanding. Like a child going through puberty the product is experiencing some growing pains as it matures but what will emerge is a high quality and much-needed form of cover for your clients.
The history of ASU is chequered and reads a bit like a soap opera but it is important to understand the background if we are to develop a better product.
Until a couple of years ago ASU was sold by many brokers as a quick and easy add-on to mortgage sales.
The penetration wasn’t great but the product gained some traction nonetheless. To encourage brokers to sell the product the firms providing it designed simple quotation and application systems with no need for a signature in many cases. And because it was not underwritten until a claim was made policies were issued immediately.
The fact that it was not underwritten at the point-of-sale was not much of an issue because unemployment was low and most insurers paid claims without too much reference to the terms and conditions as the schemes were profitable.
But as the economy deteriorated and the number of claims started to rise insurers started taking a closer look at the eligibility of claimants and unsurprisingly rejection rates started to rise significantly.
This in turn attracted the attention of the Financial Services Authority, the Competition Commission and the Financial Ombudsman Service. As a result of this a raft of new regulation has been imposed on the product and many companies have been fined by the regulator for mis-selling.
Never ones to miss an ambulance-chasing opportunity a number of claims management companies quickly jumped on this bandwagon, prosecuting claims for the mis-selling of payment protection insurance on behalf of customers.
None of this has done much to help the reputation of ASU and sales of the product have been badly hit. Customers now shun it due to bad publicity and brokers avoid it for fear of being caught mis-selling, which is ironic if not tragic because all this comes at a time when income protection is needed more than ever. Recently, the FSA fired a further salvo by making insurers reverse price increases.
But even that’s not the whole story. ASU is a monthly renewable contract and premiums are driven in large part by the claims experience of the insurer that, unsurprisingly in the case of unemployment insurance, is directly linked to unemployment figures. As we all know these have increased significantly in the past 18 months.
Insurers have an obligation to ensure their pool of funds is sufficient to meet all claims and clearly when funding levels are depleted by an increase in claims insurers need to address the shortfall.
Unfortunately, there are only two ways to correct this. Either insurers increase the number of claims that are rejected which is a dangerous strategy and cynical at best, or they increase their premiums to try and compensate. This needs to be balanced with a realistic increase in premiums otherwise insurers risk an exodus which simply compounds the problem.
So most insurers in this situation seek to offset losses with an increase in premiums while calling on reserves that were built up when claim rates were not so high.
The FSA’s decision will create higher premiums while arguably providing no benefit to customers
Of course, this is not a new phenomenon. Those of you who have sold protection policies will be familiar with reviewable term policies whereby, for a lower premium, clients get a life policy that allows the insurer to review their premiums in future in line with its claims experience.
I remember selling these plans in the early 1990s when many insurers withdrew their reviewable policies as they expected a tsunami of claims over the course of the next decade due to a widely forecast AIDS epidemic. Thankfully, this never happened.
The irony of the FSA’s recent decision is that it will create higher premiums while arguably providing no benefit to customers. And this is where many individuals have become confused.
The agreement between the FSA and the Association of British Insurers centred on insurers reversing any price increases imposed in the previous 12 months. The justification for this was that the regulator felt the terms and conditions issued by insurers did not adequately specify that premiums could rise in future.
So insurers had to reverse their price increases, which is logistically a complicated and expensive process. Then they had to issue new terms and conditions to their customers. Only then could they increase premiums.
All this has done is delay price increases while incurring huge costs to insurers that will ultimately be passed on to customers. I can’t see any benefit to customers, only confusion. And I can’t help but feel the regulator has forced the industry to do this for no reason other than it can.
All these issues aside, ASU is maturing and I believe 2010 will be the year when faith is restored in it, whether this comes about because of new entrants to the market or radical improvements in the way the product is constructed.
This will allow you to protect your clients properly at a time when they most need it. The old ASU was a product of its time but it now needs to emerge from its chrysalis and spread its wings.
SALES AND MARKETING DIRECTOR