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Protection Report No. 7 (page 4)

Peter Le BEAU

Peter Le Beau is one of the best known independent consultants in the Protection Market. He has over 30 years experience in reinsurance, the last 20 of which were spent at Swiss Re where he was Head of UK Marketing. He left Swiss Re in 2001 to start his own consultancy, Le Beau Visage, which focuses on helping companies to differentiate their value proposition.

He is a non-executive director of Monevate and HMCA and Chairman of Red Arc. He is the co-author of the Protection Review and the Redmayne Report on Reassurance and he is a programme director at the Swiss Insurance Training Centre in Zurich. He contributes a regular column to Health Insurance on Technology.

Let’s Push Things forward. I am rather fond of ice-cream but I think this enjoyment might pall a little if I had to eat vanilla flavour every day. I pondered this rather eccentric thought as I contemplated the current UK Protection industry the other day. I should preface these remarks by making it clear that I find it hard to enthuse with ‘stick-in-the-muds’ who continually bemoan the progress made in an industry and hark back to how it was ‘in their day’. I’d like to feel that any criticism I have of the current industry is rooted in a perspective which is properly customer-focused. Customer focus has become such a misused and misunderstood phrase that it has almost lost its meaning in large parts of our industry but I think it used to mean trying to construct a proposition based fundamentally around customer need. A bit revolutionary I hear some people say but it has an odd attraction in a quaint, old-fashioned way.

Now why was I alluding to ice-cream at the start? It was a tenuous connection illustrating how the Protection industry has changed. A few years ago if you wanted a large (and financially justified) estate duty policy, it was usually placeable. If you had a rare medical condition, underwriters would strive to find terms that they could offer you. There was a general acknowledgement that we were a service industry and that if life cover was required for family protection, or for a mortgage or to cover a loan which facilitated a business transaction, this was important to the client and no stone would be left unturned in an attempt to find cover. It is not so nowadays. ‘Cherry-picking’ is not new to the insurance industry, in fact the motor insurance industry has made an art-form of it but the difference is that there are lots of niche markets in the motor insurance market which cater for the unusual or non-standard risk. This is not so in the life industry. We have seen the remarkable sight of a risk industry ‘de-risking’! You can have any colour as long as it is black or any flavour as long as it is vanilla. I have lost count of the times IFAs have come to me in exasperation with a large or slightly rated risk and asked what they should do next. Some of these IFAs have business which companies would have given their eye-teeth for a few years ago. They embrace wealthy niche markets with high-quality risks and excellent persistency, with all of the relevant financial evidence that any reasonable underwriter could possibly need.

Startling as it may seem, some insurers used to feel that well-underwritten rateable business could produce attractive returns and regarded it as a matter of pride to try to offer terms to as many applicants as possible. I have sat in with CMOs and senior underwriters where terms have been crafted on unusual risks or risks where great medical understanding was needed. It used to be the raison d’etre of the life industry to help those who needed it, albeit at a sound, commercial price. This isn’t the case anymore.

Why has this ‘de-risking’ occurred? Many observers would blame the increasingly high profile that reinsurers play and note that reinsurers have become more conservative in their underwriting approach as they now often take 90% of risks written by a protection provider. This situation, which arises because the reinsurer has a much lower cost of capital than the provider, is one that does cause an imbalance because there is no ‘community of risk’. In other words, the parties to the risk don’t share the same level of interest in the outcome. This is bound to cause problems. But, it is too easy and convenient just to blame reinsurers. They are a soft target that can always be used to justify a declinature. The industry has largely de-risked because it has become a series of mass-production factories interested in high volume, low sum-assured cases and they are not geared up for any variations on that theme. Specialist IFAs like Special Risks Bureau and Risk Placement Services do a noble job in trying to confront these problems but they are restricted to the use of the current marketplace. They would be greatly aided, as would we all, if niche specialists rose up among the providers, with the appetite, capacity and capability to write unusual or frankly, just slightly out of the ordinary risks.

Just as we have seen a revision and reformation of the UK motor market, is it too much to hope that we could see the same sort of segmentation start to develop in the life industry? Would it be too far-fetched to hatch accusations of financial exclusion for those not in perfect health? Does it not seem contradictory that we have a product (Critical Illness) reeling because of advances in medical knowledge when fewer rated lives are being accepted and at a time when our technological sophistication and medical knowledge has never been greater? Consumer detriment is an emotive phrase but one that seems to describe pretty well a situation where most of the industry can’t be bothered to try to find cover on a significant proportion of the risks that it is seeing. I think it is something we should pay serious attention to before we find it becomes another nasty consumer issue.

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