The Good Ol’ Days? Er, No! - Andy Couchman, Protection Review

Back in the 1970s (yes, I am that old…) a new product made itself known if you worked for an insurer by the actuary announcing one morning that it would be launched on a particular date and with these premium rates.

Most products followed a well-trodden path, so it was usually just premium rates and policy fees that determined how different you were from your competitors.

The late and much-missed actuary Des Le Grys headed up Munich Re for many years and he used to tell the story of when, as a young actuary, his employer asked him to reprice their life products, in order to be more competitive.

Des ran through the numbers, looked at factors such as expenses, commission and what their competitors were doing and determined the right approach to take. The result? Standard Life less sixpence.

That sounds facetious, but Des knew Standard Life’s team of actuaries would have taken great care to get their rates right and, assuming Des’s employer could run on lower margins or ran a leaner admin, he was safe in just undercutting them by sixpence in the pound off their rates per mille (thousand pounds of sum insured).

A good actuary would listen to his (it was invariably a he – those were not enlightened times, and the industry had only just stopped rating people because of their race…) managers and get their feedback but they would rarely be involved in the development process itself. One reason for that was that the education level of most managers was not what it is today. Now, most people involved in product development will have a bachelor’s degree or above, and many will be professionally qualified too. Then, only 1 in 20 schoolkids went on to higher education (today it’s around 50%), and most managers tended to be grammar school educated (at the highest) but not beyond, although they were encouraged to study for a professional qualification and that level was set above bachelors level.

My first employer (Reliance Mutual) had a subsidiary (British Life Office) that was a pioneer in the unit-linked field and most of its products used unit linking to both undercut with profits offices’ rates and to offer customers the prospect of building up investment returns over time. Fundamentally though, the underlying products (term, whole life and endowment) followed the established pattern. Many included an investment element, which added value over time in the form of a surrender value or paid-up value and a higher sum insured. But only after many years and value was often poor, given that the average policy only lasted for around seven years. There was no critical illness insurance in those days (it only started to emerge in the md 80s), while income protection – or permanent health insurance as it was invariably known as back then – was the realm of mainly specialist insurers and friendly societies.

Rates were rarely changed, as that meant reprinting a physical rate book and that added expense, complication and time. To change your competitive position or your company profits, you could manipulate your surrender values as, mostly, these were not guaranteed. In what looked like sleight of hand (but my actuarial colleagues assured me was not…) you could decrease surrender values simply by assuming a higher interest rate. That sounds counterintuitive but a higher rate meant you needed a lower reserve value today to meet a specific sum in the future and the reserve value, in effect, was the surrender value too.

Later I worked for another smallish insurer – Trident Life – and again product design (we mainly offered investment-linked products) was actuary-led.

In the 80s came a move to a large insurer - Hambro Life (which became Allied Dunbar before being subsumed into Zurich) and product design there was, for the time, much more sophisticated.

The process started by the board deciding a new product was needed and then a product development group was set up, usually under the chairmanship of a systems manager or director (not least because they were best at organisation). The largely part-time group would include at least one of an actuary, a finance person (if different), legal, underwriting, claims, marketing, sales and admin people. IT was represented by systems representatives. Most of the group would be middle or senior managers and, in turn would delegate research and development work to people within their own teams. Outside organisations were rarely used unless we were developing something new to us, such as mortgage or PMI products.

A new product might be on the books for 30 or more years so a fundamental principle was that every eventuality had to be considered and then recorded. All key decisions and the product spec were recorded in a Basis Book (I never did find out why that name) and that became the ‘bible’ that could be referred back to even years later. Only once the group had agreed every aspect of the product would it go forward to the board to be ratified and launch dates usually were chosen to coincide with national company sales conferences.

We were unusual in that every new product was modelled and profit tested. There was a simple financial aim, measured by PVP – present value of profit - and that used discounting to calculate what profits would be earned and when, and then took that back to a present-day value. To try to minimise the risk of product bias, PVP was directly linked to the basic commission rate too. Today, modelling is much more thorough but ours was more sophisticated than most, especially given the relative low computer power available to the actuaries (now including many more women as the workplace began to be more representative of the wider society we served).

Compliance was very simple, but we had a company internal police force (called Special Services which, worryingly, had the initials SS) and its expertise was called on to try to ensure a rogue salesman (or woman) couldn’t con the system. With a salesforce over 3,000 strong, despite rigorous checks, bad things did happen, albeit much, much less that you might think. And yes that even included fraud and the odd murder.

We had an unusual reinsurance arrangement – our reinsurance treaty was put out to tender and reinsurance was something that rarely involved us in the marketing team.

The whole product development process usually took 3-6 months, although in some cases could be longer. IT was mainframe, big, slow and expensive so we were usually limited to just three new or majorly changed products a year and it typically seemed to cost around half a million pounds and take three months to make any major changes, even introducing major product updates.

The products themselves were still largely hybrids, using unit linking and a product review system to offer competitive pricing (typically we aimed to be within 5% of the cheapest in the key customer cells) albeit with premiums that were not guaranteed.

There was no FCA rulebook to abide by but instead, any qualifying policy (you needed that to get tax relief on premiums pre-84 and later to ensure benefits were tax-free) needed to be certificated by HMRC. That could be a painful process and was handled by our in-house lawyers.

For the product marketing team, in the early days, a new rate book section would have to be printed and we spent a lot of time on brochures, illustration forms, application forms and technical and sales aids. Much time was spent briefing the training and broker departments, and liaison with them was a key part of my role too.

Before that, our input was based mainly on what we believed would a) meet customers’ needs best and b) would sell. Research was largely informal and desk-based but our salesforce and broker division were both vocal in telling us what they wanted and of updating us on what competitors were doing.  The actuarial network was invariably the best way to get detailed information about competitor products and pricing.

We hardly ever commissioned market research with consumers. Whenever we did, we used it to help test ideas and form our opinions. However, most consumers had little knowledge or even interest in insurance and the results were largely unreliable.  One product we did pre-test was critical illness insurance and the research told us in no uncertain terms that there was no need or demand for the product, it was seen as gimmicky and no one wanted to buy it – and certainly not at that premium to straight life insurance.  Nevertheless, we went ahead because we believed in it and believed too we could get the messages across although, in the early days, few realised that the mortgage market would be the key driver to sales and that only really manifested itself when we found the most popular (and cheapest) way to buy CI was to add it to your endowment policy.

Looking back from today’s perspective it’s perhaps all very rose-tinted spectacles stuff. But were the products we developed then better than today’s? No. Our products then were up there with the best but, since the late 1980s, regulation has helped change the culture much more towards better customer outcomes. The old investment linked products (even our term insurance was unit linked, albeit with no surrender or paid-up values) have largely disappeared and today, pure protection products rule. Industry initiatives such as standardised minimum CI definitions and fairer claims approaches and higher sales standards all help produce better customer outcomes. Price remains the key factor in achieving market share, albeit price – while important – should never be the sole reason to choose product A over product B.

We haven’t achieved full potential yet, but we also now include a raft of non-financial customer benefits (added value services is one of the awful industry descriptors) that actually help individuals and families if a health (or other) problem hits them. This development alone is rapidly shaping the relationships we will have with our customers going forward and has such tremendous potential.  It also holds out the prospect of us being able to do things like offer ‘cover’ (not necessarily financial as measured by a sum insured) to IP customers over 60 or life/CI/IP cover to the uninsurable.  We’re not there yet though and there are some significant obstacles to be overcome too before it happens, but increasingly it looks more when rather than if.

Pricing is much more proactive today (no more physical rate books), as is underwriting, where the pandemic has shown we can be much more dynamic. Product design too has edged slowly forwards – although we still don’t yet have fully comprehensive CI cover, IP looks to need both more simplification and some radical thinking around structure and presentation and long term or later care cover remains still largely on the ‘to do’ list.

Look closer at products too and there’s a list of protection products you can buy but where the FCA’s new Consumer Duty may ask awkward questions in future including:

A few years ago a handful of insurers developed an IP product that ONLY paid out if you were off work because of a critical illness. As most people are off work for other reasons (mental health and musculoskeletal being the main claims heads) premiums were low – but so was the chance of ever claiming. We hope these products have been quietly dropped now.
The CI market has split into comprehensive and budget plans. Budget plans are simpler and cheaper but why would you want a CI plan that only pays out four times out of five if you suffer a life-changing illness? It’s worse than a household policy that doesn’t cover claims arising on a Monday…
Standalone CI cover. This should be cheaper than CI with term but often isn’t because insurers price to take account of selection. Paying more for less cover doesn’t look to make much sense – even if you are single with no dependants.
The debate over whether couples should have two single life plans rather than a joint-life one continues to rage. We fear the FOS may favour the latter because it is cheaper initially but for us, two single life policies are what we’d choose for ourselves and our loved ones every time.

There are others you could add to the list – and you may not agree with the list anyway. Certainly the Consumer Duty should make us all look much more carefully than ever at our current and future products at both a principle and a detail level.

One thing’s for certain. Product design now is probably better than ever and one of the hidden trends has been insurers being much more focused on the future rather than just on today. True innovation is both more needed than ever, but also a tough road to follow. As an industry, we remain largely risk-averse and intermediaries rightly remain concerned about anything that looks too radical. The price for recommending the ‘wrong’ solution remains a high one for intermediaries (as it should be), but that can translate to the stereotype of wanting (or developing) just bigger and cheaper cover rather than better cover at a fair price. However, the CI sector is showing now there are better ways than just more is good – but there’s still some way to go.

That brings us back to Protection Review. Since 2003 we have aimed to encourage real debate on real issues and a drive towards ever-better customer outcomes. But we strongly encourage innovation (including on process as has often been the case in recent years). More innovation is to be encouraged on product design and indeed every part of the mix. Oh, we support more simplification too. The CI sector is demonstrating that is possible (grouping similar conditions together, replacing the earlier conditions race trend) but the art to successful simplification is simplifying what our customers understand rather than simplifying the cover itself, not least because that is usually interpreted as offering less rather than more or wider cover. In other industries, your Tesla’s basic principles and driving experience are simplicity itself but look under the bonnet (hood?) and you’ll see a level of complexity rapidly approaching that of the aviation sector.

We need to learn from such sectors, from non-UK insurers and, perhaps most of all, from listening more to our customers and then developing the ideas they will want to buy. Product development is a dynamic process and the only certainty is that tomorrow has the potential to be even better than what we regard as excellent today.


Andy Couchman, Co-chairman, Protection Review

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