Tim Smith, Head of Protection at Hannover Re talks about Good and Bad Complexity
At the Protection Review Conference on 8th December, the topic of complexity in our industry cropped up in almost every session. We heard how consumer trust is being eroded by the complexity of our products, with the numerous options and unintelligible definitions compounding the existing belief that insurers will do anything to avoid paying claims. However, we also heard that adding additional bells and whistles to our products, such as 24 hour GP services, has the potential to increase sales. I would like to unpick, briefly, what we as an industry mean by complexity, and explore how we might distinguish between good and bad complexity.
When it comes to consumer trust, we are immediately faced with an uphill struggle. While the industry pays 98% of protection claims, the public believes that this figure is a lot lower. Anything that appears to confirm the customer’s perception, therefore, carries a lot of weight. Complicated policy wording is an obvious example of this. If the customer does not understand parts of the policy document, this is assumed to be ‘small print’ that the insurer will later use to avoid paying their claim.
The range of products on offer also has the potential to undermine trust. For example, I think most people would question why we have two tiers of Critical Illness (“CI”) products with many providers now offering basic and comprehensive cover. The idea of CI cover is simple – "if I have a life changing diagnosis, then I receive a benefit to help me deal with that". Having two levels of cover implies that, for the basic cover, you may have a life changing diagnosis but receive nothing. Either that or the comprehensive cover does not add any real value. Insurers are motivated by the selling process to offer these tiers of cover, not least because providers are often recommended by the intermediary on price based on a particular level of cover. A provider is selected based on the price of the basic cover for example, but comprehensive cover may be upsold later. Any insurer offering only comprehensive cover will not get past the first step. However, I think the complexity that this brings to the product landscape does not do our industry any favours.
It is important to note that the complexity here comes from the industry expecting consumers to make a choice that they are not equipped for. A policyholder can opine on whether they want children’s cover included, but should not be faced with a decision as to whether a gastrointestinal stromal tumour would constitute a life-changing diagnosis. They reasonably have the expectation that the insurer and the adviser will have this covered. Basic CI products, covering a limited number of conditions, are often labelled as ‘simple’. While it is arguably more complex to have an extensive list of conditions, a comprehensive product paying a benefit when the policyholder expects it is more valuable for the individual and less likely to do reputational damage to the industry. Coverage, therefore, is an area that the public expects to be able to defer to the industry, and the inherent complexity is accepted.
"Added value" services are another area of complexity that our industry has introduced in recent years. Facilities such as 24-hour GP access through virtual consultations, or second medical opinion services, can be valuable for policyholders. We should be under no illusion that the public believes these are free – the cost is included in the insurance premium and no one expects otherwise. However, they are services that policyholders potentially see the value in and are happy to pay for. Crucially they are also in a position to decide what value they would put on these services. The complexity of different offerings across the market does not lead to an impossible decision, as long as insurers are clear about what exactly is included with their products. People are quite happy to carry out a cost-benefit analysis with a wide range of options, as long as those options are intelligible to them. We only have to look to the smartphone market to see this.
There are undoubtedly times when complexity in our industry is acceptable. The simplest option does not always deliver the best value for consumers. Products need to be comprehensive and flexible enough to meet the reasonable expectations of policyholders. When our products are packaged with other services, we can expect consumers to appraise how well these additional services meet their needs. However, the industry fails when it expects consumers to take a view on complexities that they do not have the tools to evaluate. Even with advice, consumers face challenges navigating complicated definitions, or assessing which level of cover will pay a benefit when a policyholder might reasonably expect it. As an industry, we need to eliminate unnecessary complexity, which is further eroding the public’s trust in protection, and ultimately depressing sales.
 ABI claims statistics for 2020 https://www.abi.org.uk/news/news-articles/2021/05/record-amount-paid-out-to-help-families-cope-with-bereavement-ill-health-and-injury/