Lessons from life

Three initiatives in the life market could have a big impact on general insurance, argues Simon Clamp, managing director UK at life and protection provider Friends Provident.

The most pressing is the Retail Distribution Review (RDR), which aims to raise standards of practice. GI has always lagged behind life when it comes to professional standards and although the two are treated separately many consumers see them in the same light. Clamp, who sits on the ABI’s RDR committee, wants to see standards raised across the industry.

The other two initiatives are money guidance and financial capability. The former offers consumers free basic financial and insurance advice, while the latter is a public campaign to raise the profile of financial services. All three are being led by the FSA.

Clamp says it’s become much easier to borrow than save in recent years, so the number of people investing in savings and pensions is dangerously low. Several factors have contributed to this: less access to independent financial advisers, the closure of many traditional home service and direct sales forces, bad press about mis-selling and a perception of poor returns.

People seem more comfortable dealing with general insurance, he says, perhaps because it’s easier to see the need for cover in case your house is burgled or burns down than it is to picture a variable lump sum far in the future.

The introduction of schemes such as automatic enrolment could make pensions more accessible. “There are lessons to learn from the ease with which people can buy general insurance over the internet or by phone,” he says.

And there are lessons GI can learn from life. Clamp outlines three of the current initiatives:

Financial capability

The FSA and the Treasury launched an action plan for financial capability in July 2008 and are working with schools and employers to raise public awareness about financial services.

This is clearly a long-term exercise but will lead to more confidence in recognising the need to think about personal finances and do something about it. This will create greater awareness of the need for both saving and having appropriate insurance in place.

Retail Distribution Review

The Retail Distribution Review (RDR) should help the life insurance industry regain the reputation lost in recent years. The FSA has published proposals on the review for consultation in June, as well as a follow-up paper looking at the prudential requirements for personal investment firms. It wants all changes fully embedded by 2013.

The changes are limited to investments and savings. But as there is no clear division in our industry between life and pensions, savings and investments or general insurance, many firms will be affected. The main proposals are:

A clear category of independent advice with new requirements for independent advisers, not just those advising on packaged products, including the need to give unbiased advice.

A broad sales category ranging from non- independent advice, to simplified advised and non-advised guided sales processes, to execution-only business. Existing single and multi-tied advice can continue in this category.

For independent advice with no upfront fee any payment for advice through the customer’s product or investment must be funded directly by a matching deduction made from that product or investment at the same time as that payment. Upfront payments from the provider will no longer be allowed but there is still some consideration being given to whether a strictly controlled form of factoring will be allowed.

The costs of advice for independent and non-independent advisory services must be clearly disclosed separately to product costs.

All advisers, whether providing independent or non-independent investment advice, must have a minimum qualification requirement of QCA level 4 (CII diploma in financial planning). A transition period will apply but grandfathering (advising without qualifications) will be banned.

A board will be created to oversee professional standards.

The FSA will continue to offer help to firms in designing simplified guided sales processes for consumers with straightforward needs.

The FSA plans to standardise and increase capital requirements for personal investment firms, based on three months’ annual fixed expenditure of the business – at least £20,000.

Money Guidance

Money guidance enables people to take the first steps towards gaining control over their finances. Offering guidance rather than advice, it is not directly linked to selling anything. It will not provide crisis management, but should help people take charge of their affairs before serious problems develop.

A pilot of 500,000 to 750,000 people over 12 to 15 months is being undertaken by the FSA and includes face-to-face, internet and telephone guidance. It will look at how to engage people with the service – probably the biggest challenge.

The service is free, at least for now and is led by a central body but delivered through organisations such as the Citizens Advice Bureau.

I am convinced that in time it will bring people back to the valuable things our industry offers. The main areas to be covered are:

• Budgeting
• Managing debt
• The value of shopping around and how to do it
• Savings and retirement planning
• Protecting and insuring individuals and family
• Understanding tax and welfare benefits better
• Jargon-busting

The service will aim to guide people so they can choose between a small number of options and understand the consequences of doing nothing.

It may refer individuals to external services but will not make recommendations to buy or change a product from a specific provider.

Linking some activity into life stages (having a child, marriage, divorce and so on) and trigger events (rising interest rates, flooding) will open up opportunities to engage with people when the service will be most relevant to them.

And trusted intermediaries such as libraries, children’s centres, adult literacy education centres and prisoner rehabilitation services would play a key role in raising awareness of the service.

The financial services industry and government will jointly fund the service and, as long as it is given time and support, I firmly believe it will lead to many people seeking the products and services we offer in general insurance as well as life and pensions. IT