UK insurers are under fire. As an observer who has for so long campaigned on behalf of customers, it has been heartening to witness such regulatory action at last, yet nevertheless astonishing to see how long it has taken. The time for change has arrived.
What has gone wrong in the UK insurance sector? Here are some of the underlying issues.
Failure to understand end-customers and flawed profit models: Firstly, insurance companies have failed to recognise who their customers are and secondly, their profit models are flawed as they rely on consumer inertia and high initial selling costs being recouped over many years – with often unfair charges.
Insurance companies considered intermediaries as their customers: The standard mantra is that UK financial products are “sold”, not “bought”. Whether it was “the man from the Pru” or the commission-driven salesmen, insurance companies considered the intermdiaries who actually brought in the funds to their products as the customers. Salesmen, financial advisers and even employers were the “gatekeepers” who collected and directed the money, so products were designed to be attractive to them. The insurance sales force was handsomely rewarded, while the end-customer was all too often forgotten.
Flawed profit model relied on high initial sales commissions and customer inertia to recoup costs: The long-term savings profit model of the insurance sector was based on paying huge up-front fees to salesmen and then recouping those outlays over many years from the unsuspecting end-customer. Exit penalties were often levied because the initial commissions paid to sales staff would not be recouped if customers did not keep paying fees for many years.
Commission bias led to successive mis-selling scandals: Designing products with an intermediary’s interests in mind is hardly likely to result in an industry that understands the end-user – and treating customers fairly is quite a challenge if you do not know who your customer actually is.
The annuity market is a classic example: Even the most basic of concern for end-customers would have required at least cursory suitability checks, including health and marital status, before selling a standard annuity. Yet, the insurance industry has fought for years to protect its right to foist annuities on unsuspecting end-customers at continually worsening rates without any attempt to understand their needs. Insurers even offered brokers a significant percentage of customers’ pension savings just for making the sale – without worrying about whether it was an appropriate sale.
Insurance at a price: The insurance industry can provide vital products to enhance people’s lives, yet the ongoing exposure of poor practice has shattered trust in financial services. Customers need protection against events they hope will not happen – with insurance at fair price.
Too often, insurers rely on customer inertia and take advantage of people’s trust: Even on basic house insurance, let alone complex financial products, the best deals are reserved for new customers, while existing loyalty is penalised with higher premiums. How many of us have called our insurer at renewal time to tell them we have a better quote elsewhere, only to be immediately offered a discount? The industry does not reward loyalty, quite the reverse.
Financial products are not just about money, they are about people: In order to serve customers properly insurers need to understand their lives. They are not all the same. They need flexibility and value for money. That means fundamentally reappraising insurance company profit models, modernising operations and delivering more flexible products and services that individuals can relate to.
The annuity market is a good place to start: As the Financial Conduct Authority continues its investigation into the annuity market, this would be an excellent place to look for hidden charges that have caused consumer detriment. Nobody should be paid commission for selling an annuity and fees should only be paid to those who have made some checks on whether that product is suitable or not.
Customers crying out for new solutions and fair treatment: As the traditional practices of hiding fees and charges are choked off by regulatory challenge, I appeal to the insurance industry to recognise its customers’ interests.
The FCA is shining lights into the dark recesses of industry practice to force modernisation. Customers are crying out for new solutions, on-line information, apps that engage them and far more flexibility. I believe the insurance industry can – and will – rise to this challenge.
Dr Ros Altmann is a pensioners adviser and campaigner for reforms to the insurance industry.