Consumer Duty and customer vulnerability – challenges and opportunities for the pure protection market

The FCA’s upcoming pure protection market study provides an opportunity for the protection industry to distinguish itself from general insurance – and be benchmarked against the previous review. How is the protection industry doing in terms of meeting Consumer Duty?

Many believe that protection itself helps people avoid harm, so there’s no need to do anything. But is this true? No – the reality is that there is plenty of potential for harms.

Products and services

These may not pay out to the intended beneficiary, perhaps because policies weren’t set up to provide to unmarried partners (a third of couples), perhaps the trust or nominee policies were not set up effectively, or joint policies are in place which do not accommodate divorce – or there is the lack of a lasting power of attorney.

It’s also possible that the policy may not match the customer’s need – perhaps there’s no protection for a mortgage, or loan, or hand-off to a specialist; or it could be that the product or coverage amount may be incorrect – or hadn’t stayed in line with changes in circumstances; or that initial health assessments were inadequate, resulting in declined or reduced pay-outs, or increased premiums for all consumers – a clear challenge to fair value.

Price and fair value

Customers may be unknowingly paying for a policy that is no longer appropriate, due to a change in circumstances, such as divorce. Or a high commission may be built into the fees, which has little value to the consumer.

Consumer understanding

Customers may not understand their options, or what their products cover – and be disappointed when claiming; they may not understand the underwriting process – with non-standard decisions leading to higher prices than originally quoted; it could be that they might not put in a claim because they either didn’t know they could, or because they have forgotten about their policy – or trustees may be unaware of their role and responsibilities.

Customer support

Slow or poor service, or a lack of empathy when dealing with a claim, can cause unnecessary stress – or a lack of support when a joint policy is used as an instrument of economic abuse. It should be remembered that, when people are claiming, they are likely to be in a vulnerable position – and the speed and quality of response can make or break the customer experience.

What needs to be done?

Firms need to identify vulnerable customers and mitigate harms; they must monitor customers over product lifetimes; they need to report on outcomes and fair value for both the vulnerable and the resilient – and maintain evidence of the above. Doing this requires measurement and data.

But who does this? The adviser, the provider or both? How is monitoring undertaken? How is this shared between parties? Who undertakes the vulnerability assessment and who lets the other know when things change?

Specialist advisers would retain the data, but what about non-advised sales where the adviser submits information into a pricing portal but likely doesn’t retain it?

Medical underwriting may consider health indicators of life expectation, but this omits many vulnerabilities – including life events such as separation and bereavement, or characteristics such as numeracy and literacy. There is a need for more comprehensive vulnerability assessments – probably annually.

Claims aren’t anywhere near frequent enough to use as a measure of outcomes – plus, we need to measure outcomes for those who don’t claim. This means that firms must be proactive in assessing consumers – and repeat the process at reasonable intervals.

Consumer Duty requires us to look at outcomes and fair value – for both the vulnerable and the resilient – across the value chain, over time, ensuring that cover is always appropriate and is in step with both life changes and expectations.

This requires data – which requires systems. ‘Not knowing’ is no longer acceptable. Firms without evidence may find blunt changes in the FCA’s rules – as happened with GAP insurance.

But it’s not all about evidence. The sector is largely missing its biggest opportunity in decades. Meeting Consumer Duty means having more customer conversations and knowing more about customers. Effectively, this can introduce a pre-underwriting phase which creates opportunities to provide more relevant products and create sizable sales opportunities.

The challenge is that, as firms are finding out, assessing, identifying, monitoring and reporting on vulnerable customers is not simple. The only effective route to this is through good technology – and the good news is that this already exists, and firms don’t have to build it themselves. All the challenges of creating an assessment methodology and lexicon of characteristics have been solved – with software that’s already in use and proven. All of the issues raised above can be solved with systems which can be up and running in days.

This means that advisers and firms can meet the requirements and opportunities of Consumer Duty now, with very little investment.