The big problems with the UK Life and Crititcal Illness Underwriting and a couple of ways to make it better.

I spent quite a bit of time on the road today much of it catching up on the MPAF podcasts from Roger Edwards, for those not familiar Roger basically chats with a wide range of industry folk on all manner of financial services issues. Roger has a background in the life insurance industry and I think it would be fair to say that one of his 'pet issues' is the way the UK market has been driven towards a focus on lower prices and over complication of the products. Today though after hearing a few of episodes in concurrence I felt that a couple of major points were being missed possibly because they are points that only an adviser would see (or they would bother us most) and I felt the urge to write this blog post.

The first issue is the difference between the cheapest product as determined by the sourcing systems and the best product as determined by research tools such as CI Expert, Roger and guest Ian Mckenna were discussing the difference between the 'economy/cheapest' and the 'first class/best' product and the difficult position it often puts the adviser in. Personally I tend to show the client both prices and let them determine if the best product is worth the extra premium, and I suspect most advisers do the same. Major issue this with this though, the 'standard rate' prices that come off the sourcing systems is in my experience not that often the price the client gets. I've heard it quoted in a few places that 1 in 4 or 1 in 3 clients don't get standard rates but I don't think that is the adviser experience.

Due to the the fact that most plans are sold by the intermediary market based upon the comparison quote using standard rates all they need to do is get to the top of the table. I believe and I may be wrong that often rather than cut rates they tighten up the criteria on who gets standards rates in order to lower that rate. And as advisers direct most of their business to the lowest standard rates quote they are also probably directing their application to the provider least likely to accept their client at 'standard rates'. I could be totally wrong on this one but a scan look at my own record for the last 12 months shows that only 1 in 2 clients are getting standard rates and nobody over the age of 40 is. This is probably not a representative sample, just my experience but it seems to represent the experience of many advisers.

With so many clients being 'rated' the standard rate comparison tables are actually pretty useless as what an adviser really needed was the rated price. As the life office third or even tenth on the list could be cheaper than the top of the list insurer once the ratings are applied. As advisers we have experience and will phone underwriter and get an indication before we apply but it is generally not systematic or scientific, it's not a good experience for the adviser, the life offices or the client. How do we fix it?

The fix is relatively simple you make multiple applications simultaneously. When I started in this industry it was quite common practice to submit an application to the top 3-5 insurers when you knew a client would be rated but two things were different back then. Firstly the number of clients being rated was much lower and application forms were much shorter, so the workload was manageable. Today I went to see a client to arrange a plan, the application form was 28 pages long! This makes it totally unfeasible to submit to a few insurers and handle all the follow up with underwriters when the ultimate commission is just a few hundred pounds.

The solution I think though is fairly simple, a common application/quotation form as we have for impaired life annuities, one form you submit to all insurers and they give you an quote based upon that form. The insurer would also indicate if they will be requiring a GP report, the adviser and client can then decide who to move forward with. I for one would embrace this system and I suspect that most of the adviser community would too. If just a few insurers could get this started I'm sure others would join as they realise they are not being considered for anything that the adviser suspects will be rated.

The above idea I believe would simplify access to the current market and result in better consumer outcomes and an easier process fro adviser, even if the form ran to 50 pages I'd use it (Beyond that I'd think twice).

In long term though I think the whole life and critical illness market could be turned on it's head by the first insurer willing to provide 'moratorium' underwriting, for anyone unfamiliar the insurer would simply ask age, and smoker status. The price would be based on that alone acceptance guaranteed because the policy exludes all pre-existing conditions and has a survival period during which all the insured would receive is return of premiums in the event of a claim. Harder to implement for critical illness than life I would suspect but there is a reason that guaranteed over 50s plans are the best selling in the market, they are simple to understand and easy to set up because in no small part 'moratorium' underwriting is used.