Culture and the 4 Ps of protection success
These are, of course, my personal views on what leads to success in the individual protection market, targeting life, critical illness and income protection cover.
- are an insurer or Friendly Society (or rent a licence)
- may or may not have a full product offering
- aspire to be a top 5 player, fast
What should you be thinking about?
I’ve divided the coverage into two sections.
First softer (but essential) cultural factors which depend on the organization. My view is that most underachievement is a result of these factors, which is why reinsurers can be wary.
I then cover less abstract areas, which can be gathered under a marketing-like “4Ps”, tweaked for protection. I believe there is significant agreement here, especially among reinsurers. The challenge is delivering on these hard success factors.
L&G’s ambitious and delivery-focused culture means life is tough for its reinsurers and competitors. The outcomes (in terms of both volume and profitability) suggest there is a large gap between L&G and its nearest protection competitor. From my discussions with reinsurers:
Volume cannot be guaranteed, but is important; few reinsurers have appetite for low volumes and little realistic growth. No guarantees is fine if other factors are good.
Delivery is the new bottom line for new entrants. Do you have the determination, drive, discipline and attention to detail to deliver?
The 4 Ps of protection success
Place. It’s clearly important to get your channel/distribution strategy right. Perhaps some have jumped the wrong way. The IFA market is the route to volume, but some direct channels offer (for example) reduced underwriting strain at outset. A big CTF book may help.
Product. The problem is that this is not usually a route to competitive advantage - often quite the reverse; product ideas are in the public domain and the more successful are copied. You can delve into more detailed product design but here are my recommendations:
- Prioritize elsewhere: you get better value for effort from (e.g.) underwriting and pricing.
- Wait until you’re bigger: it’s easier to be a product leader if you’re a market leader.
- Ultimately be more radical: beyond finance, build unique and curated support.
Process. Mainly this means underwriting, which is important - depending on the channel perhaps critical - for individual protection. At first sight underwriting offers good scope for competitive advantage. But I think there’s a bad news sandwich for traditional underwriting:
- Bad news: You’ll struggle to get IFA market traction with under 70% straight through rates. That presents too much risk to an intermediary’s business model.
- Good news: You don’t have to start from scratch. Reinsurers and consultants can help, but of course if they can help you they can help (or have helped) others.
- Bad news: Several players are at 80%+ and the hurdle is being raised to 90%(*) by L&G. This arguably leave little scope for competitive advantage.
(*) Bernie Hickman’s Q4 2020 investor presentation set out its market leading “digital underwriting” rate of 83% and its ambition to raise this to 90% in 2021.
There is still more to do: HSBC’s Q4 2021 research identified faster underwriting as key to protection market growth. I expect more developments in the Instant Life area, together with a declining emphasis on traditional evidence (e.g. paper GPRs).
Price. Your reinsurers probably won’t be able to help much here, but that can be useful. Perhaps surprisingly, advanced pricing techniques and models offer more scope for competitive advantage than for 10+ years. Specifically:
- Unlike other areas, detailed market prices can be hard to observe
- But there are opportunities demanding technical and operational skills
- Distributor quality management (DQM) is mainstream but still under-exploited
Scope for pricing-related advantage, ranges from simple assumption setting to predicting volumes and competitors’ prices, right through to leveraging demonstrable expertise with reinsurers e.g. by using DQM to predict mortality. Such things characterize a market leader.