So, what does the market need? To begin with, the insurance industry should pay more attention to the consumer’s point of view. IFAs supposedly represent their client and act as their agent. But many insurance companies talk to IFAs as if they were product salesmen, rather than professional advisers acting for their clients, looking for best advice for a given situation.
For example, we receive numerous marketing letters telling us how much more commission we will earn by selling this or that product, with very little emphasis on why it is best for a client, or what type of client it is best for. Whereas, in fact, IFAs have the opportunity to lead the way by identifying client situations which need addressing and asking the insurance companies to consider designing products to suit.
The reality is that insurance companies tend to design products which they want to sell and then persuade IFAs to sell them. Much of the friction between the public at large and the insurance companies stems from this way of working.
Perhaps what is needed is a shift in attitude. People need to be given carrots to help them decide, not to be beaten with sticks, as has tended to happen.
Consider this. It was important to get across to the public that pension provision was an individual responsibility, but Government backing actually acted as more of a stick than a carrot. Now pensions are becoming more flexible, and will cover employment gaps and changes in employment more accurately. But at the start they did not, because not enough proper research had been done. If it had been, and the clients could see the suitability more clearly, this would have acted more as an incentive.
Additionally, the insurance industry is great at selling but very poor at marketing. In other words, it places too much emphasis on tactics and not enough on strategy. Why else is life insurance a dirty word in this country, whereas in South Africa or the US it is a status symbol? Strategy should come before tactics and the emphasis needs changing in a new market.
What is the relevance of this to long term care insurance? It is a new market and it is not going as well as it might. Once again, the insurance companies are designing products they want to sell and are not really thinking hard enough about what consumers need to buy, although there are notable exceptions.
This means we have products which raise a client’s income tax burden unnecessarily high, so that the client is raising income purely for the privilege of paying more income tax.
We still have the odd company selling the less tax efficient plans•with a minimum purchase price which is quite high, and so ensuring that it can only be bought for those for whom they are least appropriate. Why? Corporate schizophrenia?
We have immediate fee plans which do not reflect the fact that the nursing home fee bill continues after death, and the plan payments stop on death. Why? Have they never heard of life insurance?
We have immediate fee plans which provide equal monthly, quarterly or half yearly payments. All the nursing homes charge on a daily or weekly basis and it is impossible to match the payments from a plan accurately to the actual bill. Why? Have they never read a nursing home contract?
And yet they claim they are experts. Well, they may be, but not in long term care insurance.
In the past two years I have asked for arrangements to allow payments for care at home – which must be paid via a care provider– to be paid through a client’s solicitor’s account, enabling the solicitor to verify that all payments qualify under the plan, and enabling the health care plans to fund the maximum possible cost of care.
I have asked for immediate fee plans to be payable in annual installments, balance payable on death, because many elderly clients have significant embedded capital gains. I have also asked for a temporary long term care annuity for a young Down’s Syndrome client, and for immediate fee plans for clients who are over 90.
Only one company in the market place undertook to meet all of the needs at the time of the request, although some have had second thoughts on some of the points since.
Yet one marketing manager told me that the poor sales by his company were because most IFAs were too lazy to sell long term care. Why though should we allocate capital to such an inefficient exercise? Laziness has nothing to do with it.
Most insurance companies have been willing to consider these variations and, to be fair, some have spent a reasonable amount of time doing this. The reason they finally cannot implement any change often appears to be that they are in the hands of a monolithic computer operation, which is not sufficiently flexible to meet the needs of a new market and to respond quickly to one-offs, even though they might lead to hundreds more applications.
I used to be an investment banker and worked quite a bit on new products and new markets. I designed the first multi-currency cheque account in London. Write your cheque in any currency and have your account debited in sterling or dollars.
The initial for this idea came because my processing staff complained the stupid overseas bank clerks did not seem to realise that if your account was in sterling, you had to write your cheque in sterling, and would I write a letter of complaint to their managers.
Instead, I surveyed the instances and decided we had uncovered a market need. I talked to colleagues about the needs of their clients and discovered that they too could think of clients who would need this facility.
In the event we sold quite a lot of these accounts for a useful fee income from a new product which cost us practically nothing to develop – because it was just a different use of resources we already had.
Later, I was one of three senior bankers who set up the capital markets banking subsidiary of a major overseas bank. My function was to provide – design, establish and manage – all of the support services to the new dealing room.
Our dealers were among the brightest people in the City, and were anxious to grab a toe-hold in the burgeoning market. But we had to use a monolithic computer function which could not design a system to process a new product in under nine months I set up a team of three computer whiz kids with PCs and we ran interest swaps, deposit swaps, options, futures and, eventually, asset swaps on this basis. Our boast was that if a dealer specified a new product to us today he could have his new system tomorrow, and we met this self-imposed time standard every time. Even if we had never done a particular type of business before, our dealers always knew that when a client came along asked if something was possible, they could always say yes. This was because by the time the deal reached its value date we would have a system.
Buying market share
It is true that quite large fees could be taken on these deals and that I therefore did not have to worry too much about cost-effectiveness. But the important thing was that we were buying market share in a highly competitive international market, and at that time the cost of not reaching your target spot was almost immeasurable.
In any case, I suspect the profit on some long term care products is not so far off what we made.
A couple of years ago, I had the good fortune to arrange what is probably the largest long term care plan ever written in this country – I believe I still hold the record. The price range for initial (underwritten) quotes was from £360,000 to over £660,000. The client’s needs were eventually satisfied at a cost of just under £300,000.
While some of the difference in quotes was due to tax inefficiency, there is clearly a considerable profit margin on some of these products, and if providers want to justify this then they really do have to be more innovative.
This is a largely unregulated market and it is my view that it should be regulated, and fast. But regulators, auditors, compliance managers and monolithic computer departments will have to recognise that if they want to help the participants in this market to satisfy client needs and build profitable market share, they must operate with a lighter touch.
If they do not, they will get the screaming heebie-jeebies, and I have only limited sympathy – they are paid to get the screaming heebie-jeebies. Writing miles of comments will have a cathartic effect. Another crumb of comfort is knowing that when the market matures they will have a function and a job for life.
Margaret Borwick, is principal at Durkadale Professional Financial Planning, of Haslemere, Surrey.