Protection: making a huge leap

Almost 25 years ago I was involved in a huge product development at a niche life insurer. To attempt it in 18 months with the technology then in place might now been seen as reckless. But it worked.

1. Arrivals and departures. A history of challengers.
2. A challenger game plan. Improving your odds.
3. Challenger cages. Why scaling up is hard.
4. 3 Premiership moats. Which, if any, are real?
5. Swiss Life's Solutions. A giant leap in 18 months.
6. Easylife Protection. The UK's first instech?
7. They shook protection. A tale of two companies.
8. Happy April 1st. Self Assurance returns!

Arrivals and departures is based on research and interviews. The challenger game plan and the challenger’s cage result from personal experience: employment (articles 4-7) and observations from my consulting engagements, several of which have been with challengers.

This article recounts what happened: warts and all. We look at what was delivered and the positive results. But also at what wasn’t so good: what I learned and would do differently today.

There have been many changes in the 20+ years since. We consider how some of these impact the strategy of a company looking to enter or extend their presence in the protection market.

There are positive messages here, summarised in a concluding section.

Swiss Life in 1996

Swiss Life UK was a provider of individual and group protection products, with a smaller investment arm. This article focuses on the individual protection side.

When I arrived in December 1996 sales in the individual protection business unit were 2.5m API of Income Protection, 500K of life term and negligible stand alone critical illness. Swiss Life was niche with a large expense overrun. Struggling to compete on price despite a preferred life term product, differentiators included offering 50-year guaranteed critical illness rates.

From sales to management, people knew that Swiss Life needed to expand its products and sales.

The 1998 transformation

Just 18 months later much had changed.

The preferred life product range was replaced by conventional pricing and underwriting. Despite this, price dropped significantly after a competitive tender for 90% quota share reinsurance.

The product range was changed dramatically. What was initially intended to be a simple product development – a “CITA” project would introduce accelerated critical illness – ended up being a full menu range. This was a blatant copy of Scottish Provident. The new range included:

• Multiple payment shapes (level, decreasing, FIB, 1- and 5-year renewable and even GIV).
• New benefits of accelerated critical illness and TPD (stand alone and accelerated).
• Buyback options on the accelerated critical illness and TPD.
• Reviewable and guaranteed rates across most of the range.

The Solutions menu range offered multiple benefits and a shared policy fee (remember when we used to talk about those?) Solutions was well-received by advisers and had outstanding reviews in Money Marketing. For better or worse, Income Protection would remain a separate product.

What went well

Reinsurance

The Chief Actuary was initially skeptical about “giving away profit” but was convinced after discussing the profit test numbers. Also important was the nature of the expense base in an expense overrun situation and how loading for all overheads was a self-fulfilling prophecy of failure.

Significant use of reinsurance is now almost the norm, with one major insurer and most friendly societies being exceptions. These reinsurance arrangements enabled Swiss Life to be much more price competitive, usually achieving top 3 pricing.

Volume and profitability

The term range went from 500K API to around 15m. Pricing was an effective lever: the expense overrun was eliminated in the first year of Solutions sales. Swiss Life was profitable.

Teamwork

The product team had representatives from actuarial, admin, claims and underwriting, IT, legal, marketing and sales. Using a combination of video conferencing and face to face meetings in the Liverpool and Sevenoaks offices, it was a real demonstration of effective collaboration.

Project and timescales

As the actuary I was doing the pricing and reinsurance, chipping in with things such as literature. I led the overall product team: a huge learning opportunity and a brilliant experience.

But as the project expanded, going way beyond scope creep, it was necessary to appoint a project manager. A talented marketeer stepped in, demonstrating you don’t need to be a PM guru. Despite the enormous project scope we materially delivered on time and within budget.

What would I do differently?

Despite the overall success there were areas I wish we had handled differently. I take a lot of personal responsibility for this – this should probably be somewhat shared, though the memory fades.

Reviewable rates

These were already in the market, but we shouldn’t have bothered; sales were poor, as might be expected in the IFA market. In essence such products were not worth the thinking and development time. Future reviews (if any – I was no longer there) were probably challenging. Developer beware!

Not all products are equal

While the accelerated critical illness was essential, the buybacks (though trendy at the time) were not. All forms of TPD (except when integrated as part of the critical illness benefit) were not worth developing. The bottom line impact was negligible and while it felt as though the product range was more complete – going beyond Scottish Provident – it was protection eye candy.

In terms of the “shape” of benefits, DTA was essential (we copied the Scottish Provident four interest rates) and FIB valuable, though as ever it undersold its potential. But the 1-year renewable was probably not worthwhile, even though it sat with an existing 5-year renewable product.

IT and admin

In the early days of menu products the IT struggled to keep up. We used a predecessor of the iPipeline system, then offered by TCP. This wasn’t TCP’s “fault”, rather a fact of life.

Numerous bug fixes followed the 1998 launch. With less automation than today, standards and staff in underwriting and new business administration suffered. To be fair this was still an issue for at least one protection office 10 years later.

Pricing

While reinsurance went well, its deployment to retail pricing was too crude; our market monitoring and top 3 pricing provided too much business to process.

Without any clever “hiding” of prices – I developed these ideas later – competitors observed and matched prices. Applications fell and we came under pressure to buy back volume. More rate cuts and reinsurance tenders followed. We (and I include myself in this) should have stepped back and sorted the admin. I should have reduced prices more gradually and strategically.

What has changed since Solutions?

In over 20 years since Solutions was delivered there have been many changes. These impact the strategy of a company looking to enter the protection market or extend their presence.

Distribution

We have largely seen the demise of tied salesforces and (largely) bancassurance.

The biggest volume still comes from the IFA market (advised and non-advised) and mortgage brokers. The leading protection offices also have single tie partnerships.

Aggregators have arrived, but pure direct plays are surprisingly popular, especially with new entrants. But Reviti’s closure to new business has emphasized the challenges in gaining scale.

Finally commission rates have risen.

Impact: choosing the right initial distribution channel can make or break you.

Underwriting and automation

Where an intermediary is involved e-underwriting is now a prerequisite. Any company with less than 70% straight through (STP) rates in an intermediary market would struggle, due to the adverse effect on the intermediary’s business.

Leading offices are now attaining over 80% STP rates. The impact of Covid and the desire to move away from traditional medical evidence will probably push this number higher. Machine learning techniques will help, especially those targeting natural language processing.

Increased automation in the new business process and beyond has meant that leading insurers’ expense loadings have reduced drastically, supporting price reductions. Another factor supporting lower rates has been the narrowly of the standard rates class. In that context the current emphasis on inclusivity might be seen as somewhat ironic.

Impact: any company entering an intermediary market will need largely automated underwriting from outset, but you can avoid re-inventing the underwriting (rules) wheel.

Analytics

The growth in analytics is not just about machine learning algorithms; more straightforward approaches can also deliver real value. Here are three impacted areas:

• Underwriting. Underwriting development, once a partnership between underwriters and IT, has become largely data-driven. Data-driven underwriting can be supported by underwriters, IT people and actuaries. Machine learning techniques are increasingly influential.

• Distribution quality management. Mainline, with one leading protection provider having a DQM committee, chaired by the company CEO. Analytics target medical and other expenses, retention and mortality management – including but not limited to non-disclosure.

• Market monitoring and pricing. Since 2011 up to date market premiums cannot be ordered from portals. For obvious competitive reasons, alternative monitoring and prediction techniques and the resulting price optimization are not in the public domain.

Impact: the first two are good areas for partnership with your reinsurers, but they may have little capability in the third: you’re on your own!

Financials

The corporate environment has changed somewhat.

On tax changes have removed the inbuilt advantage formerly enjoyed by with profit offices.

On capital the Solvency I regime has long since been replaced. This means that writing protection business can increase a company’s capital (techniques to achieve this depend on whether you have an existing book of business).

On pricing and profitability there are more profit metrics, but economics still trumps accounting.

Impact: these changes have generally improved the prospects for new and smaller companies, removing some of the inbuilt advantages held by incumbents.

Pricing

Today there seem to be big differences between companies’ appetite and capability to use pricing. Some reprice often, with specific intent, validating their expectations. Others seem less active and specific. One thing is certain: the days of trumpeting large rate cuts are long gone.

As noted above, market monitoring techniques are more complex and some instead now focus on the effect of price changes. The market pricing techniques I used back at Swiss Life – base prices produced in proprietary projection software, with adjustments in Excel – can still be seen.

Pricing governance is now more onerous. A different approach could generate more value for all.

Finally, distributor quality management often impacts prices and/or commission rates.

Impact: there remain many opportunities to deploy savvy pricing techniques to your advantage. A price competitive company staying still is a recipe for being “picked off”.

Product development

Product features get significant industry exposure. In my view this means they provide limited scope for competitive advantage within the current product paradigm. What has changed in 20 years?

Added value benefits e.g. GP-related services are included “for free” although these can be withdrawn at any time. Most seem to be appreciated as they facilitate a sale.

Critical illness has been the benefit seeing the greatest changes: more illnesses covered, competition on definitions, partial benefits and multiple products. The changes have certainly increased complexity; a portal quote for guaranteed rate cover can return more than 40 results, with some companies returning 6 premiums.

The menu concept has proven longevity. Perhaps fittingly, given that we started with Swiss Life’s 1998 Solutions menu range, one major has successfully marketed its menu range. Benefit structuring seems to generate more value than tweaking the benefits themselves. This should suit advisers.

Impact: Companies who have pursued the most radical product development have probably not been as well rewarded for their efforts as they would have liked. Successful products can also be copied. While menu ranges are sometimes a hygiene factor, I’d argue the most successful protection offices deploy their resources elsewhere, adopting a “fast follower” mentality.

A positive conclusion

This article uses a real (historic) example to show that material positive change can be delivered at pace. This remains true even where errors of judgement and implementation are made. We’ve also aimed for honesty, so that you can avoid repeating our (and my) mistakes.

We’ve also covered some of the most important protection-related changes since the Solutions development. While these can mean extra technical challenge, there are genuine opportunities:

• the route to market for challengers is simpler than ever
• there is scope for competitive advantage in multiple areas

I would encourage you to seize them.