Protection 2.0: getting to scale

My target audience in this article is mutuals and friendly societies (“mutuals”) below the size of LV= who accept they need to scale, perhaps because they have a Protection 1.0 product range: non-menu and typically focusing on Income Protection (IP).

Make the leap to 2.0

Going from 1.0 to 2.0 is about credibility and scale. The route has been known for 25 years. The journey can be de-risked and the commercial benefit should be dramatic. Exits from Aegon and Canada Life have created a time-bound opportunity. Some are looking to step up, probably in 2024.

I believe a full Protection 2.0 menu product range will enable a few mutuals to get to scale, without doing anything too clever. Less positively, while my Protection 1.0 outlined how traditional membership models may be waning in popularity, the 2.0 replacements are far from perfect.

Finally, a major problem with Protection 2.0 is that the lack on ongoing customer engagement is left hanging. This, together with a revised approach to membership, will be my focus in Protection 3.0.

Past, present and future

Protection 2.0 was started by Scottish Provident (ScotProv), with its protection menu. L&G followed, with a focus on underwriting, price and analytics. Added value benefits became common, with alternatives to the more social emphasis of traditional mutuals.

The table shows where the protection market has been, is now and should move to.

Protection Product Added value benefits Examples
1.0 - past Fragmented Local membership (at most) Foresters Friendly, Oddfellows
2.0 - present Menu Health-focused Some mutuals and proprietaries
3.0 - future? Menu Holistic wellbeing-focused None yet

What about the colours?
The red zone includes monoline IP mutuals who may fail to scale. The orange shading shows an opportunity for mutuals and proprietaries to broaden and upgrade the membership concept, getting to the green zone. The menu concept is good, but offers scope for better deployment.

Does it matter?
A small 1.0 friendly society running a social club on an voluntary basis may survive. A medium-sized friendly society with regulated insurance products and a multi-million expense base may not.

2.0: the modern era

For me the modern era is defined by two titans who fundamentally changed how protection is done: ScotProv and L&G. Most serious protection companies have followed their lead and I believe others will have to do so if they are to reach scale and thrive.

ScotProv: Self Assurance

ScotProv’s Self Assurance menu range heralded a product-focused strategy. It transformed the company and the market. ScotProv went from a sleepy mutual to Swiss Re’s largest global client in a few years. Sales increased from £2m to £60m.

Adapting Cover Magazine’s text slightly:

In 1996, Scottish Provident launched the Self Assurance range - the first menu protection product. This combined life, critical illness and income protection in the same plan and made advice central, enabling IFAs to create a tailor-made product solution for each client.

But, from this observer’s viewpoint, ScotProv’s product focus led to it running out of ideas. It also ran out of capital under the old solvency regime. Bought by Abbey National in 2000, ScotProv seemed to decline rapidly, with the departure of key staff to newly-formed Bright Grey.

L&G: underwriting, price and analytics

In the 1990s L&G’s CEO David Prosser embarked on a turnaround strategy. By the time I joined L&G in 2001 Prosser’s magic wand had turned to protection: cheaper prices and (much) higher volumes. Top position, first achieved in 2003, was held for 20 years.

L&G: 20 years of domination * Scottish Mutual was shown as Scottish Provident in 2002. Source: TermWatch 2004 (Swiss Re)

L&G’s approach to protection, was very different to ScotProv’s. Largely following others on product, L&G instead targeted:

Aviva’s sustained challenge of L&G in 2023 is set to continue, with the acquisition of AIG UK opening up another top 5 position.

Added value benefits

Bright Grey introduced a range of added value benefits, starting in 2003. These have expanded further today. (For completeness, in 1997 PPP offered its members a 24/7 health support line.)

Health apps are an increasingly common means of accessing these added value benefits, although more traditional communication methods (e.g. web portals, phone and in-person appointments) are sometimes available.

Doing 2.0

Getting to 2.0 arguably needs little innovation and rewards can be significant: Swiss Re confirm 50%+ of IP sales are via the menu route. But you should aim for much more than a doubling of sales.

Products

You can make a fast start – months, not years – on products. Here’s a one-minute version of a small but well-formed menu range:

Some mutuals already have a fuller (non-menu) range of protection products. Foresters Financial UK offers life and critical illness, while Met Friendly also offers IP.

Beyond products

Analytics, pricing and underwriting (c.f. L&G) are central. But to get adviser and reinsurer credibility you also need strength in distribution and systems.

Summarising, a leading protection company needs expertise in:

Capability

Mastery of all areas is rare. Commercial objectives are key: DQM is more than a monthly committee meeting and pricing is more than monthly reprices. Those with an appetite or need for growth will consider whether they have the right skills or need additional bench strength.

First let’s look at pricing capability:

Pricing ability Comment
Low Equates pricing to reprices, which are slow and rare.
Medium Regular and efficient reprices. But any pricing philosophy is paper not practice.
High Pricing philosophy, including pricing beyond reprices and explicit optimisation. Reprices are efficient and the need for regularity understood.

Now to a subset of analytics – DQM:

DQM ability Comment
Low Little or no distributor analytics.
Medium Regular “MI” report to committee, but little action.
High On-the-fly results to target profit via (e.g.) retention and disclosure management.

Finally a short aside. There are opportunities to reform underwriting 2.0 to the benefit of all parties. Current underwriting approaches are approaching their limits.

The two problems with Protection 2.0

Membership

My Protection 1.0 article highlighted the challenges with a traditional membership model. Many mutuals have chosen not to go down that path, instead following their proprietary peers in offering (e.g.) health-focused additional benefits such as free private GP appointments.

For 20 years added value benefits have been a popular way to increase consumer engagement, with FT Adviser suggesting in 2019 that they:

… have become a common feature on many protection policies over the past 15 years, offering everything from shopping discounts to bereavement counselling. But many believe these extras are set to become the core part of the protection proposition, with the insurance becoming an add-on.

Of survey respondents, 60% saw such benefits becoming the core product. But are these benefits financially robust? CIC expert Alan Lakey says:

A lot of people … do not realise they have cover. If protection is sold on the back of the added-value services, people will use them more and the cost may have to increase.

And use is increasing. Use of The Exeter’s HealthWise app jumped 131% in 2023. More to the point, Virtual GP use has soared. Some have speculated that insurers may start cutting access with Issac Feiner, owner of Lifepoint Healthcare, saying:

My personal opinion is that people should be ready to reach into their pocket and pay for private GP services. I do this myself.

Perhaps this is the reason that L&G’s GP24 cover costs £3.25 a month.

Importantly, does this represent true engagement or are customers being opportunistic, grabbing obvious value from private assessments?

Engagement

Lack of engagement is a more than inconvenient truth.

Lifesearch’s 2022 report said:

“General insurance protects against the everyday. Our product is best understood as catastrophe insurance: consumers generally buy it reluctantly and begrudgingly.”

Roger Edwards agrees:

“People do not want to think about the possibility of serious illness or death; the added-value benefits are much more appealing.”

Most people simply don’t want to buy protection.

That’s why we need Protection 3.0

Protection 3.0 tackles head-on the lack on engagement, by re-defining what protection could be. It aims to make the traditional protection product the add on, without the financial frailty of the current added value benefits offerings. It aims for ongoing engagement beyond the sale.