1. The trends in the market in 2016
2. Whole of life pricing
3. Changes in the market and what has driven some of that change
4. Innovations in serious illness cover and critical illness cover
5. Term life cover and affordability
Tutors on the panel are:
Justin Taurog, Managing Director of Distribution, VitalityLife
Andy Philo, Franchise Distribution Director, VitalityLife
PRESENTER: Welcome to this Akademia which is going to look at the life insurance market. I’m Tony Suckling, and in this programme we’ll be covering the trends in the market in 2016. We’ll be looking at whole of life pricing, what changes have occurred in the market, and what has driven some of that change, innovations in serious illness cover, and critical illness cover, term life cover, and all the important issues surrounding that of affordability. Joining us to talk through these issues, and to provide us with some solutions to consider, from VitalityLife, we have Franchise Distribution Director Andy Philo and Managing Director of Distribution and Sales Justin Taurog.
PRESENTER: So let’s get to business. We’re going to be talking about the key trends you’ve identified in the life market for 2016. So what are those trends?
JUSTIN TAUROG: Well, Tony, one of the key issues we see facing society is a fundamental change in, I suppose, demographics and the fact that we have an ageing population who are living longer, retiring later. Whereas historically protection was primarily focused around pre-retirement protection, protect your mortgage: the idea of you’ve paid off your mortgage at retirement, you then retired from a company pension and that provided you a guaranteed pension to you and to your spouse. Historically the paradigm was protection pre-retirement. You know, we think that whole world has changed where people as I touched on are retiring later, are living long in ill health, care becoming far more of an issue. Far less people are having company pension schemes, so retiring and with pensions freedom having to look after their own retirement needs.
PRESENTER: There’s always the question though of affordability isn’t there?
JUSTIN TAUROG: Sure, and that’s why that’s a key point. If you look at the actual market, fundamentally the majority of sales are term sales. You get a plethora of people rushing to buy funeral plans at retirement, and a very small part of the market is underwritten whole life new business. And I think the key point you touched on there, I think affordability has been a key driver of that in that whole life premiums are probably four times the cost of a term premium for the same sum assured.
PRESENTER: And if you’re aiming at a population where the demographic is changing then that surely needs to change. So just remind us what you believe are the key drivers for the pricing of whole of life policies? And I think we’ve got a slide on that which will help us to talk that through.
JUSTIN TAUROG: Brilliant and if we can bring it up. So obviously when you’re pricing a long-term insurance policy the key issues need to be focusing on firstly one being mortality, you know, the chance of somebody obviously getting a payout and when that would likely happen. You’ve also got interest rates and how much, the return we get on the premiums that policy pay to us that we invest; now obviously reserving until we have to pay out a claim. And you’ve also then got cost of capital. Now we have to hold reserves. You know, you’ve got Solvency II regulations which obviously came in earlier this year, which sets aside how much you need to reserve. And particularly for longer term policies now there are requirements to hold reserves now has been increasing.
So you’ve got those three key drivers of pricing of whole life. And our whole philosophy and our whole premise we operate on is the whole concept of shared values. And what I mean there is that if we can work with our policyholders to help them get healthier, participate in their health awareness, clearly it’s great for them. Also great for us because they’ll live longer and we’ll pay out a claim potentially later, much improved mortality experience. But similarly interest rates now at the moment are at 300-year lows as we’ve all obviously seen. And what that means is it puts up the pressure on premium rates, because insurers get a lower return on the capital, on the premiums that they invest.
PRESENTER: OK. That first part, the business about health, is really turning what we’ve come to think of about traditional insurance on its head. You used to be in a sense rewarded for being a heavy smoker and being unhealthy because you were likely to die sooner, and therefore it was in the insurance company’s interest. So that’s a complete flip. Has that been accepted, have people understood that?
JUSTIN TAUROG: Well Tony very much. We launched a new category of insurance in September 2013. We launched our Vitality Optimiser product. And the whole philosophy there was it was very much around empowering individuals and policyholders to get a better deal from their life insurance. So the point you touched on that insurance is a long-term contract, and if someone buys a policy today but they engage in health or improve their health they should be rewarded for doing so.
PRESENTER: Let’s have a look and see just how successful it’s been on slide number 3
JUSTIN TAUROG: we have a graph here showing how the proportion of our new business that is now written with the Optimiser. And as I said we launched it in September 2013. Now it’s over 60% of our new business is now written with the Optimiser, which is fantastic. I mean policy holders are engaging with the benefits, the wellness activities.
PRESENTER: So that’s the first part of that original slide that we saw, the health part of it. The second part was a lot more difficult. It was the interest rate wasn’t it?
JUSTIN TAUROG: Sure. So what we’ve been looking at the next evolution of the Optimiser proposition. As we touched on interest rates are at 300-year lows. So what we wanted to do is give our policyholders the ability to benefit if interest rates normalise to what they have been historically. So what we’re launching is the Vitality Interest Rate Optimiser, whereby what we’ll do is we’ll give policyholders actually a much deeper discount
PRESENTER: So 67% discount compared to traditional whole of life depending on their age at entry, I believe, yes.
JUSTIN TAUROG: That’s exactly right. So if you have a look at the slide on the left there, so you can see anyone who’s younger than aged 45 will get a 67% discount, so rather than paying £100 a month for example would pay £33. And then based on age, and obviously older lives will still get a discount, a lower discount, but a 55-year-old will still get a 55% discount on their starting premium. So a substantial discount.
What then happens is we then obviously provide the whole world of Vitality within the product. The half price gym membership, half price Garmin and Polar devices, and half price bikes at Evans. But the whole principle behind it is the more people engage, and even if it’s just walking a day a week, walking the dog or whatever it might be. We then reward people for that activity.
What then will happen, as you can see on the right there, is each year the premiums will change based on wellness activity, as they do today on the Optimiser, so you can see there bronze, silver, gold and platinum, but also based on the interest rate environment. So as I touched on someone will pay a starting premium of £33 a month if they’re younger than 45. The next year the premiums will adjust. If long-term rates are where they were at the beginning of the year, around about 3¼, we’re talking about long-term rates. A platinum member will be a 1.4% increase, a bronze member 4.4%. But that’s coming off a premium of £33.
PRESENTER: Sure. So it does actually mean people can be in a sense in control of their own premiums.
JUSTIN TAUROG: Very much. I mean as you can see that’s a key point. The more individuals engage in their wellness, and even if they just do a little bit of activity, get to silver, the increases will be lower. If they get to platinum, so that is obviously slightly more engagement, you know, a platinum member can actually, if interest rates get back to 5½-6%, will have no increase. So it’ll be £33, 67% in effect for the duration of their policy. So they control it based on wellness, and also benefit if interest rates return to long term. PRESENTER: How can an adviser use this new solution? What ideas do you have to help them sell this into people who may be resistant to the idea of whole of life insurance?
JUSTIN TAUROG: Well, Tony, I think the key thing which we’ve seen, and we’re really seeing some evidence of it today, is with this new product in effect the premium rates are closer to term rates than they are to whole life, the starting premium because of that discount. So hopefully what we’re doing is we’re bridging that gap between term and whole life, and making whole life more accessible. And as we said earlier affordability I think is one of the key inhibitors of the whole life market today.
So what we believe it enables is advisers to maybe protect the mortgage with a term policy. But bearing in mind that that policy if it expires at age 65, the policyholder dies the next day, cover’s gone. So as I touched on earlier I think that whole paradigm has changed where whole life is so much more we believe a need and should be part of a financial planning process. So what we think this enables advisers to do is take some term cover for the mortgage, but add some whole life. Inheritance tax isn’t going anywhere, funeral costs, give that more holistic protection.
PRESENTER: Surely it’s going to reduce their commission. Thinking about it from a purely profit centre adviser’s point of view, I get the bit about philosophy, and I can see that that is a morally upright thing to do, but this is a hard old world out there. Commission is important to keep advisers in business. What are you doing about that?
JUSTIN TAUROG: Well, Tony, I think two things. Firstly we think it gives advisers an opportunity, whether it’s going back to their existing customers or at point of sale, customers need more protection. So giving a more holistic solution which I think will enable the adviser to obviously provide a more rounded solution. But at the same time we recognise how important advice is in any financial planning process. So we realise that because we’re giving a discount on the starting premium, commission would be on a lower premium, instead of £100 on £33 or whatever. So we actually boost the commission we pay to an adviser.
JUSTIN TAUROG: So up to 45% Lautro, 60% of Lautro if the plan’s indexed. So recognising advice, how important it is, starting premium is lower, it actually boosts the commission we pay. But it’s actually quite interesting. What we’ve seen is on our Vitality Optimiser customers are more engaged in the sale, they see some tangible benefit from it. So rather than paying a lower premium for the same cover, they actually end up taking out more cover, maybe adding serious illness cover or life care cover, so actually end up almost working towards the same budget but getting more cover.
PRESENTER: Interesting, and presumably all the customers are the same aren’t they? Do you customise this at all for people?
JUSTIN TAUROG: No, that’s a great question. So I mean I’ve touched on the Vitality Interest Rate Optimiser as the one option, which is both on wellness as you saw and on interest rates. A deep discount but then the premium adjusts on those two factors. Now what an adviser could do, they could just use the Vitality Optimiser, which as we touched on just looks at wellness and premiums adjust based on engagement in Vitality. Or they can just take the Interest Rate Optimiser where the discount won’t be 67% it’ll be 45%, but premiums will then just change based on interest rates. So they can customise any solution.
Now there’s one other option which we also have launched called the Premium Optimiser, where we give an upfront discount, as we do on all the optimisers, but then premiums just go up by a fixed 2½% each year, so not linked to interest rates.
PRESENTER: Having dealt with that then, let’s turn to business protection now. why do you believe that business protection is such an important area for advisers to tap into at the moment?
JUSTIN TAUROG: Tony, we think that’s a massive need. In the same way in the personal protection world there’s a protection gap, there’s a similarly massive business protection gap. Businesses need to protect continuity and if something goes wrong, key person cover or having to repay a loan or partnership protection, such an important need for a business. And I also think with auto-enrolment I think there’s more opportunities for advisers to talk to their small SMEs and medium businesses around their business protection needs. So we think there’s a massive need, and it will be growing part of the market, business protection.
At the same time we always been in business protection and it’s a core part of our offering, but we hadn’t offered the Vitality Optimiser solution on our business protection plans up until now.
PRESENTER: OK, so across all the range of business protection plans. What do you think this will mean for businesses briefly?
JUSTIN TAUROG: Well I think a lot, a couple of things, firstly meeting a fundamental need to ensure that business continuity for a business if something happens to a key individual. But with the Optimiser what they get is an initial discount based on the term, so lower cash, better cashflow in the early years. If the employee is then engaged in wellness the business benefits through lower premiums in time.
PRESENTER: And you clearly believe that that’s good for employers to engage in their employees’ wellness as it were, you do yourself don’t you?
JUSTIN TAUROG: We do, yes, and it’s a massive thing. We run an annual survey, Britain’s Healthiest Company. And it’s amazing the impact of wellness on an organisation. You know, better, lower absenteeism, higher productivity if you have a healthy workforce. And a lot of bigger companies will have maybe an in-house gym or might have health checks for their staff, but it’s harder for smaller companies to put together a holistic wellness package. Whereas with the Vitality Optimiser proposition they get that whole in effect readymade wellness proposition for their employees, and benefit through their protection premiums if the employees engage. Welcome back. We’re now joined by Franchise Distribution Director Andy Philo. Andy, you should have a simpler title for somebody like me. We’re going to talk about the serious matter obviously of serious illness cover.
ANDY PHILO: Well when we launched serious illness cover back in 2007, we were doing that really after a period of a lack of innovation in the protection space. Been in the industry for a long time, and we’d really seen very little innovation. Innovation was limited to a price change quite frequently, to the point where we still think consumers actually feel that insurance is too expensive and in fact is isn’t. Other things like incident rates.
Those are the other sort of things that we were seeing in terms of changes of innovation. And we really wanted to come to the market and disrupt it and do something a bit more challenging. So we develop serious illness cover off the back of the success of the South African market, where it’s been phenomenal. And I guess to answer your question there’s four things that are probably different about Vitality serious illness cover compared to the market. The first thing is full body coverage. So we break the body system down into 14 different systems. So we’re able to provide more coverage for an individual.
Secondly we take a total approach to severity. So we feel that we should pay an amount that’s equal to the severity or the impact on an individual’s life. And the concept is no different to that of car insurance, Tony. I’m sure you’ve got a car, you’ve probably got fully comprehensive insurance. If somebody goes in the back of your car you get a new bumper, you don’t get a brand new car. So we tried to approach our insurance policies in the same way. So depending on the severity or the impact on somebody’s life, then we’ll make a payment equivalent to that.
And the third point is around the number of conditions we cover. So with the recent changes that we’ve announced just on the roadshows, we now cover in excess of 170 conditions under our comprehensive plan, and over 100 conditions under our primary plan. So it really gives the consumer complete confidence that they’re more likely to get a pay out from us.
PRESENTER: What about multiple claims then?
ANDY PHILO: So that was the fourth point really, so multiple claims is really important. So again if you’ve had insurance, you always value insurance when you’ve had a claim, whether that be car or house or indeed severe illness cover. The issue there is that generally speaking if you make a claim on the insurance policy, particularly in the serious illness cover space, the value of that cover goes down and you’re uninsurable after an event. So with our severity approach what we do is we pay a partial payment. So for example if we get a category C claim we’ll pay out 50% of the sum assured. Rather than the policy just cancelling and not being of any value to that client, there’s still a balance there available for them to draw down on if that claim actually deteriorates or they get another unconnected claim. Equally we have another element to our product range where you can reinstate that cover to the full value. I think we’ll talk about that a little bit later.
PRESENTER: I’m always a little concerned about screening, early screening. You get to my age in life and you realise just how important these things are.
ANDY PHILO: Yes, absolutely, it’s very important. And part of the Vitality programme it’s possible to get a 50% discount on screening, a range of different screenings. And the reason that’s really important is because it’s easier to identify illnesses at an earlier stage now, often even before symptoms actually start to exist. So screening is really important particularly in the severe illness market.
PRESENTER: OK. Let’s wrap all those changes up and have a look on this slide, slide number 5, so that you can talk us through the major changes to serious illness cover, and why you’re doing it.
ANDY PHILO: So we’re really reacting to medical developments, technology developments across the globe. As you know we trade across the globe now, across five different continents. And we use that learning to help us to develop our product range, and make sure we’re ahead of the market. So we’re launching six new conditions just recently. Just if I can pick out a few just in particular from the slide. Bowel gangrene or bowel ischemia is a severity level D. And that can often result in long-term complications, so deterioration can occur after that. Corneal transplant is a category F paymentAnother one probably to pick out is the spinal stroke where there’s a category D pay out. And the reason these are important and they’re severity led is because there can be long-term effects. So the point on spinal stroke, it can have longer term effects with bladder and bowel problems. So therefore even though we’re paying out a smaller amount upfront, if that deteriorates you can get further payouts. You can use that money for whatever you want. So whether you want to get a second opinion, you want to sort out your finances, your family affairs, take a holiday, you can actually do that.
PRESENTER: A bit of control, independent control as such. Traditionally an adviser would look at this on a pretty individual basis, but you’re changing things and starting to think of more of a family approach, what are you doing and why?
ANDY PHILO: Well Justin touched on earlier on about our shared value concept, which is central to everything we do. And we’re not just interested in just the principal member being insured, we want to try and protect the family and all the members. So we’ve introduced family benefit. Again it’s a unique element of our proposition; it’s not available in the rest of the market. And it covers three distinct areas.
The first one is complication in pregnancy: very often an exclusion under a traditional type policy; 3% of all pregnancies have some kind of complication. So we’ll make a payout in the event of complication in pregnancy. So that could be ectopic pregnancy, stillbirth, those sort of instances. Secondly we’ll cover congenital conditions. So if a child is born with spina bifida, cerebral palsy, etc., Down’s syndrome, there’s an additional payment there. And then thirdly we’ll make a contribution to funeral, a contribution for a child.
So each of those covers a £5,000 payment; you can get multiple claims on those up to a maximum of £20,000. But this is really about insuring the family as well, and covering as many eventualities as we can. As I say it is unique to us and it’s included on all serious illness cover policies going forward comprehensive.
PRESENTER: How are you helping customers protect their cover? Because in a sense as you mentioned if somebody has a serious illness it’s gone, over and done with, so what are you doing in the protection of cover arena?
ANDY PHILO: Well I made reference earlier on is that if you have a claim under an insurance policy that’s when a client really does value that policy regardless of the type of policy it is. That’s the reason you remember you paid all the premiums and you were convinced to take out the product in the first place. So we’ve simplified what we used to call minimum protected account. And this enables a client to reinstate the full value of their cover in the event of a claim.
So let’s take an example. If you’ve got £100,000 worth of serious illness cover in place, and unfortunately you have a severity claim C, so we’ll pay out £50,000. What actually happens under a traditional policy is we’ll pay out £50,000 but there’s still a balance of £50,000 from the original sum assured that’s still in place. So if that condition worsens, deteriorates, or another unconnected condition exists, then you’ve still got a balance of £50,000.
But we’ve now introduced protected cover, and that allows you to bounce back the full sum assured. So after that event happening, so we pay out £50,000, we’ll actually pay, we’ll reinstate that sum assured up to the full value, up to 100% of the original value. And we do that without any further underwriting, without any additional premium increases or any deferred period.
ANDY PHILO: So on the left we’re just trying to demonstrate here, and this is some research conducted by the King’s Fund of the number of people that are living with three or more long-term conditions. And as Justin mentioned earlier on, it’s really good news that we’re living longer, but we are living sicker because of disease of lifestyle now, so people are living with long-term conditions but for longer. So in 2008 1.9 million individuals lived with three or more long-term conditions. And the projection is by 2018 – which is only two years away – that will go up to 2.9 million. Another million people will be living with three or more long-term conditions. So if you have an illness or a disease, the likelihood is that could deteriorate further.
So this is a real life case study, a very unfortunate gentleman but nevertheless he’s been very well protected by his adviser. So just talk through this on the right hand side. This is a gentleman that had £170,000 worth of decreasing sum assured, and the premium for that was £53. He had life cover and he had comprehensive serious illness cover, and 100% of the full MPA. So in October 2012 this gentleman suffered from leukaemia. It was a severity A which is 100% pay out under our plan. So he would have received over £150,000. The reason there’s a difference between the original sum assured is because it’s a decreasing sum assured just to remind you. Then a little over two years later he had another illness and we made a severity F payout of £13,563. And then a little under a year later he had another severity A payout, so a full payout for total blindness where we paid another £127,000 out.
So in total this gentleman has received £300,000 from us. Clearly we can’t take away the pain and suffering that he’s undergone, but nevertheless financially he’s able to adapt his property, sort his financial affairs out, and manage his life far more effectively with the comfort of that. Because he had 100% MPA on this plan, it is possible to receive another £350,000. It depends on any other illnesses that develop over a period of time and eventual death.
If I can just go back to the protected life cover and protected serious illness cover that we’ve just launched, we’ve made that a lot simpler now. So previously an adviser would have been able to choose a varying degree of reinstatement. So we’ve taken away and made that a lot simpler. So now you can just reinstate up to 100%. But also the cost was a little bit unknown from an adviser’s point of view. So sitting with a client it would have been uncertain about what the price was. He had to do a quote.
So now you’re able to just reinstate the life cover, if you want to do that, which is particularly good in the mortgage market at a cost of 20% of the serious illness cover premium. But if you want the full Rolls Royce product, if you like, of full serious illness cover reinstatement, that would cost you 35% of the serious illness cover premium.
PRESENTER: OK, all right. There we go. We’ve talked about whole of life, obviously, but you’re making some changes to term cover as well aren’t you Andy?
ANDY PHILO: Yes we are. So Justin’s mentioned that we have a massive focus on the whole of life market at the moment, but equally we recognise that three quarters of sales in the UK protection market are either term assurance or term assurance with a critical illness or serious illness rider. So there’s a massive opportunity there. So we are making some changes to pricing. We’re reducing our pricing by an average of round about 6%, in some cases up to 30%, So that’s one of the main changes. The other change as well I think where we’ve really listened to the advisory market is we’re extending the term of our product. So we’ll now go to age 90 for a client, and a maximum term of 70. So that’s very much in reaction to what our advisers are telling is that there is a match between term and whole of life cover.
PRESENTER: let’s move onto Vitality’s healthy living proposition. You launched Active Rewards, Andy, a year ago, how successful has that been?
ANDY PHILO: So what this basically, we ask people to engage in their health, do a little bit of exercise, just a nominal amount of activity in order to get nine points a week and that unlocks really rich benefits. And just in a little under a year we’ve had in excess of 750,000 coffees delivered from Starbucks, and over a million movie tickets now released just as a result of a client having a policy.
We think it makes that policy more valuable. As I said countless times, nobody wants to claim under an insurance policy, we want to put it in the bottom drawer and never look at it again. But the reality is we’re helping people to understand their health, look after themselves, and also get a reward for doing so.
ANDY PHILO: So we’re going to make some more changes as we go to the year two Active RewardsBut the main thing is we will be announcing some new and exciting Vitality partners later this year.
PRESENTER: in a moment we’re going to explore some of VitalityLife’s other technology changes with Justin. For a moment though let’s have a look at this digital vision video. Justin, can you briefly explain the new adviser hub and the new smart adviser app?
JUSTIN TAUROG: Sure. So I suppose other industry’s the use of technology has been astounding, I mean uber revolutionised I suppose the tax industry, look at Facebook, WhatsApp. Technology has I suppose changed our lives. Whereas within the protection environment I don’t think we necessarily maximise in the use of technology as an aid for advisers and customers. So what we’re launching firstly on the adviser hub is a whole new adviser zone. One of the key, the key things which we’re now launching is a menu plan quote and apply capability. So we spoke about earlier I suppose term, whole life and I suppose the importance of having that holistic financial solution.
So with the adviser hub you can quote for a joint life policy, single life term, whole life, whatever’s right for the individual customer, spouse, and just go through one application process. Just answer questions once and submit once.
PRESENTER: The smart adviser app.
JUSTIN TAUROG: So the smart adviser, I mean what we wanted to do there is really strategically empower advisers to adapt as their policyholders’ needs change. Whereas I think historically part protection policy and take the document, put it in a drawer, not be able to change it or update it. So with the smart adviser it’s an app, we also will have it on the adviser hub as a web tool, with a very simple process. If you’re seeing a customer and they want more cover, six questions, not having to recapture information, just six simple underwriting questions, and if that goes straight through policy activated immediately, commission with the next commission run.
So we’re adding an ability to increase life cover, to add life care cover. We’re going to be adding PMI and Vitality health is another option. So just simplify that whole journey. If you’ve seen a customer who already has a Vitality product, very simplistically adapt.
PRESENTER: All right, Andy and Justin, I think we need to leave it there. Thank you very much indeed both of you. And indeed thank you to you for watching. That concludes this Akademia on the life insurance market where we’ve looked at trends in the market for 2016, whole of life pricing, changes in the market and the reasons for those changes, innovations in serious illness and critical illness cover, term cover affordability. Please now complete a reflective statement to validate your structured CPD.