2016 Star Ratings Life Assurance Discussion paper Defaqto Limited 2015. All rights reserved. No parts of this publication may be reproduced in any form by any means, whether electronic, mechanical, optical or any other, or be stored in a retrieval system without the express written permission of the publisher. The publisher has taken all reasonable measures to ensure the accuracy of the information and Ratings in this document and cannot accept responsibility or liability for errors in or omission from any information given and for any consequences arising.
About this document This document outlines the key developments and trends that will inform the criteria we use for the 2016 Star Ratings for life assurance and, based on these, sets out the areas where we would like to consult the industry as part of ensuring that our ratings process remains robust and transparent. 2
Key developments and trends The market The indicators are positive for life assurance. The latest figures from Swiss Re show that sales of term assurance and non-profit whole of life assurance increased in 2014 and recent research from Direct Life showed that of 300 UK advisers that use online portals, 72% believed that protection sales will increase further in 2015. Also, there have been definite moves towards simpler products with a direct-to-consumer focus. On the one hand, this is an exciting move because it could be a way of actually growing the market rather than simply competing for a greater share of existing business. On the other hand, more thought needs to be given to what drives distribution in the digital world. In the YouGov report for Scottish Widows earlier this year, considerably more people regarded broadband essential than those who regard protection to be essential. We do not yet have a consumer base that seeks out and purchases life and protection online unless prompted in some way. Product developments continue in whole of life. Lifequote have now added whole of life assurance to its comparison service after a third of advisers in a survey requested it for estate planning purposes. However, whole of life has wider application for lifestyle protection and wealth creation/replacement during what was traditionally known as the retirement phase of financial planning. The sort of products designed for the adviser market is significantly different from those designed to be marketed direct to a specific target market. In 2015, Defaqto introduced five life assurance ratings: Level Term Life Assurance (Advised) Decreasing Term Life Assurance (advised) Life Assurance (Direct) Whole of Life Assurance Over 50s Life Assurance Our Star Ratings methodology favours feature-rich products more typical of distribution through advisers, and the level and decreasing term ratings and the whole of life rating have been constructed on that basis. However, cognisant of the interest in simple, direct-to-consumer propositions, we introduced a new rating in spring 2014 that focusses less on features and benefits and more on service and the customer journey, the life insurance (direct) rating. Additionally, the Over 50s Life Assurance Star Rating has focussed primarily on value for money and customer focused features. 3
Providers There are 51 providers of life assurance on the Defaqto database. The majority offer level and decreasing term assurance. Excluding business protection plans and relevant life plans, there are 65 level term assurance products from 40 providers and 55 decreasing products from 34 providers. Additionally, 16 providers offer whole of life and 24 providers offer 32 Over 50s plans. The market is highly white labelled and there are approximately 23 underlying insurers. Provider Level Term Decreasing Term Whole of Life Over 50s AA AEGON AIG Life Asda Money Aviva Life & Pensions UK Limited Barclays Beagle Street Bright Grey British Seniors Insurance Agency Canada Life International Clydesdale Bank Connells Direct Line Engage Mutual Assurance ESMI Forester Life Friends Life HSBC Life (UK) Ltd John Lewis Insurance Legal & General Lutine LV= Nationwide Building Society NatWest NFU Mutual Old Mutual Wealth 4
Provider Level Term Decreasing Term Whole of Life Over 50s Partnership Police Mutual Post Office Money QuickCoverLife.co.uk Red Rose Friendly Society RIAS Royal Bank of Scotland Saga Sainsbury's Bank Santander Scottish Provident Scottish Widows (direct) Sheffield Mutual FS Shepherds Friendly Skipton Building Society Smart Insurance Sorted Insurance Sun Life Tesco Bank The Co-operative Bank There Virgin Money VitalityLife Yorkshire Bank Zurich Assurance Products/propositions In the level term and decreasing term assurance market, Defaqto offers star ratings based on comprehensiveness of proposition. These ratings include features such as indexation, waiver of premium and guaranteed insurability options. The majority of the level term and decreasing term products in our database are designed for intermediaries and therefore have the features typically associated with advised business. A number of these are white labelled by other organisations, typically banks and building societies, and sold direct. There are also some simpler products designed for direct to consumer marketing. These typically do not have the features and benefits listed above and tend to achieve only 2 or 3 stars. For these we have developed the direct life assurance rating requiring additional information about the proposition, acquisition and claims turnaround times and other softer factors associated with a good customer journey. 5
In the last year there has been the launch of a simple product from There (Reliance Mutual) and we are aware of others in the planning stage. There is a strong movement towards simpler products quite apart from the simple products initiative being progressed under the Sergeant Review. The following table illustrates the product changes, launches and withdrawals over the 12 months to June 2015: Date Provider Summary of critical illness cover changes Jun-14 Reader's Digest Over 50's plan withdrawn Jul-14 HSBC Time period for Free Cover and Interim Cover increased from 60 to 90 days. Jul-14 Jul-14 Barclays Barclays Barclays Life Cover through Aviva is no longer available on a decreasing basis. Barclays Life Cover from Aviva is only available on a single life and level term basis. The product also no longer offers terminal illness or guaranteed insurability option. Aug-14 Legal & General Changed to the maximum cover available for Relevant Life Plan. Aug-14 Ageas Protect Changed to the maximum sum assured for Relevant Life Plan. Sep-14 Bright Grey Maximum term for relevant life plan increased from 40 to 57 years Sep-14 Royal London Over 50s plan launched with paid-up and premium holiday facility Oct-14 RIAS Introductory offer increased to 50 M&S vouchers for over 50s plan. Oct-14 Engage Mutual Discount for online applications withdrawn; level of cover has been increased. Oct-14 AEGON New Whole of Life Plan launched Nov-14 Reliance Mutual Over 50s plan withdrawn. Nov-14 Nov-14 PruProtect PruProtect An optional accelerated benefit, Lifestyle Care Cover, added to the Whole of Life Plan. Mortgage Plus Plan launched; the plan provides five covers: Mortgage Life Cover, Mortgage Incapacity Cover, Serious Illness Cover for Mortgages, Optional Serious Illness Cover for Children, and Waiver of premium. Nov-14 Friends Life Interest rate used on all mortgage term policies decreased from 10% to 8%. Nov-14 Connells Interest rate used on all mortgage term policies decreased from 10% to 8%. Nov-14 Co Op Interest rate used on all mortgage term policies decreased from 10% to 8%. Nov-14 There There-in-one launched: includes death and disability insurance. Dec-14 Santander Over 50s Plan withdrawn Jan-15 Legal & General Relevant Life Plan policies can now be submitted via OLP Connect system. Jan-15 Ageas Protect Two new levels added to the mortgage interest rate for the decreasing Term plan, 5% and 6%. May-15 AIG Life Whole of life insurance plan launched Jun-15 Saga Maximum age of availability of Over 50s plan reduced to 75 6
Key implications for the 2016 Ratings process We are planning no changes to the Life Assurance (Advised) Star Ratings this time. The ratings are based on comprehensiveness and support those products marketed to advisers. In terms of the Life Assurance (Direct) Star Ratings, we are not proposing any specific changes but we welcome feedback on the current criteria set. We have recently refreshed in the additional information we request by questionnaire but are open to suggestions about how we can more effectively measure the softer service issues. In the case of whole of life assurance, we are considering the issue of accelerated benefits. Firstly we have added Terminal Illness as a criterion. People who have whole of life cover and who are diagnosed with a terminal condition stand to benefit significantly from drawing down the proceeds of the policy to help settle their financial affairs, if they need to. A number of products facilitate this and it is a mark of quality. Second, VitalityLife has introduced an accelerated benefit on its whole of life policy that could be used to address care costs. This seems like a sensible move in product design and we are aware of a similar development from another provider. Facilities such as this will make whole of life more appealing to customers in future by extending its application. In terms of guaranteed acceptance whole of life Over 50s Life Assurance we are keen to encourage good outcomes for consumers in product design. Two features have come to our attention from Royal London in the last year that are customer-centric and seek to address one of the longstanding criticisms of Over 50s plans, namely, that those who stop their premiums stand to lose all their benefit. Royal London is addressing this by offering a premium holiday for those who cannot afford to pay their premiums and a paid up plan where premiums stop completely. We anticipate that these features will be adopted by other providers in due course and the inclusion of them as criteria is being explored. Areas for discussion Based on the material in the preceding sections, these are the areas where Defaqto would like to discuss its proposals, and receive any feedback that you might have. Current criteria New criteria Direct life insurance Terminal illness benefit for whole of life Accelerated care benefits for whole of life Over 50s paid up plan Over 50s premium holiday Are the current criteria still relevant to the product and the Star Rating? Are there any features and benefits of life assurance, which are not currently covered within the existing criteria set, that should form part of it going forward? What is your view of the direct to consumer rating for life assurance and do you have any suggestions for how this might be developed? Do you agree that terminal illness should be a Star Rating criterion for whole of life assurance? Should policies that give an accelerated benefit for help cope with care costs receive credit within the Star Ratings? Should paid up plan be included in the Star Rating criteria for Over 50s plans? Should premium holiday be a Star Rating criterion for Over 50s plans? 7
Appendix: Proposed 2016 criteria Based on the above analysis, we propose including the following criteria in our assessment process for the 2016 Ratings (core criteria are in bold text). Proposed criteria Life Assurance (Advised) Decreasing Term Underwriting Process Option to Vary Term Maximum Age at Expiry - Life Option to Vary Sum Assured Maximum Interest Rate Mortgage/Loan Maximum Increase Mortgage Guarantee Joint Life Separation Life Cover Rates Guaranteed Second Medical Opinion Reviewable Rates Claims Support Services Waiver of Premium Health and Wellbeing Services Default WOP Definition Term Illness Limit (Months) Replacement Cover Proposed criteria Life Assurance (Advised) Level Term Underwriting Process Conversion Option Maximum Age at Expiry - Life Option to Vary Term Life Cover Rates Guaranteed Option to Vary Sum Assured Reviewable Rates Guaranteed Insurability Renewable Rates Second Medical Opinion Sum Assured Indexation Claims Support Services Waiver of Premium Health and Wellbeing Services Default WOP Definition Term Illness Limit (Months) Replacement Cover 8
Proposed criteria Life Assurance (Direct) AKG Financial Strength Grey Claims Panel Annual Statement Issued Immediate Claims Point of Sale Decision Given % Life Immediate Guaranteed Rates % Life 24 Hours Option to Vary Term NPS Acquisition Option to Vary Sum Assured Accessibility Option to Vary Sum Assured Online Application Assistance Free Cover During Underwriting Decision Tree Maximum Free Cover Period Calculator Helplines Available Online Changes Life Claims Paid % 2012 Trusts Flagged Net Promoter Score (Claims) Trust Guidance Given Emergency Claims Wills Flagged Average Life Claims (Days) Wills Signposted Typical Life Claims (Days) Proposed criteria Whole of Life Assurance AKG Financial Strength Option to Increase Sum Assured Limited Payment Term Option to Decrease Sum Assured Underwriting Process Option to Change Life Assurance Maximum Age Attained Guaranteed Insurability Maximum Sum Assured Guaranteed Premium Rates Sum Assured Indexation Reviewable Premium Rates Key Person Plan Available Critical Illness Option Partnership/Shareholder Claims Support Services Waiver of Premium Health and Wellbeing Services Option to Increase Premium Terminal Illness Option to Decrease Premium 9
Proposed criteria Over 50s Life Assurance AKG Financial Strength Benefit Moratorium Period Online Terms and Conditions Premium Refund Basis Online Quotation Accidental Death Benefit Online Application Counselling Service Maximum Age Attained Helpline Available Minimum Monthly Premium Sum Assured Age 50 20pm Premium Cessation Age Sum Assured Age 60 20pm Maximum Premium Guarantee Sum Assured Age 70 20pm Increasing Cover Sum Assured Age 80 20pm 10