Auto-enrolment has, arguably, done more to foster a savings culture in the UK than any Government policy has before. With 10 million extra people in the UK now saving into a pension, is it now time to turn our attention to another major issue – closing the country’s protection gap?
Astonishingly, nearly two-thirds of us (65%) have no life insurance or protection cover in place, according to the Financial Conduct Authority’s 2017 Financial Lives Survey.
That means millions of adults run the risk of putting their families under serious financial strain if they were to die or were unable to work because of serious illness.
Why is the UK not protected?
There are multiple reasons people in the UK choose not to purchase insurance to protect their finances.
First, many people still believe that insurance providers look for any reason to reject a claim, despite payout rates proving otherwise.
Another reason is, quite simply, people need to be sold insurance; they tend not to go out and buy a policy without being nudged.
This is an important point as it could hold the key to improved take-up.
What can the UK learn from other markets?
As part of a recent white paper, “Pensions and protection in the ‘nudge’ era”, Bravura looked at how other countries have dealt with under-insurance.
In the UK, protection policies are sold separately from pensions or long-term savings products, although they may be offered by employers as part of an employee benefits package.
Other countries, however, have taken different approaches, many of which have resulted in improved sign up.
In Australia, for example, pension scheme members are given a small amount of life insurance cover by default.
Having automatic insurance, which they can opt out of, has the benefit of providing cheaper premiums for most members while providing cover for groups of people who would normally struggle to get it. And overall, this has proved to be a successful approach to address the issue.
Compulsory insurance has been touted as a solution to the UK’s protection gap but, at the moment, there is little evidence to suggest legislators in this country have the appetite to step in to drive up cover.
South Africa, on the other hand, is making real progress in closing the protection gap, with a vibrant and innovative insurance sector that is making effective use of technology.
The country’s insurers are leading the way in collecting and analysing data to drive more effective underwriting.
Take, for example, Discovery, which sells insurance through the Vitality brand. It has borrowed heavily from behavioural economics to incentivise policy holders to become healthier by lowering premiums when they consistently choose to exercise or eat healthily.
This is tracked through a phone, or a fitness tracker such as a Fitbit, and is used to offer more dynamic underwriting.
Realising that many people are put off by the lengthy application process to buy insurance cover, Discovery also uses data analytics to speed up the process to give speedier quotes.
The power of data
Harnessing data should also address another key hurdle in the UK – winning back trust.
By using rich data-sets and implementing more sophisticated data analytics to underwrite protection, we should see an increase in insurers paying out in the right circumstances. In time, this could result in higher sales.
As with anything, there is more than one way to solve a problem. Using quite different approaches, Australia and South Africa have come up with ways to help close the protection gaps in their respective countries.
Success in Australia and South Africa doesn’t necessarily mean success in the UK but taking a look at what our peers are doing might just inspire us to come up with our own solution.