60 is the New 50. Pacific Life Re Re:think. Introduction. August October 2018

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1 60 is the New 50 Pacific Life Re Re:think August 2018 October 2018 Introduction The whole of life over 50s plan in one shape or other has been a feature of the UK protection market for a number of years. But with people living longer, should we consider whether the time has come to consign the over 50s product to history and give life to the emerging over 60s product? And while we re at it, what about the other features of the product? Do these need an overhaul? Has guaranteed acceptance had its day or is it still an important feature for the customer? Do customers understand the moratorium? In this article, we give our thoughts on all these questions with support from qualitative customer research we have commissioned. 01

2 02 Is There a Customer Need? Is there is a need for a guaranteed acceptance whole of life plan in the marketplace? We think there is. Our customer research showed a key motivation for customers to buy the product was to provide financial peace of mind. 1 However, this meant different things to different people. Some wanted to be able to leave their family with money to cover the cost of their funeral as they didn t want this to be a financial burden; some wanted to give their family peace of mind that they would be able to cover any outstanding debts when they died, such as mortgage and credit cards; whilst some just wanted to leave something behind for their family to spend on whatever they liked. Many saw the over 50s plan as their last chance to buy insurance. Some wanted to be able to leave their family with money to cover the cost of their funeral... some wanted to give their family peace of mind that they would be able to cover any outstanding debts... whilst some just wanted to leave something behind for their family to spend on whatever they liked. 60 is the New 50 So given the genuine need for the product, why are we even considering whether or not it should be replaced with an over 60s plan? The answer lies in the claims experience for the age group. Our data shows that for this age group, actual claims experience can be somewhere between 400% and 800% of the general population. This age group have ready access to underwritten life insurance policies and therefore there is a large degree of anti-selection inherent in a guaranteed acceptance product. We wondered whether changing from the familiar over 50s to the less than familiar over 60s might put some customers off. Our research showed that it didn t. In fact for some, it had an even stronger appeal and some embraced it enthusiastically, coining the phrase 60 is the new The study was conducted by ICM Research who interviewed adults aged 50+ in the UK using Focus Groups.

3 What About Guaranteed Acceptance? One way to reduce extreme cases of anti-selection is to include one simple question in the application, for example: Have you ever been diagnosed with diabetes, cancer, heart attack or stroke?. Some call this a killer question approach. The downside of course is that it is no longer a guaranteed acceptance product. Our research found that customers were not against the idea of a killer question being added to the application process if it meant they could get cheaper premiums. Any concern about the loss of guaranteed acceptance was unfounded. We found that there was little understanding and awareness among our customer groups that over 50s plans are guaranteed acceptance, and customers who had never gone through a full underwriting process didn t place any value on the concept in the first place. Our research found that customers were not against the idea of a killer question being added to the application process if it meant they could get cheaper premiums. Do Customers Understand the Moratorium? If there was a killer question, it might be possible to avoid having a moratorium. Do customers realise there is a moratorium and does it put them off? We found that customers do understand and accept the moratorium but not all of them knew why it was needed. While some understood the risk management aspect of it, some thought it related to recouping expenses. 03

4 04 But You Could Receive Less than You Pay in Perhaps one of the biggest criticisms of the over 50s plan is that, if you live long enough, you could end up receiving less than you paid in. The notion of paying in more than you get out is a powerful one. Some providers have capped the premium payment period such that once you have paid in the sum assured, premiums cease. But wait a minute. This is insurance we re talking about, right? Surely the whole point of pure protection life insurance is that it is perfectly possible to receive less than you pay in? So there are different ways of looking at this. From an actuarial perspective, there is no free lunch. Capping the premium payment period means that the sum assured is lower than it would have been had the premium paying period been longer. So which is better for the customer: capped or uncapped premiums? We decided to take this out of the hands of experts and see what customers thought. What we found was surprising. Firstly, customers were untroubled by the fact that if you lived long enough you could pay more than you get back over the lifetime of the product, and did not make the connection between the phenomenon and their own over 50s plans. When we presented the capped premium version with premiums payable for a limited period but with a lower sum assured, customers were torn and could not work out which was better. One or two liked the idea of a capped premium recognising that the older they get, they might be less able to afford the premium. Others disliked the fact that the sum assured in the limited premium term was significantly lower. We concluded that there was no right answer.

5 We had thought that offering customers a choice might be a good solution to this dilemma but what we observed was that when presented with a choice, most customers could not decide. For some, the choice itself led to confusion such that they would probably not have bought an over 50s plan at all. Customers were untroubled by the fact that, if you lived long enough you could pay more than you get back over the lifetime of the product... When we presented the capped premium version with premiums payable for a limited period but with a lower sum assured, customers were torn and could not work out which was better. 05

6 06 Do Customers Need an Incentive to Purchase? Many insurers selling an over 50s plan offer an incentive of some description. The carriage clocks of yesteryear are long gone and now customers are more likely to be offered an Amazon voucher. But are incentives needed for this product? Surely the purchase of a protection product should not be influenced by a voucher, which after all is indirectly paid for out of the premiums. There is the risk that it undermines the product itself, particularly if the incentive alienates the customer. That said, we believe there is a place for incentives in the direct to consumer space, to tip the scales towards a purchase - as long as the incentive is not disproportionately large so that it overrides any consideration of whether the product is appropriate. We wanted to know if the insights from customers supported this position but recognised that this is a difficult topic to research. Our research produced some interesting responses. Some liked the idea of vouchers and money back on their policy. All were adamant that their purchase decision was not based on the incentive but that it was nice to receive a thank you. We tested a number of different alternatives. Amazon vouchers were very popular as they had a cash-like appeal because you can use them to buy a lot of different things. All were adamant that their purchase decision was not based on the incentive but that it was nice to receive a thank you.

7 In terms of the value of the voucher itself, many thought 30 was an insult. We re not children was the response from some, and it seemed that for our respondents, 50 would be a more acceptable amount. In terms of non-monetary rewards, some respondents had totally unrealistic ideas of what a suitable incentive would be such as a holiday, while other suggestions, such as a case of wine, were more viable. It s important to note that only half of the respondents who had bought an over 50s plan had actually received an incentive, which supports our thoughts that it might not be needed. For the other half, customers claimed incentives paid no part in their purchase irrespective of their attitudes towards incentives. It s important to note that only half of the respondents who had bought an over 50s plan had actually received an incentive, which supports our thoughts that it might not be needed. 07

8 08 Is a Funeral Cover Option Seen as Beneficial? Many over 50s plans include an option to use the payout as payment or part payment towards their funeral on preferential terms with a particular funeral provider. We think this is a valuable option irrespective of whether customers choose it or not, and aligns to the positioning of the product as something that could be used to pay for a funeral. Our research supported this view. However, while some thought it was a valuable option, others said they d prefer the money to be left for their family for them to do what they want with it they didn t want the money to be stuck with a funeral director. Final Thoughts We think it is time for the industry to move to an over 60s plan. Not only does it remove the anti-selection inherent in the age group, thereby providing better customer value, but it also resonates more with customers; it is even enthusiastically embraced by those who no longer regard 50 as old. Companies don t need to be afraid of taking different approaches such as having a simple killer question to reduce anti-selection. As to the issue of but you could receive less than you paid in, we don t think that this makes the product inherently unfair. The nature of pure protection policies is that you can receive less than you paid in, however, we can understand why some providers offer capped premium payment periods. We think it is time for the industry to move to an over 60s plan. Not only does it remove the antiselection inherent in the age group... it is even enthusiastically embraced by those who no longer regard 50 as old.

9 For more information about Pacific Life Re please visit our website follow us on LinkedIn or contact Europe James Tait Head of Protection Pacific Life Re Europe T: +44 (0) E: Pacific Life Re Limited (No ) is registered in England and Wales and has its registered office at Tower Bridge House, St Katharine s Way, London, E1W 1BA. Pacific Life Re Limited is authorised and regulated by the Financial Conduct Authority and Prudential Regulatory Authority in the United Kingdom (Reference Number ). The material contained in this booklet is for information purposes only. Pacific Life Re gives no assurance as to the completeness or accuracy of such material and accepts no responsibility for loss occasioned to any person acting or refraining from acting on the basis of such material Pacific Life Re Limited. All rights reserved. PLREOF1018