Is there such a thing as a bad insurance product?

It’s not difficult to think of insurance products that have hit the headlines for all the wrong reasons. Yet does that make them a bad insurance product? Or is there more to this question than first meets the eye?

Payment protection insurance and card protection insurance (PPI and CPI) are two insurance products that have been criticised in the press and triggered huge fines and compensation for the consumer detriment they’ve caused. Surely if there was such a thing as a bad insurance product, then these should take the gold medal.

Well, I don’t see it that way. The problem with PPI and CPI was not that they were intrinsically good or bad as products. After all, both PPI and CPI did met the needs of a certain segment of the market. The problems caused by these products originated more in the way they were packaged, the way that they were distributed, the way in which they were priced.

Some of you may say that if a product is packaged badly, sold badly, priced unfairly, then surely that means it’s a bad product. And to a certain degree, you’d be right, but only to a certain degree. If PPI and CPI were bad products, then surely they would have been banned. Yet both do have a market, albeit one much smaller one than they ended up being sold to.

Other Indicators

So I would steer away from labelling products as good or bad, and replace those value judgements with indicators of certain other attributes. Here are a couple of examples I usually look for.

1.  What is the balance between the core value proposition of the product, and the frills and extras added on to it? A good example here is travel insurance, whose core value proposition is medical and repatriation expenses, not the £100 for this or that bit of cover. If that core value propostion isn’t clear and prominent, then there’s a danger it will be the frills that will instead grab the consumer’s attention. Come claim time, the consumer will then find out just how little they’re worth.

2.  How far has a product strayed from its original target market? It’s often tempting to take a product that has been successful in one segment of the market (because its core value proposition met their needs very well) and expand its sale into other segments that resemble that original segment in some way. I know it’s not insurance, but the sale of interest rate swaps to small businesses is a classic example. Many insurance firms have a broad range of products and cross selling often forms part of their growth plans, but if those cross selling ambitions aren’t matched by the right needs analysis, then those firms are entering an ethical minefield.

Simplicity and Suitability

I want to conclude with two points from these examples. Firstly, you can see why the regulator is emphasising simplicity and suitability (coming out of examples 1 and 2 above respectively). Secondly, ethics is important not just in how a product is sold, but in how it is packaged, priced and distributed. Together, could those two points signal that the proximate cause of much of the trust deficit that insurance suffers from, lies not out in those sales teams around the country, but closer to home, in the teams that decide how a product is to be packaged, priced and distributed? It does look that way. So the solution lies not so much in further rules for sales people, but more in helping good people avoid bad choices.