Addressing GDPR concerns when storing data on vulnerable customers is critical to establishing trust

At first glance, financial services firms face a dichotomy when striving to meet the FCA’s requirements on Consumer Duty and treating vulnerable customers fairly. On the one hand, there is a need to acquire, store and manage sensitive data on health and circumstance. On the other hand, there is also a need to meet GDPR’s requirements on managing sensitive personal data.

One of the challenges faced by financial services firms is meeting their duty in terms of the FCA’s requirements on Consumer Duty, whilst also storing and managing sensitive, personal, vulnerability data in accordance with GDPR.

The FCA’s guidance on vulnerability, FG 21/1 (issued in February 2021), requires any regulated firm to understand the personal circumstances of its clients; this includes health and lifestyle information, which is not generally obtained or stored by financial services firms. Many firms avoid storing such information, because this is ‘sensitive information’ as defined under GDPR. Where medical data is collected, it is typically input into, and stored on, the providers’ systems – and not held by advisers.

Recent Consumer Duty regulations FG 22/5 – whilst not insisting on personal date being acquired on everyone – does require consumer characteristics on:-

• Any consumer who volunteers to divulge their characteristics/vulnerabilities

• All vulnerable customers (approx. 50 of the population according to financial Lives survey)

• All customers who later experience harm or a bad outcome

And to report at a high level of proportions of consumers with protected characteristics and to report on characteristics within actual and target markets. For the majority of firms the most economical way to collate this data will be to assess and collect it for all customers.

Understanding and defining the level at which data should be stored, for all medical conditions and lifestyle issues, is a major piece of work – and then communicating this, and policing it across organisations, a massive challenge. As most staff have been trained on GDPR and are fearful of collecting such data, the default situation is to not store it.

One of the key tenets of GDPR is that data should be stored and used only by those people who need to know it. This is the challenge: firms need to understand and communicate an individual’s vulnerability across the organisation, but clearly it is not sensible to have such personal and sensitive information available to everyone within an organisation (or, in some cases, across organisations). It can’t be Schrödinger’s data: at the same time, both private and available.

For us at MorganAsh, this was a key consideration when building MARS, the MorganAsh Resilience System – a cloud-based tool designed to help financial services organisations manage vulnerable consumers. After all, the data would need to be both secure and accessible – data isn’t valuable if it remains locked away, and it’s at risk when it isn’t.

In MARS, this is overcome in two ways. The first is that we don’t present the data itself under all circumstances. We convert the data in an overall representation of vulnerability – which is the level of detail primarily available. This doesn’t just obfuscate the personal data by necessity, it converts it into something more useful, something more readily understood.

We call this a ‘Resilience Rating’. The Resilience Rating consists of a superficially simple range of 1–10 – with 1 being ‘very vulnerable’ and 10 being ‘very resilient’. Like a credit score, this high-level rating can be used safely and openly across an organisation, to provide a quick and simple measure of vulnerability. We use the term ‘resilience’ rather than vulnerability, because it is a more positive term for consumers. Those people who don’t need to see the personal detail simply don’t have access to it, but they can have a ready understanding of a consumer’s vulnerability.

Secondly, MARS has multiple access layers – every person who logs onto MARS does so at a defined, specific access level. Simplistically, this has two dynamics – what is the level of detail they can access, and what is the scope of data they can access. Level of detail means access to a consumer’s vulnerability characteristics; scope of data means which consumers can be seen. For example, an agent taking inbound calls may need a scope which covers the whole company, so they can see all customers – but they can only see a high level of resilience rating without knowing the reasons for this or seeing any of the data on which it is based. Another example would be an adviser, who should be able to see the detail behind all of the consumer’s characteristics – for example, that they have a gambling addiction – but the adviser will only be able to see this detail with their own clients.

Since the resilience rating is not a piece of identifying information, it can be available to the whole company. The information that is used to get to that rating is only known by the adviser.

In this way, MARS meets both the FCA’s and GDPR’s requirements, enabling detailed personal information to be stored securely, with the appropriate information only being accessed by the appropriate people at the appropriate time.

We’ve also envisaged that there will be a need for firms to share data. Again, this needs to be done with permission – ‘explicit consent’ under GDPR – but if it’s shared from an independent, secure system, then the risk to the consumer is in many ways less than if that consumer provides either the same data, or different types of data, to lots of different organisations. The more places that data exists, the more at risk it is. At a human level, being asked to provide the same data time and time again can, in itself, be stressful for someone who is already vulnerable. It is ultimately a consumer benefit which helps to ensure that the consumer doesn’t come to foreseeable harm.

As an aside, data security should be a given for any system which stores this kind of information. MorganAsh is an ISO 27001-certified company – this is an international standard for managing information security. MorganAsh is also a Cyber Essentials Plus-certified company – this is the highest level of certification offered under the Cyber Essentials scheme.

All of these things help to build trust with the consumer, who may be reluctant to share personal information. And it’s not enough just to do these things – the consumer should be made aware of them, and why they are being done. The drive towards understanding and managing vulnerable consumers and increased data protection are both there to protect the consumer – and should be communicated as the benefits they are.

Firms can trial MARS, free of charge, for a month, without limitations. Pricing is straightforward: MorganAsh charges just for each adviser; administrators and paraplanners can access the system for free, and there is no limit to the number of consumers that can be added. Click here for free access to the MARS tool.

How to ensure the consistency of vulnerability assessments

As they move toward greater adoption of the FCA’s guidelines on consumer vulnerability, firms are struggling to achieve consistency in making, recording and communicating vulnerability assessments.

The Financial Conduct Authority (FCA) published its guidance FG21/1: Guidance for firms on the fair treatment of vulnerable customers in February 2021. It sets out the requirements, for all regulated firms, for what they should do to both understand and manage customer vulnerability. Affected firms are taking this on board and moving towards adoption of the FCA’s recommendations. The FCA’s first review, just published, comments on some good progress being made – but it also highlights a lack of monitoring, evaluation and management information.

The measurement of consumer vulnerability is, currently, somewhat problematic, for several reasons. It’s often subjective – based on the knowledge and perspective of the individual making the assessment. It’s inconsistent across products, departments and firms. It is seldom detailed enough – frequently an assessment, unhelpfully, consists of just an ‘is/isn’t vulnerable’ flag. Consider how we evaluate wealth: people aren’t ‘rich’ or ‘poor’ and clearly not all vulnerabilities are equal. So, most worryingly, vulnerability measurement often doesn’t give any real indication of the severity of vulnerability – which can be vital when making decisions for products or services which themselves carry different levels of risk.

Compare this with credit scores. Although there isn’t a universal standard, they are easy to communicate between firms, cheap to acquire, continually updated, and – although sometimes possibly crude – they work reasonably well. What’s more, they’re quite ubiquitous, generally accepted and are understood by consumers and firms alike.

MorganAsh believes that we should be able to measure and communicate a consumer’s vulnerability in a similar way – a way that is quick to do, cheap to use and easy to communicate. Ideally this would be regularly updated – and we should be able to share any updated information readily. Most importantly, how vulnerability is measured should be consistent and as objective as possible.

This is why we have built our ‘resilience rating’ into the MorganAsh Resilience System (MARS). The rating is a simple range from ‘very vulnerable’ to ‘very resilient’. The aim is to quickly and efficiently communicate a consumer’s vulnerability.

We use the positive term ‘resilience’ rather than ‘vulnerability’, in the same way that ‘credit score’ actually communicates debt. We feel that it’s a term which will be more accepted by consumers, who need to understand (or at least become aware of) this – in the same way they readily do with credit scores. Unlike the credit score, the resilience rating is primarily designed to protect the consumer, rather than the firm.

At present the resilience rating is used within firms, to enable a vulnerability assessment to ensure the consumer is processed fairly. We believe, in time, that it will come to be used between firms – shared, to save everyone time and money.

A lack of accountability and transparency used to be one of the downsides of credit scores. Fortunately, GDPR laws forced this to change – with consumers having the right to access their own data. Indeed, credit-rating firms now advertise that consumers can ‘take control’ of their ratings – with their control and privacy becoming, of itself, an important differentiator, even though this is based on a legal requirement. It’s logical, therefore, that we would ultimately propose the same for consumers’ resilience ratings – this transparency and protection not only makes sense, it is also legally sound. We envisage that data within the resilience rating is ‘owned’ by the consumer – and it follows that the consumer should be able to amend and change it as they think fit. This will ensure that any vulnerability rating will align not only with the FCA’s regulations, but it will also be fully compliant with GDPR.

Although primarily designed to protect consumers, in reality the resilience rating protects both consumers and firms. It protects the consumer from mis-selling, and it protects firms by providing detailed evidence for compliance with the FCA’s regulations.

The resilience rating is at the heart of MARS: an online system specifically designed to enable financial services firms to better assess, measure and manage consumer vulnerability – helping them to operate within the FCA’s vulnerability guidelines.

Firms can trial MARS, free of charge, for a month, without limitations. Pricing is straightforward: MorganAsh charges just for each adviser; administrators and paraplanners can access the system for free, and there is no limit to the number of consumers that can be added. Click here for free access to the MARS tool.

Understanding customer vulnerability is more important than ever

Although organisations providing financial services may well be mindful of the vulnerability status of customers, changes in the FCA’s rules mean that current methods of assessing consumer vulnerability may well be inadequate.

Consumer vulnerability is a hot topic – one which is becoming even more important with the introduction of new guidance from the Financial Conduct Authority (FCA).

It’s something that financial services organisations absolutely need to address in a more objective, rigorous and consistent way than is the general norm. Vulnerability is complex: it can be invisible or obvious; it can be commonplace or life-limiting; it can be temporary or lifelong. It’s not binary.

Almost half of the UK’s population can be defined as vulnerable in some way. Although many organisations say that they have processes in place to understand consumer vulnerability, it would be interesting to see just what percentage of their customer database is flagged as such.

The FCA first introduced the concept of vulnerable consumers in its Occasional Paper No. 8: Consumer Vulnerability, back in February 2015. The paper described a vulnerable customer as someone who, due to their personal circumstances, is more susceptible to harm – especially if a firm does not have the appropriate levels of care in place.

In February 2021, the FCA issued new guidance on vulnerability: FG21/1: Guidance for firms on the fair treatment of vulnerable customers. The guidance was issued within current rules. Then, in December 2021, the FCA issued a consultation paper – CP21/13: A new Consumer Duty. This is designed to raise the bar quite significantly. It introduces a new Consumer Principle (which will be in addition to the FCA’s Principles for Business), new rules to support the Principle and four outcomes that explain how firms should meet the new Consumer Principle. This will appreciably increase the need for financial services firms to embed best practice for working with the vulnerable – including the assumption that all buyers may be vulnerable – into the heart of their culture, processes and systems.

Some good work has been undertaken by firms to address this issue, but there is still much more to do – especially as the introduction of Consumer Duty massively raises the duty of care for how customers are treated. This will be supported by large-scale changes to the current regulations which cannot be ignored and for which few firms are currently ready. This means that a superficial screening will be inadequate and firms will need to fully engage in understanding their customers.

Most firms have provided training to front-line staff, particularly with recommended protocols such as TEXAS(1), IDEA and CARERS.  While these are good, they are limited to verbal conversations and do nothing to record the characteristics and status of the consumer. Since Consumer Duty legislation requires firms to monitor the outcomes of their interactions with consumers, there is a real need to record vulnerability characteristics in order to understand any steps undertaken if, and when, an outcome will not, down the line, be in the consumer’s interest.

Consumer Duty’s cross-cutting regulation specifically requires firms to avoid any foreseeable harm to customers. Clearly, in order to understand if harm was foreseeable or not, there must be records of the consumer’s characteristics and vulnerability status right from the outset of any interactions.

Few firms, if any, are genuinely ready to operate in this way – and they must ready, or significantly upgrade, their management of consumer vulnerability.

To help, MorganAsh has developed, from the ground up, an online system to objectively and consistently assess, measure and manage the vulnerability status of customers.

The MorganAsh Resilience System (MARS) provides three assessment methods: online, by adviser assessment or by a MorganAsh assessment over the phone. These three options should cover all eventualities. MorganAsh uses its underwriting decision engine to assess consumers’ characteristics and provide an objective, understandable vulnerability rating – something not unlike a credit score.  MorganAsh calls this a ‘resilience rating’ since the term ‘resilience’ has more positive connotations than ‘vulnerability’ – which should help when positioning the process with consumers.

MARS can also be customised, for specific use-cases, and can integrate with many CRM systems out-of-the-box, with further integrations planned.

As well as helping to assess vulnerability, it can also track changes in vulnerability status.

Depending on the resilience rating, MARS can provide the required recommendations of next actions. These range widely, for example including signposting to charities and special interest groups, to directing the consumer towards additional processes and compliance checks. The recommendations can be configured by each firm to match their particular risk model.

As well as providing a superior service, this easy-to-use online system ensures that firms comply with the FCA’s vulnerability guidance – and can demonstrate that compliance via a series of customised reports.

Financial services firms can try MARS free, for a month, without restrictions.

Footnotes

(1) TEXAS, IDEA, CARERS are mnemonics to help those speaking with vulnerable consumers.

Resolving long-term absence: the need for a correct diagnosis

It sounds painfully obvious: you can only resolve a long-term health issue with a correct diagnosis. Yet we’ve found that in almost half of the long-term absence cases we take on, the reported condition was far from being the full story. Only once these were properly understood could the issues be resolved.

There’s nothing usual about the way health issues are either diagnosed or self-diagnosed. We look at the symptoms, find the most likely cause and then treat it. Mostly, this works. Conditions such as a torn muscle, broken bone or even a chronic chest illness aren’t a challenge to diagnose and are generally straightforward to fix. But for long-term health issues, especially when involving mental health, things are more complicated.

When people are referred to us by their employer (or the employer’s insurance company) we’ve found a significant gap between what was diagnosed and what is going on. An analysis of case referrals to MorganAsh shows that, in 47% of cases, the original reported condition was not the full story – and in 11% of cases, treatments were changed once there was a proper understanding of the actual issues.

This is a huge disconnect. But why? Too often, all the underlying causes of health issues aren’t fully understood before treatments (such as counselling and physiotherapy) are recommended. This is particularly true of cases that involve mental health issues in the workplace, which themselves are almost always the result of a combination of factors.

There is a real need for those who suffer from something which keeps them off work for extended periods to talk to someone who can properly understand their whole situation. Someone who can assess it holistically; thoroughly.

It takes time and expertise to understand all of a person’s well-being issues – regardless of their causes. That person needs to not be limited by employment law or commercial considerations. The approach should be to use the accepted biopsychosocial approach (where a person’s medical condition isn’t just because of biological factors, but also psychological and social factors) and combine this with an understanding of any workplace issues.

We find that seldom are long-term absence issues driven by a single, easy-to-identify thing. A physical condition can lead to anxiety. An ill fit in the workplace can result in depression, which then manifests as physical symptoms. We’re not clear-cut entities. Our personal and family lives affect our work lives, whether we like it or not – and vice versa.

Without any criticism intended, many of those who suffer from long-term absence slip through the net. This can be due to too quick a diagnosis, or not enough digging for underlying issues, a desire for a quick fix – whatever.

While there is certainly a place for online support, and apps to help with mental health, they assume that employees can self-diagnose their condition. The next line of defence assumes that HR people and mental health first-aiders can recommend treatments from EAPs – which is problematic at the least, as this pretty much skips the diagnosis stage. Even when there is a diagnosis, there may not have been enough time to delve into what’s really the problem.

If almost half of cases don’t have the full diagnosis, it’s no wonder that absence becomes long term.

Read our full report

We have a full report available of our findings. If any of these comments resonate with you and you would like to find out more, please download the full report.

Employee assistance programmes – genuine fix or the illusion of a solution?

Employee assistance programmes (EAPs) are a popular employee benefit. Many companies provide them. But there’s a real problem: they’re massively underutilised, and frequently don’t deliver the expected benefits. If they’re needed, why is this?

I’m not going to dispute the case for EAPs. The money spent on them is well-intended. They offer support and services which can benefit employees. But the reality is that they are generally pretty ineffective.

They’re universally sold on a per-head, per-annum basis. This isn’t a utilisation issue, but it does mean companies pay regardless of the utilisation. A fallout from this is the way that cases are typically handled – the focus is on providing a service to the company, not to the individual. This isn’t just semantics. It’s at the heart of many utilisation issues.

For example, EAPs are seldom proactive. The person with the issue has to raise her or his hand to get help, something many struggle with. But people may not know that the EAP exists, or what they’re covered for. They may feel reluctant to talk about some issues. But it’s not just the first interaction: employees are almost always expected to manage their case and be responsible for driving it forwards. It’s a recipe for disaster. We know that even with state healthcare people fall through the cracks because they are expected to ‘report back’ after every intervention.

Services often position or advertise themselves as providing a solution, but the reality is they only contribute to it by helping with part of the journey. The table above shows how typical services contribute to the whole recovery journey.

Proactivity reaches beyond this. Many EAPs aren’t staffed by healthcare professionals. Employees are expected to effectively self-diagnose and the EAP, without challenging this, then refers them to what seems like an appropriate service. This means that people ask for help too late, or unwittingly ask for the wrong kind of help. Yet, in almost half of the cases on which we’ve worked, that initially reported condition was only part of the problem. We like to compartmentalise issues – and, with (say) a broken arm, sure, you can. But many issues are more complex. Physical conditions can be a manifestation of mental health issues. Or time spent off work from physical conditions can lead to mental health issues. Mental health issues such as anxiety can have complex causes – only solved by addressing workplace problems, or home life challenges. We’ve found that many cases have a mix of physical health, mental health, workplace, home and social issues.

You can see the problem. The reported issue is treated – but the actual problem remains. There is a real need to intervene earlier, get to the real nub of the problem and then ‘own’ the case on the employee’s behalf. Whatever they say, most EAPs don’t do this.

And there’s more. Healthcare services – which need to be navigated by the employee – operate in silos. Without external ownership, people get passed from pillar to post and get lost in the system. Data isn’t readily shared between silos and this frustrates progress too.

Even if the problem is fairly identified correctly, treatments may not work initially and need adjusting. Employees feel that they’ve ‘had their quota’ and tend to live with the issue, recovering over a needlessly long period.

We also know that many people aren’t compliant with their treatments. They skip physiotherapy. They come off medicines too quickly. They don’t maintain exercise regimes.

When they return to work, it’s assumed that they are ‘fixed’ and aren’t followed up, when they are possibly still struggling.

These issues – and more – result in EAPs suffering from ‘drop-offs’ in use which render them ineffective. The good news is that there are simple ways to address and overcome these challenges. It’s possible to put processes in place which don’t replace EAPs but rather work with them so that organisations get the expected benefits and value from them.

I’ve just written a detailed white paper on this topic: ‘Improving the effectiveness of employee assistance programmes’. You can download here.

And if you have any questions or comments, I’d love to hear from you – either here, or by LinkedIn message, or by contacting me directly. Feel free to connect. We’re building a comprehensive picture of employee well-being and EAP services and your experience may well be valuable to us.

Is the standard table approach still relevant?

For the last 95 years(1) the Continuous Mortality Investigation has been producing tables annually, setting out the life expectancy rates for people in the UK. These tables, which are produced by mathematical model, have been widely adopted by most pension schemes in the UK – and represent the average person, of average health with an average income.

In 2020, however, the system failed; the pandemic meant that data collected no longer fitted the model used by the CMI. CMI_2020 was not fit for purpose and the word from the CMI was that at it would change its model and “place no weight on the data for 2020 when projecting mortality rates.”(2)

2020 certainly was a long-tail unexpected event. We need to allow for these, but this has also forced the debate of how we should be determining mortality – and whether standard models are appropriate for most pension schemes or not?

What do the experts say about this? At MorganAsh our strong view is that schemes should be taking an evidence-based approach to setting mortality assumptions. This means finding out about the health of the actual members in the scheme and setting individual assumptions relevant to the actual health profile of the membership. This is now possible, using Medically Underwritten Mortality Studies for pension schemes.

Comments from other experts include the following:

“At this stage we suspect many schemes are likely to adopt a ‘wait and see’ approach through remaining on CMI_2019, or adopting CMI_2020 with no allowance for 2020. However more sophisticated users may wish to revise their assumptions.”

Club Vita

“Right now, predicting the outcome for a given pension scheme is very challenging and will depend on how a scheme’s membership is affected, which will vary with the age- and sex-profile of its members (the immediate impact will be bigger for schemes with older and more male memberships) and potentially where they live. The profile of deaths in the population will also continue to evolve.”

Stephen Caine, Senior Mortality Consultant, Willis Towers Watson (3)

The Pensions Regulator also supports an evidence-based approach to choosing mortality assumptions.

So how do you create evidence-based mortality assumptions? MorganAsh has a track record of helping companies improve the quality of their demographic assumptions through gathering actual health data about scheme members. This allows schemes to make better informed decisions around valuations and, in turn, reduce their pension scheme deficits – by removing unnecessary prudence and inaccuracies built into the standard tables produced by the CMI.

Typically, we see pension valuations reduce by 5-10% following a review by this method but, most importantly, sponsors and trustees gain from an insight into their membership that they would otherwise not have.

Surely this is something trustees and sponsors should be looking at now? To find out whether the timing is right for your scheme, and to find out more, contact us.

Refs

(1)   Continuous Mortality Investigation Limited Directors’ Report dated 29 Feb 2016.

(2) CMI to modify Mortality Projections Model for CMI_2020 | Institute and Faculty of Actuaries

(3) What could the mortality impact of COVID-19 be for pension scheme liabilities? - Willis Towers Watson

Understanding customer journeys for the secondary annuity market

We have been looking at the potential customer motivations and hence potential customer journeys for the secondary annuity market.

A recent YouGov survey reports 33% of consumers are interested in cashing in their annuity, with a further 12% in the ‘don’t know’ camp. We have devised several customer profiles to assist our thinking:

The financially better off and GARs

There will be customers who received an annuity rate at a relatively high rate compared to today’s returners; some of these may be enjoying guaranteed annuity rates or GAR policies. For this cohort, if they are healthy, they could now receive a single amount that could be more than they invested originally.

The chance of these people transacting is high, and their expectations, subject to their health, are likely to be exceeded. A straightforward process should suffice.

Never wanted an annuity

Some people never wanted to take an annuity and may have felt pressured into doing so. They hence may be motivated to sell-out, regardless of the consequences. For these customers, understanding and managing their expectations will be difficult, and if they transact or not will depend as much on the advice and management of these expectations.

Opportunists

Some people will read the headlines in the press and opportunistically look to see if they can get a better deal. All else being equal, this may turn into a debate about having a guaranteed income for life and short-term cash.

Traditional advice, or at least risk warning, will be an essential component, to inform consumers about the issues of longevity and the eroding effects of inflation. It is likely that most of these will not transact, but they will need advice and prices to come to this decision.

Frustrated with low income

Clearly there are retirees whose income is lower than they would like, and just want more money. They may feel aggrieved at the banks, governments or companies – and feel that they should be receiving more income.

All else being equal, a single cash payment is going to be no better for them than a regular income. However, they will need a lot of help and discussion to placate their frustrations and to enable them to make the right decisions.

Ill-configured annuities – change in circumstances

For some they will have a single life annuity, instead of a joint life. It may be an annuity that has no escalation component, and, due to changes in their personal circumstances, they may want to re-configure their annuity.

All else being equal, they could cash in their existing annuity and buy a new one in the new configuration.

The issue here will be the cost of administration over the benefits to the consumer. Moving from a single life to joint life may well be worth the cost of change.

Ill-configured annuities – poor purchase

For some people, they did not shop around and purchased directly off their pension provider, often without advice or due consideration. Perhaps they took a single life policy without escalation.

When presented with a price to purchase their income, they may well be disappointed, and hence motivated to look for blame and compensation with regard to the original purchase. This is going to be problematic for all concerned.

Poor health

Around 70% of consumers qualify for an enhanced annuity due to their health issues, although far less receive these benefits. Whether this is the fault of the consumer, the adviser or the provider does vary and is often a grey area. Clearly, if someone in ill health received a standard annuity, then they are going to be disappointed by the fee they are offered for their income when their health is assessed.

This is going to be problematic for all parties, as the consumer may be looking for compensation from the original provider, adviser or both. While not the focus for the secondary market, how consumers’ expectations are managed for this could make or break the reputation of the secondary market.

Cashing in small incomes

There are many small incomes, which quite frankly are a nuisance for the providers as well as the consumers, and the opportunity to commute this will be welcomed by many. 

Clearly, a low-cost transaction is favourable. There is the possibility some providers may promote this route to reduce its administration of these small pots, even offering enhanced values to do so.

Managing consumer expectations

Clearly, for some consumer segments, their expectations will be rewarded with a transaction. However, for others this will not be the case, and they will be disappointed. The graphic below tries to demonstrate this.

From the above we have come to the following views:

• Advice/guidance will be needed for a large proportion of people.

• The proportion who transact is likely to be far lower than those who request a price.

• If remuneration for transacting is on a winning-provider-pays basis, this is likely to be proportionally high due to the low conversion rate. Hence, a fee for advice and a small fee for the transaction cost may well be appropriate.

• Managing expectations, by providing indicative prices, could well be an important part to manage consumer expectations and minimise the administration costs of full pricing.

• How we manage consumers who did not purchase the appropriate annuity and feel disgruntled with their original purchase, be this mis-sold or mis-bought, is a major issue for the success of this market.

Annuity mis-selling – the need to keep medical information on file

The Aviva case should be a wake-up call to many.

On Saturday 28 March, the Telegraph ran a story: “Is this the worst pension mis-selling case ever? Aviva knew this customer was ill”.

The story, by Katie Morley, highlights the case of a nurse who was in ill health and did not receive the appropriate health enhancement for her annuity. She subsequently complained to Aviva, and ultimately, with the Telegraph’s help, has received compensation.

The compensation looks to be retrospective with additional income being paid for annuity income paid out so far and an increase for the future annuity income. The additional monies are based on the difference she should have received if her actual health had been taken into account at the time of the annuity sale.

Consumers not receiving the appropriate annuity, due to an inadequate health assessment, is of no surprise to many in the industry. What is, I think, a precedent, is that the claim was based on Aviva already having the health information on file. Further, that this information was held and collected for a different financial product 3 years previously to the annuity sale. This has massive implications and not only for annuities and providers but also for the annuity sale process.

We don’t know the exact details of the sale process, and I suspect that the sale process was not greatly different to that undertaken by many others at the time. My suspicion is that although Aviva is the party in this case, it could have been many other providers or advisors. My suspicion would be that the attempt to obtain good medical information at the time was inadequate, and again this was not uncommon and indeed is unfortunately still ongoing today. We know that around 70% of consumers qualify for an enhanced annuity when their health is properly assessed, and yet a far lower proportion of consumers are receiving the incomes they deserve.

Many sales processes rely on asking the consumer some health questions, and rely on the answers with no checking, validation, or cross-checking against previous records. The information is simply passed onto the provider. This is in stark contrast to how we collect financial information. Typically, we have trained advisors to explain the questions, validate the answers and in most advised cases to cross-check against previous financial information on file.

What this case is highlighting is that if the seller has the information on file, or does not undertake a proper health assessment, then it is deemed mis-selling. In this case, the sales team were part of a provider, and the provider had material health information on file for a different financial product processed some 3 years previously. This will be typical across providers whose systems are organised around products, rather than consumers.

I doubt whether many advisors’ sales processes retain the health information on file – they may collect it, but they may pass it onto a provider for a life insurance or other quote, but not retain it. In such circumstances, not only are they not using this information for their customer, but they will have no information on file to defend such a claim from a disgruntled annuitant.

Many advisors will cite that by sending the annuity application to a whole-of-market application process they ensure they receive the best price and that single sales from providers do not do this. This was certainly true up until recent times, but the truth now is, if the medical information is not supplied to any of the providers because it is not collected in the first place, then the price received from any provider will not reflect what the consumer could receive.

The negative publicity around annuities, and the potential secondary annuity market, is in my opinion going to reveal more disgruntled annuitants, who received a poor deal. Further annuity rates are going to remain low in line with investment returns. Any annuity sales process should be concerned at this precedent. The conclusions are:

• Ensure proper medical assessments are undertaken.

• Keep the medical assessment on file.

• Obtain the best annuity rates.

The future of underwriting

Smart underwriting is better than no underwriting.

Underwriting is out of favour at the moment, and we are seeing a trend towards simplified underwriting, simplified products, shorter questionnaires, and higher priced products taking on more risk. These initiatives are aimed at improving the customer journey and increasing sales by dropping the ‘cumbersome’ underwriting elements. However, there is little evidence to show this approach is working. For example, in the UK sales continue to fall. This article takes a contrary view and explores how we can use underwriting to increase sales.

The changes taking place within underwriting are well-documented, including how the traditional underwriting process is no longer appropriate. However, there are several areas of the sales process that can be enhanced in order to make underwriting a positive part of the sales process rather than a negative. We take a look at each of these in detail below.

• The integration of the sales and underwriting process

• Providing a personalised sales and underwriting journey

• Promotion of underwriting as a personalised assessment

• Improve customer expectations by giving rated prices up front rather than starting with a standard price and then increasing the price

• Engaging with the consumer

Integrating the sales and underwriting processes

In the UK, online systems already provide ratings at the point of sale for around 60% of consumers for life and critical illness products, but there are still 40% of consumers (and all those that need disability products) that are not covered by these methods. To provide a positive customer journey, a process that integrates the manual and the automatic underwriting into the sales journey is required. While this could be instant, it is more likely to have a short delay while the manual underwriting takes place. This is not the end of the world – it can be an integral part of the sales process, as we shall explain further below.

Personalised underwriting

In the times when paper forms dominated, the process had to provide a standard set of questions to every applicant. But now as we have technology, every set of questions can be bespoke for the consumer. In online and tele-sales processes this is already done for gender and product with questions only asked if they are applicable. It is proposed that this can go a lot further. For example, the information gathered can be made dynamic based on age and the distribution channel if it is the consumer, or, if an agent is asking the questions, the amount of insurance required, by duration and amount. Hence, in effect, we can dynamically move from a ‘simple underwriting’ to a ‘full deep underwriting’ approach depending on these many factors. In addition, the questions can be made conditional upon the questions already answered. If the consumer changes the answers, questions to validate this change can be triggered. The quality of the agent undertaking the interview, if the interview is voice-recorded, can all trigger different risk profiles in line with the risk of anti-selection and non-disclosure. Not only can the questions flex for risk reasons, but also for the customer journey, making reference to the process so far, and predicting the next steps of the process, specifically for each consumer. Question sets and scripts have been built purely focused on collecting risk information. The next step is to start amending these scripts in line with custom engagement, both in design and dynamically.

Promoting underwriting as a personalised assessment

People like to be treated as individuals and don’t like to be treated as ‘standard’. The underwriting process is bespoke for each individual. Automated or manual, it is an assessment of the individual’s unique circumstances. Unfortunately, this great value is hidden by a process that treats everyone the same. However, by using technology such as online, phone or live chat, we can manage every consumer individually and give them feedback that is individual to them. The value of this individual assessment should be promoted, making the consumer feel they are being treated as an individual. Examples could be: “This will be individually underwritten and will be personal for you. It does mean that if you are unfortunate enough to claim, you will be covered, even though you have had some conditions before.” Because we are in the finance industry we like to talk to our customers about finance, and we avoid the medical issues as we are uncomfortable talking about them. However, most consumers are more at home talking about medical issues than finances. Culturally greeting across the globe enquire about people’s health, for example “how are you?”, yet financial matters are often taboo. So, in reality, asking people about their health is perhaps not as big a barrier as one would expect.

Rated and standard prices

It is well-documented and understood that the common practice of quoting ‘standard’ prices and then increasing them with rating or exclusions leads to a reduced rate of sales for these rated cases. So much so that many processes just avoid the rated cases, either officially or probably in far greater numbers unofficially. Most research tells us that the consumer overestimates the price of insurance, and it is the belief of many that the process of giving a low price and then increasing it later is a major factor is turning these consumers away from their purchase. Online automated underwriting systems have enabled the provision of rated prices up front in the sales process for a proportion of consumers and this is great progress. There are some new services that offer indicative underwriting to improve the process. These solutions are incremental improvements to the existing process to reduce the ‘standard price’ sales detractor. While these are steps in the right direction, it is proposed that in the future we can go further than this by integrating our underwriting and sales processes completely. Underwriting processes can be undertaken in parallel with sales, rather than afterwards in series. For the ‘clean’ cases this will have no impact. For those with conditions it will allow for automated and manual underwriting, at the time of a sale. It takes less time for an underwriter to make an underwriting decision than for a consumer to complete an online form or a tele-interview to collect this over the phone. Underwriters could view this data in real time and give instant decisions, although probably allowing a short delay of a few hours is probably more practical for resourcing reasons. We underwrite early in the process and quote an indicative underwritten price, and hence never quote a ‘standard’ price. We manage the affordability issue up front, thus managing expectations. While this may qualify out some consumers at the start of the process, this is far more efficient and consumer-friendly than qualifying them at the end of the process.

Sample – customer journey – changing the process to improve engagement

Consumer engagement

Tele-interviewing and the automation of processes online have been two great improvements within underwriting over the last ten years as the industry has largely moved away from paper. Both approaches are dynamic, allowing changes in line with the inputs, whereas paper was a purely static one-size-fits-all process. The main focus of these systems has been to reduce our transaction costs and speed up the process, and they have been very successful at both of these pursuits. However, the truth is sales are going down and the majority of transactions started online are in fact completed offline. There are many reasons for this, some due to the awkwardness of the process but mostly due to the old adage that ‘products are sold and not bought’, and the human touch is still needed to make the consumer feel comfortable about their purchase. While some insurers still pursue increased automation using STP (straight-through processing) rates it is proposed that we should turn our attention to increasing our engagement with the consumers. The STP fad is over and it’s time to focus on consumer engagement to make the process itself more enjoyable rather than simply try to eliminate it. Part solutions to the above already exist in various forms. For example, experienced protection advisors manage the consumers’ expectations through the process, treating them as individuals. However, these are in the minority and this is difficult to replicate in direct-to-consumer channels. Most online processes are handed over to a telephone sales team who talk the consumer through the process. The usage of live chat is encouraging and allows underwriters to talk to consumers about their likely rating prior to proceeding with their application. Technology is also helping us, with the ability to merge tele-interviews and online applications so consumers can choose the way they want to buy. The increasing use of smartphones and tablets drives us to shorter, more personal engagements using voice and text for now, and video in the near future.

At MorganAsh, we are using underwriting as part of our consumer engagement, and it works. While not for everyone, and far more complex than the ‘simple’ approaches, it is not uncommon in other industries for simplicity to be presented from complex systems behind the scenes. Simple consumer engagement with full underwriting in the background will provide the best price solution, and hence over time I believe will rise in popularity.