The Henley Centre has long argued that consumers are becoming more critical of product and service providers and more cynical about their professed motives. In a number of sectors, journalists play an important role in this process as consumers look to the media to provide impartial commentary and advice. The life insurance industry provides a particularly striking example of this influence. The current debate about the adequacy of self-regulation, for example, has been precipitated by recent media exposure of dubious selling practices. Over the next 12 months, the life insurance industry can expect the media to become even more influential.
In January 1995, companies will be legally obliged to reveal the costs of selling and administering policies – a process known as hard disclosure. It means that an industry which has relied on product complexity to hide charges and commissions will suddenly find itself exposed to much greater cost scrutiny. Advocates of “hard disclosure” argue that, at long last, consumers will be able to select policies and advisers in a more informed and more sophisticated way. They also argue that disclosure will stimulate competition and ultimately drive down costs, to the benefit of policyholders. Our own research, shown in the chart (left), suggests that 27% of consumers intend to select their adviser on the basis of lowest commission with their current adviser.
We anticipate that hard disclosure will have two effects on the life insurance industry. First, sales activity will be temporarily suppressed during 1995. Many consumers believe the advice they receive is in some way “free”. When they are confronted with explicit commission charges, their reaction will be to put off their purchase decisions. The second effect of hard disclosure will be to focus product selection almost exclusively on comparative costs. This will certainly encourage consumers to select products and advisers in a more rational way. However, comparative costs are not reliable indicators of either investment performance or the quality of advice – both of which are also important purchase considerations.
Given that purchase behaviour in this market remains relatively unsophisticated, consumers will undoubtedly be sensitive to the nature of media commentary concerning hard disclosure. Media analysis of commission charges in advance of the January disclosure “deadline” may have the effect of making consumers aware that financial advice is not “free” – reducing the likelihood of consumers postponing purchase decisions. However, the long-term effects of journalistic scrutiny may be less benign for the life insurance industry. The intense and persistent focus on comparative costs is likely to sensitise customers to price, with the result that the life insurance market could, in a very short period of time, become as competitive and as commoditised as the motor and household insurance markets.
The UK life insurance industry will be subjected to additional government regulation as a result of media reports of improper selling practices. Insurance firms will be required by Jan. 1995, to disclose the costs of selling and administering policies, a procedure known as hard disclosure. Proponents of hard disclosure say that it will enable consumers to know the true costs of insurance policies, which will lead to greater competition and lesser costs.