The blog I probably won’t be writing about insurance

I’ve been asked to write a piece about insurance, with particular emphasis on some aspect or other to do with the recent floods.  I can’t say too much about it, except that it’s going to be nice and light and amiable.  So I’d better not say what the recent floods really make me think.- which is that one way or another, this looks like another biggish nail in the whole coffin of the concept of insurance.  In the unlikely event that concepts can have coffins.

Insurance, it seems to me, thrived during a long period in which we understood that everyone faced risks that would be cripplingly expensive, but we had no way of quantifying how expensive each person’s risk wold actually be.  From this came the concept of pooling risk:  if a hundred people faced a 100 to 1 chance of a mishap that would cost them £100 to remedy, then everyone would be smart to pay a premium of £1 to save a potential £99.

Up to a point, insurance can cope with the availability of more accurate risk profiling data.  Say we can establish that of those 100 people, 50 face a risk that’s twice as great as the others.  No great problem in charging the riskier half £1.33, and the less risky half 66p.

But take that line of thought further, and eventually you end up in a place where the whole concept of insurance comes into question.  This happens when, at the extreme, we can accurately measure the risk faced by each of the 100 individuals.  If we know that there’s one who faces a 99% probability of whatever it is, and two who face a 98% probability, and so on, how do we set our premiums then?

The answer is that we have only two alternatives:  either we ignore the information, or we can’t offer insurance.

At the moment, we’re in a curious limbo between these two options.  Usually under instruction from politicians, regulators and others, we ignore some of the most important information – for example, life insurers don’t use the results of genetic testing; following a recent European Court ruling no insurer takes account of gender;  and – coming back to those floods – there is for the time being an agreement that homeowners living in areas where the flood risk is low will subsidise those in areas where it’s high.

But elsewhere, insurers do use much other very detailed information – motor insurers, for example, use literally dozens of pieces of data in their underwriting processes.

Going forward, left to their own devices, underwriters would only go in one direction with this.  Ironically, though, it’s a direction that would eventually bring about the end of their industry – not exactly a helpful outcome for them, or indeed for their customers.

Hmm.  I think I’ll need a different angle for that nice, light, amiable piece.

 

Henry’s horse and “online advice”

Everyone knows Henry Ford’s famous remark, that if he’d asked his customers what they wanted they’d have said a faster horse.

And pretty much everyone – certainly everyone in financial services – understands the truth of this:  that consumers find it hard to imagine step-changes and much easier to envisage incremental improvements.

In financial services, though, this problem doesn’t only exist among consumers.  All too often, those of us in and around the industry find it hard to imagine what might exist beyond incremental improvements – a good example being the current enthusiasm expressed from various quarters for the concept of “online advice.”

Industry leaders and also some very senior regulators have shown major interest in this concept, and it’s easy to see why.  Pretty much everyone now accepts that the full-fat, face-to-face, regulated advice process is far too time-consuming and therefore expensive to make any kind of sense for consumers with modest financial resources:  either the adviser must get paid too little, or the consumer must pay too much.

In this situation, the faster-horse option is to find a way of delivering that advice process more cheaply.  So it’s hardly surprising that so many people like the idea of putting it online.  With the help of some clever algorithms, whatever they are, surely it’s possible to design a self-completion process that allows consumers to work through pretty much the same stuff they’d have previously done face-to-face with an adviser, and come out with much the same recommendation.

Yes, it’s easy to see how people get there.  But I’d have thought it was also pretty easy to see why it isn’t going to work any more than turbo-charging old Dobbin was going to work – and also, a step or two further down the road, to see what the FS equivalent of Henry’s Model T might look like..

The reason it isn’t going to work is pretty obvious.  Moving online may solve the cost problem, but it’ll replace it with a time problem.  Either the online process is simple and quick enough that consumers will be willing to see it through, but too limited to provide a basis for genuinely robust advice;  or it’ll be complex enough to provide a basis for genuinely robust advice, but too difficult and time-consuming for most consumers to be willing to see it through.

And believe me, there is no middle-ground compromise here.  If consumers will be able to demand compensation when wrongly advised, there’s no way of simplifying the process to the extent that most will find it tolerable.

So if online advice isn’t the answer, what is?

Well, the funny thing is that something remarkably equivalent to the Model T Ford already exists, and indeed is already proving remarkably successful in the marketplace.  It’s early days yet, but NEST’s approach to workplace pensions has a great deal to tell us about mass-market investment generally.

Yes, OK, there are some important differences – in particular, thanks to auto-enrolment, it’s only in the field of workplace pensions that we don’t have to bother recruiting customers.  But once enrolled, the key point about NEST is that those responsible have taken a clear and positive decision that getting the huge majority of people’s money flowing into a sensible, middle-of-the-road investment is a better outcome than putting them through a complex process that might lead to, say, 10% of them ending up with a more appropriate investment option but, say, 40% of them deciding that it’s all too hard and opting out.

As a result, as you know, people can simply default into NEST’s core investment solution – in other words, they don’t need to spend a single moment on selecting it.  And, as a result, they do:  over 90% of those auto-enrolled stay enrolled, and of them over 90% end up in the default fund.  The important thing to understand is that these two over-90%s are inextricably linked:  if anyone was so foolish as to try to reduce the second over-90%, they would inevitably also reduce the first.

So – despite the differences – NEST already gives us a pretty good impression of what a mass-market, predominantly online investment solution should look like.

That being so, it really is particularly obtuse of a great many in our industry who ought to know better to keep trying to strap poor old Dobbin onto those roller-skates.

Does anyone understand the FCA’s financial promotions rules any more? No? Me neither.

One of new-wave investment provider Nutmeg’s latest bunch of tube cards has a headline which says something like Are you happy with your investments’ performance?, alongside a picture of a blackboard carrying the message Medium Risk +15.4%.

There’s then a sentence of body copy, in big print, saying that Nutmeg’s medium risk portfolio increased in value by 15.4% last year.  And then down at the bottom, in small print, there’s a long health warning which includes a very complicated message about the 15.4% being “simulated” perrformance.  And right at the end of this there’s a sentence saying that past performance is no guide to future performance.

Now perhaps I’m missing something, but when the FSA ruled a few years ago against consumer advertising in which the main message was to do with past performance,  I thought this was pretty much exactly and in every detail the kind of thing they were banning.  Main message to do with past performance?  Check.  Lack of clarity and detail about the nature of the past performance claim?  Check.  Dubious assumptions in the small print about how the past performance has been calculated?  Check.  Advertisement appearing in a place where it will be seen by inexpert investors?  Check.  Health warning hidden away at the end of the small print?  Check.  I can literally hardly see an element in this advertisement that the regulator would be happy with, apart from maybe its rectangular shape.

On the whole, I’m passionately and vehemently against the financial promotions rules.  As I’ve written here many times, they’ve made it virtually impossible to promote  investments to the public, and this seems to me an outcome so obviously counterproductive that I’m amazed that the FCA’s own people, caring as they do about the best interests of consumers, haven’t taken to the barricades to protest against their own regulations.

But I have managed to convince myself that the rules around communicating past performance really are pretty much the only ones that make sense.  It really is true that past performance is no guide to future performance.  And it really is the case that it doesn’t seem that way to consumers:  if it went up 15.4% last year, they kind of expect that it’ll probably go up somewhere between about 13 and 17% this year

And yet someone at Nutmeg has signed this ad off.  They must have done.  There it is, right now, as bold as brass, on the Northern Line.

I suppose the simple explanation is that someone has made a mistake.  In that case, I’d imagine that Nutmeg will be hearing from the FCA round about now, and the ad will be disappearing during the course of the next week or so.

I’ve no idea what might be the complicated explanation, though.

We love producing content-driven comms. But does anyone love consuming them?

I think I already said that I did my annual gig chairing the Money Marketing Financial Advertising Awards a few days ago. It’s always a good opportunity for a bit of trend-spotting – for example, after two years without a single specimen, I can now confirm that the craze among health insurers for sending out DM packs which look like reports from an X-ray lab has now definitely ended    And online advertising is still generally pretty dire, but other forms of digital communication – especially those using social media – are improving at a rate of knots.

But sometimes the most important and big-picture trends are the hardest to spot.  They’re the hide-in-plain-sight trends that are so obvious, you almost don’t notice them.

For example.  By the time lunch was served at last year’s judging, I was extremely hungry, and this year I was hungrier still.  And over the same period, we’ve over-run more and more at the end of the day:  I still tell my fellow-judges that we’ll be done by about 4pm, but actually this year it was more like 5.30.

What do these points have in common?  Fairly obviously, they say that the judging process is taking longer and longer from each year to the next.  And the reason for this has nothing to do with the pernicketiness of the judges, but everything to do with the fact that the entries are getting more elaborate, more complicated, more time-consuming to peruse..

Time was when your typical entry might be a poster, or a press ad with a headline and 50 words of copy.  These days your typical entry is more likely to be an integrated content-driven opinion-forming initiative, which includes a 15,000-word white paper, a microsite, a blog, Facebook and Twitter pages, a film on You Tube, a series of HTML emails and a couple of full-page ads in the trade press.

Some of these new-style entries are deeply impressive at all sorts of levels – not least in terms of the huge amount of work and enormous number of skills needed to produce them.  But there is one big thing that worries me about them – specifically, about how they work in the real world and not just on judging days.

It’s pretty obvious what that big thing is:  are we sure we’ve really got time for all this? Frankly, I used to be dubious enough about whether people had time for the poster and the press ad.  I’m twenty times more dubious about whether they have time for the 15,000-word white paper, microsite, blog, Facebook and Twitter pages, film on You Tube, series of HTML emails and couple of full-page ads in the trade press.

Of course I accept that campaigns like this can have a significant effect even on those who don’t read every word in the white paper.  But when – on a day like the judging day – I get a sense of the immense amounts of time, effort, skill and cost that are going into producing huge oceans of content that none of us has the time, inclination or energy to read, I do rather wonder whether we’ve got a bit carried away with all this stuff.

And saying that, I guess I ought to bring this blog to an end without a moment’s more delay.