Series 6 Episode 3: Overcoming legacy issues and future-proofing the life and retirement sector

Transcript

Tessa Norman: Welcome to the latest episode of Risk & Regulation Rundown, the podcast where we share our views and insights on financial services risk and regulatory issues. I'm your host, Tessa Norman, and in today's episode we're going to be focusing on the life insurance and retirement sector. Taking an in-depth look at how customer needs and expectations are evolving and how firms can adapt to navigate those trends, as well as a range of other changes that we're seeing in the sector across regulatory, policy and technology, to ensure that firms are equipped for the future direction of the sector. I'm delighted to be joined by Jess Lewis and Jamie Drysdale, who are both directors in PwC's insurance consulting practice, to share their insights and experience in the market with us. Jess is here with us in the studio and Jamie's joining us remotely from our Edinburgh office. Welcome to the podcast.

Jess Lewis: Thank you for having us.

Jamie Drysdale: Great to be here, thanks so much.

Tessa: Jess, I think it's important to kick off this conversation by talking about the socioeconomic context that firms are operating in because that has such a big impact on customer needs, demands and expectations, and we've also seen a lot of change over the past few years. Can you talk us through how you're seeing factors such as a rising cost of living and some of the post-pandemic trends we've seen and how it's impacting different customer segments?

Jess: Definitely, thinking about the life and pension sector as a whole, I think that there's a couple of ways that we're tracking trends, and we look at the demand side for the life and pension sector and realise that there is a very massive shift happening from defined benefit to defined contribution, which is in reality saying a lot of individuals will not have guaranteed income in retirement. A lot of them are moving to what will be just a guaranteed or a defined contribution amount of money that they then have to decide what to do with once they do get to retirement, but we have been in a state of extreme volatility. We've moved into a high interest rate environment, and as you've mentioned, cost of living has gone up, and so when you are in defined contribution schemes, you're both seeing that there isn't a guaranteed outcome in retirement but also affordability of daily life and household needs can affect the ability of individuals to contribute to their workplace or individual savings plans. We're also seeing an ageing population and longer life expectancy as a whole. I think from our latest numbers, we expect about 30% of the UK population to be over 60 in the next five years. This is a massive savings gap that we're getting to, where individuals realise that the pot of money that will be available in retirement may not be as much as they would have expected or hoped for in order to cover their cost of living. Then we have the changing economic and political environment that we're working within.

At the time of recording, it is an election time and that always brings a bit of uncertainty, and then lastly we have changing workforce dynamics, and this starts to put more of a focus on what we think of in the group protection space, that individuals are moving across employers more often. Individuals are going on mental health leave more often, and so this creates implications for the types of products and services from group protection and then for workplace pensions to work for a more dynamic workforce need, and five generations in that workforce.

Tessa: Jamie, how are you seeing some of those trends that Jess has talked about, translate into changing customer expectations and needs, and therefore what does that mean for insurers as they respond to that?

Jamie: That's a really comprehensive overview from Jess. I just want to call out a few examples of what we're seeing in terms of needs on the customer side. So a real desire to transact quickly, and that's across both IFAs and retail customers, and it's certainly the case now that those groups are not able to do everything that they want to do digitally, or maybe they don't want to do everything digitally and they want to speak to somebody. There's certainly been this cost-of-living crisis, as Jess was saying. Customers want access to their money now and there's a lot of anxiety around access to cash to pay bills and so forth, and probably coupled with that, just in terms of post-pandemic trends, we've got a couple of things going on. We've got a spike in mortality, and from a customer need perspective, we have more customers going through a bereavement process, more making protection claims. Probably the last thing then is, this peak in interest rates has led to a surge in annuities new business, and particularly on the IFA side, there's an immediacy around this because it's quite a fast-moving landscape in terms of pricing and I think we'll see that continue.

What does all that mean? That means, at a macro-level, a real increase in demand for insurers and an increase in incoming contact in particular, and insurers are under pressure, for not only the demand but customer expectations have moved beyond where insurers are currently at. What was acceptable a few years back in terms of service is now not okay. As a rule of thumb, we're seeing at least 5% more demand a year going forward, particularly on the voice side. Teams are really stretched and the importance of service in core journeys has become much more of a focus, at board and exec level as a result.

Tessa: Given some of those service pressures that you've talked about, what do we know about how customers are feeling about their providers as a result, Jess?

Jess: We've been looking at this through a partnership that we have with DataEQ. We're able to track customer sentiment through digital channels. As a whole, in insurance we do see a net negative sentiment. When we start to break into that, we see that, as Jamie mentioned, a lot of it is related to service and expectations around service. A lot of the follow-up consumer support queries, over 70%, are often related to turnaround time, trying to get an update on a request that's already been made, and we've seen this acutely with one organisation with annuities. The individuals are able to submit applications for them and then they're waiting weeks for an outcome, but they're not given any progress on when and the status of their application. We're also seeing it on pension transfers at a critical time when individuals are leaving the workforce, entering into their retirement, and so understanding when they're going to receive what is going to become their income is quite critical. Then we're also seeing the response rates to social media queries are still below 50%, so while a lot of the life and pension companies have introduced social media channels or digital channels, they're maybe not optimised yet effectively to actually engage with customers in the way that they expect.

I think that there's another piece that Jamie did build on as well, which is related to the expectations of other services. So when individuals are looking at their life and pension providers, they're comparing them not just to others in the industry but to every other experience that they have, and what we see is a notable drop in customers leaving or a noticeable change in customers leaving when they have an opportunity to do so. If they're leaving a workplace plan or if they're at a time of retirement, it's playing into when they have choice to go to a different provider, they are often going to another.

Jamie: I think probably just building a little bit on that, I think Jess has covered a lot of what we're seeing from a customer perspective in terms of sentiment, to build on that in terms of complaints and what we're seeing there. So the most critical area in complaints has really been in pensions and de-cumulation, so there's been a 40% increase in complaints in the last two-and-a-half years, which is obviously really material for the industry, material for customers. Like Jess was saying, three-quarters of those complaints really come from service, and that's verbal communication, written communication, lack of communication and delay, so very much in line with what Jess was saying. When customers are not able to transact quickly, when there is that black hole of communication, when they can't get their money out from their pension, there is this really important expectation that is broken, and that is that the insurer will be there at the moment of need and that they will get money into the hands of customers as quickly as possible. I think post-pandemic, we've just seen a heightening of the need to fulfil that promise when it really matters, and there are some important instances where that's obviously not happening.

Tessa: Yes, as you've both talked about, the fact we're starting to see that customer sentiment translating into both complaints and losses in customer retention is going to be concerning for a lot of firms, both from a business perspective but also I imagine there’s a significant link here to regulation and the FCA's expectations, particularly thinking about the consumer duty, which we know requires firms to deliver a higher standard of customer support, as well as meeting higher standards in a number of other areas. I think some of those service issues that you've talked about, I can imagine, particularly around communication and timeliness, sound like issues that the FCA would take quite a dim view of in light of the duty. Of course, it's not just the consumer duty that firms are grappling with in terms of regulatory change, as you mentioned earlier on in the conversation, there’s other changes and initiatives, such as the advice guidance review. So how is that changing regulatory picture impacting firms?

Jess: Regulation is really putting a microscope on the quality of services provided to customers. Consumer duty has resulted in insurers being able to evidence the quality of service beyond the point of sale, and I think that that's a critical change. What we see with those that we've worked with in key outcomes related to the duty is often there's a lot of data around the sale. There's a lot to show consumer understanding, effective customer support, fair value, but it's beyond that point of sale to the ongoing engagement, to the point of claims to ongoing administrative services that they might need to provide, where there's a gap often in the level of service provided. This is also an opportunity though, and I'm quite optimistic about consumer duty because I do think at the end of the day, any firm that is out to serve their customers within the market would want to be in line with all four outcomes of the duty. There is a great opportunity to bring customer understanding and customer support to a higher level across the industry, to bring up financial education, financial confidence, and to make sure that customers do get the level of service that they expect when they are first made aware or on-boarded to a provider.

The other regulatory change of the advice guidance boundary review again presents a lot of opportunity, both for insurers and intermediaries within the market, such as IFAs or broader wealth managers, to consider how they can guide customers more effectively to appropriate outcomes and to appropriate decisions, without necessarily the full cost or the traditional cost of ongoing advice. I think this is where we really need to look at what technology can do to support an advice channel or a guided decision-making channel, where you might have a digital first interaction. You may have a point-in-time advice conversation with a licensed advisor. Or you may be getting, as a customer, a bit more of an understanding of what others like you are doing to make decisions, whether that's on your workplace contribution, whether that's an optional insurance product that might be provided as part of your group protection plan or whether that's something larger, like understanding your options at retirement.

Tessa: Yes, it's going to be interesting to see how some of those potential policy changes play out, and as you said, Jess, some of the opportunities that they might create for emerging models. Jamie, what are some of the changes that you've seen firms make so far, particularly in response to the higher standards of the duty?

Jamie: I think there's something important to say here, which is our clients are customer-focused and no-one in their teams comes to work trying to do a bad job for the customer, but we have this situation in life and retirement where the sector has fundamentally been slower to adopt technology and some of the practices around really world-class customer experience that we see in other sectors. As a result of that, you have this build-up of complexity in products, poor customer journeys, tech and process, their people skills and so forth, and there's cultural acceptance that some of this is unchangeable. I think consumer duty has really sharpened the focus on addressing these challenges and getting the right outcomes, as Jess was outlining. Three quick examples, and I'd be interested to hear from Jess on what she's seeing as well, so one is around communication. I think we all on this pod, as customers as well as practitioners, know that comms is terrible in the industry and there has been a substantive focus on that, driven by the FCA, and a realisation that many of those comms are no longer fit for purpose and there needs to be work there. Second initial piece of focus on reporting, again, that's mandated, boards need to demonstrate that they can discharge their responsibilities under the duty, and certainly my clients in life and retirement are really noticing this, the impact of this and the increased transparency. I'd like to see boards and execs do more to challenge the underlying fundamentals of the reporting, so, 'Do we have the right service levels? Are we addressing the real root causes of issues for customers?'

Probably the last focus around this first wave of change really is in core customer journeys. Are they in line with the principles of consumer duty? So where there are outliers, for example, in the claims space, there has been a lot of focus in there and just making sure that there's a degree of compliance with the spirit and the letter of consumer duty. Jess, really interested to hear what you're seeing.

Jess: I totally agree with you, particularly on the communications piece. I think every life and pension company that we've spoken to is aware that they have now so many more communications to be aware of, to be tracking against, to be monitoring and being able to report to their board and to the regulator on, on how customers are able to use them effectively and to prove our understanding. This is an opportunity area to not just show that those communications are compliant but to rethink, 'What does consumer understanding mean, and does it make sense to use the methods that have been used in the past?' Annual letters, the way that the digital portals are set up, the engagement through the web or through the contact centre, all of those things can be tracked to quite a minute detail now and can really result in thinking, 'What is the core message and what is the outcome that we need the customer to get to, for them to feel that they are in the adequate product and have the support that they need?' Perhaps that will result in quite a flip-change of the way firms actually communicate with the end customer. I think another piece to highlight too is vulnerable customers. There is now such a further ability to segment customers and understand their needs.

We have more data than we've had ever before, and while most of the life and pension companies do have quite a robust tech stack to untangle, in order to have a full view of their customer, they also do have more tooling, to be able to understand what might be traits of vulnerability, realise that those traits do not necessarily have to be permanent. So what are situations where an individual is more likely to be vulnerable? What are the risk factors that might result in vulnerability and how do you make sure that service extends to them across all channels and all products to suit their needs? Jamie mentioned claims as a critical area where we see both perhaps under-investment in what can be a leading-edge client experience, this is also an area that is rife with vulnerability and just the characteristics of bereavement or if individuals have lost their job or if they're taking a sick leave will just result in a higher likelihood of being vulnerable. We can design for that. We can really think of ways to better serve the end customer at their time of need and deliver on the promise of the products.

Tessa: Thanks both, and I think one of the common threads that I really took away from that is the importance of data, whether that's about how you're really measuring and monitoring the impact of customer communications and whether customers have truly understood them, whether you've got sufficient data on your customers and their vulnerabilities and needs. Also, that board reporting piece that you spoke to, Jamie, and the importance of having sufficient scrutiny and oversight, and I can imagine that there are some particular challenges around data for this sector, given some of the points that we've been talking about, in terms of legacy systems and technology. Jess, what's your take on how firms can be approaching some of those data challenges and overcoming some of those issues?

Jess: I think what we've seen for the life and pension sector is what I would regard as the hollowing out, where you're trying to reduce the reliance on core systems. You're trying to bring up the level of data to be used by more of the business and be accessed across different parts of the business and really bringing together what might be in the front office digital channels, what's in the contact centre and then what the operations teams might be working within as well. The reality is, about data, I think it's to just get started. I think there's a top-down and a bottom-up approach that should be taken in this space, which is setting a strategy and having a direction for the business of how they want to be using data, as you mentioned , Tessa, bringing it to the board level is so important. That's actually a piece that we've worked on explicitly with one pension company that wanted to make sure that they had very clear reporting, from the business units to the Ex-Co, all the way to the board, but then the other piece is how you empower the workforce to get comfortable using data differently. Part of that is making AI tooling, which is available to all, which, even if it is not mandated, individuals are finding ways to use that on the job themselves. Enabling the workforce to come up with their own opportunities or their own use cases for data or for generative AI, and then making sure that there are guardrails in place so that you are not only protecting the organisation but thinking about how you're protecting the customers' data as well within that.

Jamie: I think maybe just building on what Jess was saying, on the data side, it's such a mess for our clients that it can sometimes feel a bit overwhelming in terms of where to get started. I think maybe just taking it up a level, the choices that our clients have in terms of where to go on technology is inextricably linked with data. Historically, up to this year, it's been quite simple: outsource the closed book, run it as cheap as possible and let somebody else help you with the data challenge on their platform, and then invest in a new platform for open book or simplify your existing platform for open book. I would say that there is much more consideration now around closed book and what should be done to make sure that companies are having a good experience in the back book, that they do have control over customer outcomes. So that discussion about investing in the back book a little more is very much live, just given some of the challenges in the outsourcing market in life and retirement.

I would say, on the open book side, the streamlining of platforms, the streamlining of data is a big focus at the moment, that's quite a material investment, so as Jess was saying, just trying to find the places to start in a couple of areas. Clients that I'm working with are focused on claims and underwriting, as two really core processes to get the data right.

Tessa: I think it would be remiss of us not to touch on AI as well in the context of technological change, it's something that you've both referenced earlier on in the conversation, and as you said, one of the solutions and tools that firms can think about in terms of some of these data challenges, I'm sure there are plenty of additional use cases as well and firms are at different stages. Jess, how are you seeing firms thinking about AI and starting to approach that?

Jess: Yes, I think, as a whole, every firm is thinking about AI, and we often can't walk into a client conversation without the conversation turning to AI at one point or another, but I think it's where the use cases are starting. I think that there has been a definite understanding that the back office is an opportunity there because you are looking to cut costs within it. We do often hear from our finance transformation colleagues about how they're transforming the finance function and how AI is becoming a better tool there. We're also seeing it in the core operations. So how do you enable the workforce that might be servicing customers or that might be processing requests to work more effectively? This might not be immediately felt by the end customer, but it should be indirectly felt, in terms of shorter wait times, in terms of greater transparency of where they are in the process. Where we're seeing the ambition go to with AI is not to lose the human touch entirely, and I think that that's a critical piece to say. Often, with colleagues or with peers within the industry, we hear about a fear that jobs will be removed, I see it more as tasks will be removed, particularly in the next couple of years.

What we should benefit from is ease of entering information or sharing information across platforms, being able to synthesise and understand natural language effectively. Which then allows service agents or advisors or those in business decision-making roles to understand exactly what they need, prep for their interaction, prep for their meetings and capture all of the outcomes from high-impact face-to-face discussions much more effectively than they could in the past. So, if we think of AI and some of the benefits to the end customer, my hope, personally, is that it does bring down the cost to serve and it does bring up the ease of interacting with the life and pension companies.

Tessa: I really like that thinking about both the benefit to the end customer and to the workforce as well. Jamie, is there anything that you'd add to that or does that align with what you're seeing among your clients?

Jamie: The thing that I'd maybe just call out is the reality of what's going on in our clients right now. So, there is no shortage of proof of concept, use case lists and I would say there's probably proof of concept fatigue and a lack of scaling up of the capability. The capability is not scaling up because, maybe the investment isn't there, certainly, and the skills are not there in the industry and there is a heck of a lot going on in the existing change stack. I think it is almost like digital, when digital, in inverted commas, was first a thing and it was seen as special and separate, rather than, 'It is another piece of the toolkit for us to utilise and draw down on.' I think certainly some of that is playing out at the minute with our clients. I think, as Jess was saying, where the gains are going to be made, and certainly where we're working with clients at the minute, there are some of these immediate opportunities, where you do have datasets and systems that maybe are a bit more parameterised, like in firm claims and complaints and call-wrap, where you have the ability to make a difference in quite a short period of time using the technology. Where I'd really love to see it get more to is away from just pure cost-out inefficiency, where we were when RPA came along, six, seven years ago, and really looking to improve experience first, to coach front agents, to augment journeys, and then the cost really falls out off the back of that.

Jess: I might just add one more thing on that. We spend a lot of time having these discussions, and Jamie's so right in saying there is no shortage of proof of concept. We also have to remember we're in a very risk-averse industry by nature, insurers are constantly thinking about the risks and the trade-offs, and we're here talking with you on a Risk & Regulatory podcast, and the risks if things go wrong for a customer, when you do have AI in place, are real and the risks of harming a customer relationship are real to the insurer. We do realise this industry will likely move slower than some of the others that will be adopting AI or might be scaling AI much quicker.

Tessa: We've talked quite a lot about how much change we've seen over the past few years and where the industry might be moving to and what the future might look like. I think it'd be great, to wrap up our conversation, to ask you both to look into your crystal balls in a bit more detail and answer for us, what's the biggest change that you think we're going to see in the sector over the next five years? Jess, I'll come to you first.

Jess: My hope is that the biggest change is that we see these types of financial products, so life insurance in particular, group protection, workplace pensions and retirement products, more understood by customers, and therefore access and usage of products optimised to their needs. I would love to see that, you know, the way that firms think about servicing customers really evolves to be all about building trust and retaining that trust with the customer. I think that there's a risk here that customers will be priced out or further excluded from the market as the quality of data and the granularity of data on target customer segments continues to improve, and in reality, customers can be priced out of the market if there are not guardrails put in place. I think that there's a lot to be aware of as we go into this next frontier that we're all learning and working within.

Tessa: Jamie, how do you see things changing and moving to over the next five years or so?

Jamie: I'll limit myself to one thing, and I'd say the biggest change will be a continuation of a change that we've seen, which is further consolidation in the market, and that's because of everything that we've been discussing, so the need to invest in experience, which easy to say, hard to do, it takes sustained focus and investment. I think regulation is going to play a part in consolidation and meeting the requirements of consumer duty, particularly value for money, as Jess was saying. I think that crisis falls squarely over the top of the mid-size, small-size mutual, where we're standing right at the moment, and I think we'll see a smaller set of players with larger market share who provide this core set of products at a lower price but hopefully, fingers crossed, have this great experience for customers that's in line with the consumer duty.

Tessa: Great, thank you both so much, it’s been really fascinating to hear about how all of those different factors and trends that we're seeing in the market come together, and it certainly feels like we're at a bit of an inflexion point for the industry. It's been helpful to hear about some of those practical steps as well that firms can take to meet those challenges and ensure they're well-positioned for the future. To our listeners, I really hope you've enjoyed this conversation and thank you very much for listening. As always, please subscribe to future episodes and please rate and review this series, as it helps other listeners to find us. If you'd like to hear more from us on risk and regulation, please look out for our regular publications on our website, which we'll link to in the show notes. Thank you.