The whole country, as advisers are so often told, should wake up to the need for income protection insurance. But, as Edmund Tirbutt reports, insurers’ obsession with product innovation might just be leaving everyone in a spin
There are certainly reasons to start being more optimistic about the individual income protection (IP) market but there remains some way to go before we can safely say that we have turned the corner. In particular, sales figures for 2008, which have supposedly demonstrated the first annual increase since 2002, have been leading to premature celebrations.
According to Swiss Re’s 2009 Term & Health Watch, individual IP sales totalled 126,815 in 2008, representing a highly impressive increase of 13.5% over 2007. Sorry to ruin to a good story, but closer examination of the facts shows that sales of IP as we understand it did not in fact increase at all. The figures include 29,244 policies from HSBC, whose LifeChoices’ IP option, launched in June 2007, seems to have far more in common with payment protection insurance (PPI) than with IP.
Remove HSBC, which accounts for well over 8,000 more policies sold than any other single provider, and total new IP sales during 2008 actually fell by 11.2%.
The HSBC policy option, entitled SicknessChoice, is considered to represent IP because it is a permanent contract with premiums guaranteed for the duration and because premium prices are rated according to gender, smoking habits and broad age bands. But its pricing is very similar to that of mortgage payment protection insurance (MPPI) and, most importantly of all, it only pays out claims benefit for a maximum of 12 months.
Dennis Smith, head of life and protection at HSBC, describes the product as “a modular evolution of PPI”, and Ron Wheatcroft, technical manager at Swiss Re Life & Health, admits that it is difficult to say whether it should be classified as IP or not. He says: “It was quite a fine decision but we have always focused on long-term business.”
Worryingly therefore, the individual IP sector has arguably experienced a significant sales decrease despite a number of factors that commentators joyously flag up as having contributed to a supposed sales increase. The most well documented of these is the idea that mortgage brokers and IFAs have been making efforts to have protection conversations with clients which they didn’t have time for when mortgage business was plentiful. But other influences are also reported to have been at work.
Andy Milburn, head of marketing at Munich Re (UK Life), points out that family protection now accounts for around 20% of individual IP sales, whereas a few years ago it was only 10%, because 90% of sales were mortgage related. Matt Morris, senior policy adviser at national specialist intermediary LifeSearch, observes a big increase in enquiries about unemployment cover and reasons that, because the consumer is far more aware of the vulnerability of their income, the change in mindset naturally leads to a discussion with an adviser about IP.
A number of insurers have also produced notable sales increases as a direct result of implementing product changes. LV= reports sales to have increased by 20% in the year to May 2009, with the gain being sharpest in the early months of this year. This reflects its offer – initially available between this February and April and subsequently extended to the end of 2009 – that those who take out IP and get a critical illness receive a lump sum critical illness (CI) cover pay-out equivalent to three months’ IP benefit (even if they don’t actually make an IP claim).
Similarly, a product relaunch by Bupa in February 2008 contributed to the company experiencing a 40% increase in sales during 2008, and a product revamp by progress from Royal Liver this January (see box) has resulted in it experiencing sales in May 2009 a staggering 264% higher than those in May 2008.
Nevertheless, a number of trends could well help the IP community as a whole enjoy a genuine annual sales increase before too long. Widespread use of teleunderwriting, the action being taken against PPI by the Competition Commission and a proposed 2010 review of the Association of British Insurer’s (ABI) IP Statement of Best Practice should all count positive. So should an increasing awareness of the importance of educating intermediaries.
EDUCATION, EDUCATION, EDUCATION
One of the most welcome features of the Income Protection Task Force’s second White Paper unveiled this April was its stated intention of launching a series of national roadshows this year sponsored by Task Force members. Rather than promoting individual product solutions, these will aim to ensure that advisers are aware of where IP sits in the protection hierarchy, that they understand how to demonstrate its importance to customers and to adopt processes so that application, processing and administration are carried out effectively and within cost parameters that enhance profitability.
This collective effort will hopefully help to correct a situation in which commercial considerations have meant that major protection players have tended to reserve their main educational thrust for other products.
Roger Edwards, proposition director of Bright Grey and Scottish Provident, says: “IP accounts for only 6% of the overall protection portfolio at Bright Grey and 15% at Scottish Provident, so it’s hard to write a business case to revolutionise the product. Educating the life and CI salesforce in IP requires quite an investment and at the moment we are not doing so because it’s incredibly difficult to write a business case to make changes to the product, let alone to train people. The training we give new staff obviously covers IP but actually going out there and focusing on it on an ongoing basis is quite another thing.”
Nevertheless, most major IP insurers at least provide very informative websites, and Friends Provident has been particularly notable for taking the online educational process to a new dimension through live online seminars. The four of these relevant to IP that it has staged during the last year have attracted upwards of 200 participants each, with at least the same numbers again subsequently viewing recordings. The main attraction of the approach is that no time is taken up travelling to and from the event.
Some mortgage networks have also been cranking up their training. National mortgage network Home of Choice, for example, has held a dozen free courses in IP over the last 18 months. Each is attended by four or five individuals and lasts for four hours. This is considered to have been the main reason for the network selling 400 IP plans during the first half of this year.
Gerry O’Brien, chief executive of Home of Choice, says: “Only around 30 to 40 of our 400 member firms are genuinely focusing on IP but I would be delighted to get to 100 in the next couple of years and I feel this is manageable. The mortgage market is never coming back to where it was. The lending criteria will always be far stricter and IP will be a more important product because the requirement of securing the loan will become greater. Some other networks have lagged behind, so if they can also start training there is clearly significant potential for IP sales to increase further.”
The fact that mortgage advisers are only required to sit an extremely basic paper on protection means that their knowledge of IP is often very limited to start with, and those who have not sold the product for a few years are likely to hold misconceptions about the length of the application and underwriting processes. But many clearly already have an abundance of raw material that can be built on.
Richard Campo, technical adviser at national mortgage brokers Alexander Hall, says: “What mortgage brokers are very good at is building relationships with clients because they often hold their hands for three or four months during the mortgage process but they then fail to capitalise on this. In some cases they are scared of harming the relationship by trying to cross-sell but I feel such fears are groundless. If you can handle the biggest financial transaction anyone is likely to make then they are likely to want to seek your advice on other things.”
IFAs with wealth management backgrounds who are now trying to sell IP could also be well out of date with new developments like teleunderwriting, online underwriting and online application processes. Additionally, for both experienced and inexperienced intermediaries of all sorts, it should be remembered that trying to sell IP during a downturn can be a very different art to trying to sell it when the economy is booming.
Paul Clark, director of City-based mortgage brokers City Mortgage Solutions, says: “As a small firm we are currently having to revisit the skills process of selling IP to enhance skills in conjunction with coping with tighter budgets. Selling IP can’t be entirely a budgetary issue because some people, for example, still smoke whatever the cost. But selling to a tighter budget undoubtedly requires more skill, so there is a need for additional product knowledge and role plays.”
A further very significant recent trend has been the growth in popularity of IP plans offered by friendly societies. Indeed, according to Swiss Re’s Ron Wheatcroft, these have made up for a gap that would have been created by demand for traditional IP plans dropping by some 30% between 2006 and 2008. The big development has been the ability of several friendly societies to provide IP that is protection only – as opposed to old style Holloway Plans that include an investment element. Pioneer Friendly and – since this February – Holloway Friendly(see box) – now offer this format and Cirencester Friendly, which offers the ability to deselect the investment element from a Holloway Plan, effectively does so as well.
Mark Banfield, senior partner at AFP Partnership, an IFA based in Maidenhead in Berkshire, reports that around 70% of his firm’s business has been going towards Pioneer during recent months, while Henrietta Oxlade, an IFA with Central London based Bond Wealth Management, estimates the proportion from her firm to be around 40%.
Oxlade says: “Previously I did little business with Pioneer but now I consider it as an option in around half the cases I deal with. My self-employed clients find the day one cover very useful and the fact that all risks taken on get ‘own occupation’ cover is important. Having premiums that are initially cheaper and then rise with age is very attractive during these uncertain times when people are concerned primarily about the present and are not at all bothered about the prospect of future premium increases. Pioneer’s administration is also particularly good. They issue policies virtually overnight.”
For similar reasons, Diane Saunders, director of Leeds-based IFA Diane Saunders Financial Advisors, has found herself increasingly recommending Cirencester Friendly’s IP with the investment option deselected. This differs from Pioneer (which offers ‘own occupation’ and a level benefit structure throughout the policy term) in offering a range of benefit structures. The two most popular are own ‘occupation cover’ which reduces to 50% of the original benefit level after three years and ‘own occupation’ cover that switches to ‘any suited’ cover after 52 weeks.
Saunders says: “Like Pioneer, Cirencester has a very good niche product for people who are otherwise difficult to insure because it provides ‘own occupation’ cover and doesn’t rate on sex, occupation or smoking habits. I have recommended clients to Cirencester who are being charged under a quarter of the premium they would be charged by the major insurers. Although premiums are reviewable, applicants are given a strong indication as to the likely future costs and so they can decide if it will be affordable, which it nearly always will be. Cirencester is very easy to deal with, its systems are excellent and there is good access to underwriters for asking questions.”
Pioneer Friendly has also been at the forefront of an uncharacteristic wave of product innovation in the individual IP sector during the last year (see box). In November 2008 it tweaked its Professional Income Protection cover to change the ability to carry out all financial underwriting once only at outset from being an automatic feature to a free option, thereby increasing flexibility in response to the realisation that not everyone has the necessary information to do the underwriting at outset. This April the company then launch Bills & Things, a short-term plan distributed through selected intermediaries to start with – before going whole of market this July.
Bills &Things is designed to cover household expenditure and bills but is not linked to income as such and involves no financial underwriting. Policyholders can choose cover levels of between £500 and £1,000 a month and between a benefit payment length of two years and (just to give Swiss Re a further headache) one year. The deferred period, for which there is no choice, is four weeks.
The other innovative provider to really catch the eye has been PruProtect, which this April launched two new IP products. Primary Cover is a lifestyle protection product while Comprehensive Cover is enhanced with stronger benefits and features. Both include the chance to reduce – but not increase premiums – through the company’s Vitality programme.
The products include a financial underwriting guarantee that negates the need for further information about salary after the application stage, a seven day deferred period for the self-employed, new recovery and back to work benefits, ‘own occupation’ definition of disability for everyone and an online IP and State benefits calculator.
Kevin Carr, director of protection development for PruProtect, describes the feedback he has received on the products as “awesome” and is aiming to become the market leader for IP in the IFA market within three years.
He says: “The feature I’ve had most questions about is the income guarantee, and competitors are emailing me and checking we are really offering it as they think it’s too good to be true. The back to work benefit has also gone down very well.
IP is not that price sensitive. You have to be competitive but value is a more important consideration than price in the IFA market.”
Neil McCarthy, sales and marketing director of national protection point of sale and application solutions provider Direct Life and Pension Services, is somewhat more circumspect. He says: “Some of the developments PruProtect has introduced to help claimants are certainly welcome but it is too early to see how the pricing of both its new plans compare to the existing providers.”
While innovation should undoubtedly be considered a positive trend from a number of perspectives, the fact that there is currently so much of it could, unfortunately, prove counter-productive to the trend in the direction of education. How can you educate anyone about the intricacies of something for which the goalposts keep moving?
Furthermore, we could soon have no way of monitoring the impact that education is having on sales because, as seems likely, if the numbers of products offering a halfway house between IP and PPI continue to multiply, it will become well nigh impossible for the likes of Swiss Re and the ABI to produce any meaningful statistics relevant to IP. Perhaps the day is not to far off when both training courses and statistics will refer to “disability insurance” rather than IP.