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Nice to be niche?

Only a small percentage of individuals take out income protection each year, but that doesn’t make it any less popular among those who value the cover it provides. Edmund Tirbutt suggests that while the product might never be a blockbuster in terms of sales, good times might yet lie ahead

August 2008 Features

The most positive possible starting point for any discussion of the individual income protection (IP) market would currently seem to be the realisation that it will not be long before we reach a point at which “the only way is up”. Annual sales may first have to dip below 100,000 but it is hard to see them falling much further than that.

According to Swiss Re’s 2008 Term & Health Watch, 111,780 individual IP policies were sold during 2007, a decline of 14.3% over 2006. As recently as 2003 sales were at nearly double this level, and Swiss Re reports that the IP gap has now increased for the fifth consecutive year to £190bn of annual benefits.

The Association of British Insurers’ (ABI) sales figures have shown a slight upturn in the first quarter of 2008, recording 36,000 new contracts. This was higher than the best equivalent quarterly figure in 2007 of 31,000 (for both the first and fourth quarters). Nevertheless, it seems likely that this reflects the fact that mortgage brokers have been re-contacting their client bases to have conversations about protection that they never had time for when they were inundated with mortgage requests.

If so, it is only a matter of time before this temporary source of leads is exhausted and, as the credit crunch continues to bite, intermediaries trying to stay afloat are likely to prioritise the easiest sales. As has been well documented, IP is nobody’s idea of one of the easiest sales.

Nevertheless, the sector still has its fair share of bright spots. IP sales at Pioneer have risen by 20% during the last 12 months and at Bupa, which has allowed intermediary business to be submitted online by its extranet since this February, sales have risen by 30% during the first half of 2008 compared to the first half 2007.

National specialist intermediary Direct Life experienced IP sales growth of over 200% during the last 12 months, albeit from a low base. IP is the most selected product from its Intelligent Protection tool – which was launched in 2006 to encourage advisers to give holistic advice – accounting for 34% of cover purchases compared to 33% for life assurance. National specialist intermediary LifeSearch enjoyed a bumper period this May, when it sold 203 IP policies – around 50 more than its monthly average.

PPI AND THE COMPETITION COMMISSION

There are also a number of developments that could bode well for the product in the medium-to-long-term, and the broadside aimed at payment protection insurance (PPI) by the Competition Commission this June is potentially among the most significant. Following a 15-month investigation into PPI, the Commission’s provisional findings concluded that a lack of competition in this market was having an adverse impact on consumers, who were being overcharged to the tune of £1.4bn a year.

The Commission, which will make its proposals clearer by the end of the year, is considering a range of potential solutions, including imposing a complete ban on “credit point of sale” PPI. Single premium policies could also be scrapped, all PPI policies could be made annually renewable and could also be subject to a temporary price cap.

Such dramatic proposals have certainly surprised many in the industry who had expected the Competition Commission to do little more than pay lip service to the PPI problem, and they will be music to the ears of the Income Protection Task Force (IPTF), which has highlighted the mis-selling of PPI as a major barrier to the progress of IP. Its December 2006 White Paper concluded: “It is safe to say that there will be little change until the current profits on sales of PPI, where commission is typically up to 80%, are curtailed, hopefully by action from the regulator.” Nevertheless, there has also possibly been a downside to the Commission’s involvement.

Rod McKie, head of individual protection marketing at AEGON Scottish Equitable, the insurer, says: “All the attention surrounding the Competition Commission’s findings could well have created adverse publicity for IP products because many consumers don’t understand the difference between IP and PPI and will therefore be turned off from buying both. We have no evidence of this actually happening yet but it is certainly a risk.”

Furthermore, such proposals could not have come at a worse time from the point of view of practical implementation. With the government straining every sinew to ensure that banks rebuild their capital bases to recover from the credit crunch, it is hard to see how it could impose any measures during the next 18 months or so that could have a negative impact on their profit margins. Doing so could result in higher mortgage costs and increase the chances of a housing market crash.

Mark Jones, head of protection marketing at Friends Provident, is unusual in disagreeing.

He says: “I don’t think the banks could afford to put their mortgage rates up because of action on PPI because they would lose too much business to smaller lenders that haven’t sold much PPI and would therefore become much more competitive. The first bank that decides to stop selling PPI voluntarily or which massively reduces its prices could get huge PR value from doing so.”

But even if Jones is correct and PPI sales reduce dramatically in the very near future there is no actual guarantee that there will be a corresponding pick-up in IP sales. Nick Kirwan, head of health and protection at the ABI, questions the supposed link between the two products.

He says: “PPI has only been around in significant numbers for the last 10 years, yet sales of IP have disappointed for four or five decades, so it’s nothing to do with PPI. Before the explosion in PPI sales the decline of IP was blamed on critical illness (CI) cover, and I’m not sure that I believe that either. There isn’t a shred of evidence to suggest that either product has a negative impact on IP.”

OTHER REASONS TO BE CHEERFUL

The parts of the Welfare Reform Act 2007 due to be introduced this October, although primarily of significance to group IP, could also have a positive impact on the individual market.

Peter Le Beau, co-founder of the IPTF and regular Health Insurance columnist, says: “We expect the introduction of the Employment and Support Allowance in October to draw attention to both the paucity of state sickness benefits and the draconian approach the government will adopt to granting them. Over a million people will lose entitlement to state benefits. So it could be a watershed if the industry can utilise the opportunity sensibly.

“Previously the state has paid people that the insurers would not pay but after October the situation may be completely reversed. The Task Force is to produce another White Paper following the change in the state benefit system, and we are likely to hold a major industry seminar in early 2009 where we have strong political input.”

Of possibly far greater potential significance has been the trend towards providers using teleunderwriting because, disclosure issues apart, this can greatly speed up the application process.

Most providers are now using or piloting teleunderwriting – whether “big T”, where the teleinterviewer covers all the medical questions,“little t”, where an application form still has to be completed, or both (for an analysis of the different approaches, check the archive on the Health Insurance website at www.hi-mag.com “Crossed Wires?”, August 2008).

Both approaches can dramatically shorten the time taken for most applications from over 20 working days to only five or six working days by cutting out the need to obtain a GP report. This greatly reduces the chances of policies falling through during the application process.

Among those straggling providers to have recently thrown their hat in the ring are Scottish Provident, which started embarking on a teleinterviewing pilot this June, Norwich Union Healthcare, which has already used teleunderwiting for tied IP business but expects to introduce it for intermediary business next year, and Bupa, which will be introducing the approach this September following a lengthy pilot.

Developments in online underwriting and other tweaks are also helping to speed up the application process. This July, Friends Provident started offering online underwriting for IP that includes applying some loadings and exclusions, and this June Legal & General – which already applies some loadings online via its Mortgage Payment Insurance IP product – announced it was offering a mobile medical service to speed turnaround on high net worth applications.

Peter Hamilton, protection management director at Zurich, says: “Industry ‘not taken up’ rates are still in the region of 30% to 40% and if we can reduce these then advisers will have greater confidence and will see a positive impact on their own costs. In too many cases customers receive an illustration on one basis only to find that they are asked to pay significantly more when their actual occupation is known. We have built a more detailed occupational database into our quotes engine to significantly improve the chances of the right premium being quoted at outset, but an industry standard occupational database would help even more.”

Whether publishing claims statistics will have much of a positive impact on IP remains hotly debated, but LV= took the plunge this May. During 2007 it paid 86% of claims – 8% were declined for non-disclosure and 6% for not meeting the definition. Other providers, however, clearly remain wary of following suit.

“Publication of claims statistics remains a talking point,” continues Zurich’s Hamilton, “and we believe that the introduction of an industry-wide definition of what constitutes a claim would be a positive step. In general terms, disclosure of claims figures ought to mean greater transparency and lead to greater trust among consumers but our concern is currently that there are inconsistencies among insurers about what counts as an IP claim. This could lead to unfair comparisons around the claims experience and, in turn, could lead to headline grabbing, but unhelpful and potentially misleading, league tables.

“Some statistics, such as those for non-disclosure, are easily assessed but others are not. For example, in some cases we may not pay a claim initially because there is no loss of income as required by the policy conditions but if the client’s financial circumstances change two months later we may pay it. Should this be recorded as a paid or as a declined claim?”

PRODUCT INNOVATION AND CHANGE

Innovation from LV=, which launched Mortgage & Lifestyle Protection this May, has provided further reason to be cheerful. The product, which makes teleunderwriting mandatory, combines many of the best elements of both IP and mortgage payment protection insurance (MPPI), offering unemployment cover, own occupation disability cover that will pay out until the end of the policy term and guaranteed premiums – even for the unemployment cover.

Chris McFarlane, head of protection at LV=, says: “We have seen a significant number of customers buying MPPI in the belief that they were getting the longer-term cover. We also found that the complicated application process was one of the main reasons that brokers weren’t selling IP, but we expect 50% to 60% of people to be accepted over the phone, with the whole acceptance process taking only a couple of days. Both mortgage and non-mortgage intermediaries like the simplicity and the fact that the non-disclosure risk is being taken away. We are very pleased with what we’ve done and with the market reaction.”

Alan Lakey, senior partner at Highclere Financial Services, an IFA based in Hemel Hempstead in Hertfordshire, says: “I rate the product and will recommend it where appropriate. The premiums, particularly for professionals like solicitors and accountants, are market-leading and the rates are guaranteed. I’ve always taken the view that if a client wants MPPI they will end up with IP and standalone redundancy cover, but this now allows me to do it under a single product. Nevertheless, while it offers own occupation cover for most occupations, the higher risk ones are rated accordingly, which doesn’t happen with the likes of Pioneer and Cirencester friendly.

“I think LV= has made a great breakthrough. I have always been moaning about how the small friendly societies seem to come up with innovative IP that meets clients’ needs but that bigger organisations don’t seem able to, but eventually one has. Too many other players start from the premise that they must perform tweaks on their existing plans so they don’t have to change their systems.”

Kevin Carr, head of protection strategy at LifeSearch, is somewhat more reserved and will be following the product’s progress with interest.

He says: “I don’t know if it’s Machiavellian brilliance or a potential disaster. The industry has complained for years that MPPI confuses itself with IP, so why shouldn’t IP call itself MPPI? But I believe we should have a clear distinction between the two products for the purposes of Treating Customers Fairly.”

In September 2007, Zurich launched a new product for the IFA market that cuts out overlap between IP and CI when the two are taken together. When a CI claim is accepted the IP benefit ceases, therefore allowing the cost of the IP element to be reduced by some 25%.

There was also a significant IP product revamp from Bupa in February 2008. Cover has been extended to age 70; mortgage outlay cover has been simplified to cover up to 140% of mortgage costs; a carer’s benefit has been introduced, so that if a policyholder’s dependant suffers a condition covered by the plan the policyholder gets a lump sum equivalent to six months’ income; and policyholders now have the option of reducing premiums by selecting a benefit period limited to two years.

Norwich Union Healthcare has also re-launched its IP offering for the intermediary market this July. Guaranteed rates, which it had withdrawn from offering in 1993, have been reintroduced; all remaining exclusions have been removed; the maximum annual benefit level has been increased to £180,000; and premiums can now be reduced for opting for a five year maximum benefit period or for a level benefit option (previously benefits had automatically been index-linked).

This July Fortis and LifeSearch also launched their Real Life Cover, which combines seven protection covers plus the added option of unemployment cover in one package (see page 14). In addition to the “life fund”, there is a “living fund” with four elements: income cover, critical illness cover, child and partner carer’s cover and recuperation cover.

If you are unable to work because of illness or injury your income cover pays you a monthly amount of 1% of your current sum assured, which in total provides cover for up to eight years. You can make as many claims as you need to, as long as there is still money left in your living fund and when you are receiving a monthly amount your premiums are paid for you – they do not come out of your fund.

AEGON Scottish Equitable, meanwhile, reports that it will be making some small improvements to its IP product in the second half of this year and Pioneer, following its merger with Exeter Friendly this March, acknowledges that it is looking at the possibility of producing a hybrid IP/private medical insurance product.

ABI CHANGE OF EMPHASIS

Nevertheless, industry-wide attempts to find a winning product formula seem to be less in evidence than they were a couple of years ago. For example, in November 2006 the ABI hosted a whole-day IP workshop with the optimistic title “Towards 10 Million Satisfied Customers”. Since then, however, it seems to have found IP a lesser priority than total permanent disability (TDP) – a relatively small component of CI.

Nick Kirwan stresses that interventions that the ABI has made on behalf of TPD and CI as a whole have been evidence based and that the problem with IP is that there is not yet sufficient evidence available to prove the consumer detriment necessary for obtaining Office of Fair Trading (OFT) support.

He says: “We have looked at a number of sources for evidence for IP, including asking the Financial Ombudsman Service on more than one occasion for information on complaints. It cannot help at the moment as it is not capturing data in a way that sheds enough light on the subject. I have also spoken to Which? magazine and discussed the possibility of them asking questions next time they do a survey.

“Some of the work we have been doing on protection generally, such as on non-disclosure, has certainly helped IP and it’s not true to say that we have other higher priorities. But the whole protection debate is moving in a different direction and we are taking a completely different look at IP and attacking it in a different way. The new Protection Strategy Committee will take a top down approach and will not start by thinking about products but by thinking about consumers, distribution, regulation and the framework within which we operate. I want it to come up with some hard lobbying and objectives regarding what needs changing for protection as a whole to succeed, and this could create an environment in which IP can thrive.”

SILENCE IS GOLDEN?

A period in which IP assumes a much lower profile could in fact turn out to be a blessing in disguise because one school of thought maintains that the decade-long discussion about what needs fixing has proved counterproductive by spelling out the barriers and creating negativity. A period of comparative silence could therefore be exactly what is needed to allow the field to gain genuine momentum on the back of positive developments like teleunderwriting and possible regulatory action against PPI.

However, Mark Johnson, head of marketing at Swiss Re’s UK life and health operation, begs to differ. He says: “I agree that the product won’t be fixed quickly but we feel we have to keep talking about it because distributors and consumers must be kept aware. Our research shows consumers rate losing income through accident or sickness as a greater concern than losing income through unemployment or untimely death and that many people think the product is too good to be true and even doubt that it exists.”

Talking or no talking, there are probably better times ahead for IP in the medium to long term. By the next time we have a buoyant mortgage market the product could be much better placed to capitalise on it. Even if, as seems likely, it never becomes more than a niche product, the bigger the niche the better.