With the ABI now turning its attention to income protection, what can be done to give hope to a product that has suffered yet more declining sales? Lucy Quinton investigates Click here to download pdf
The latest figures from the Association of British Insurers' (ABI) show that the individual income protection (IP) market recorded a dismal end-of-year result in 2005, with sales of new policies falling yet again to 130,000. The news will come as no surprise to industry experts, and unfortunately, it looks like the malaise is set to continue as the market refuses to buck the trend of decline experienced since 2002 when the number of new contracts dramatically dropped from 199,000 to 158,000 in 2003.
Mutual mistrust
Defaqto recently published its annual IP report detailing the somewhat lacklustre performance in the area. Nick Telfer, head of life and protection at Defaqto and author of the report, says: "An IP policy is a contract based on mutual mistrust. Consumers do not trust the insurance industry to pay out and underwriters believe people prefer being ill to going to work. In 2005, over 1.5 million people took out disability insurance policies, although less than 10% of them chose IP. There is clearly consumer demand for sickness and disability insurance, but not IP."
Telfer's remarks ring true with IFA Alan Lakey, principal of Highclere Financial Services. He says: "Quite a few clients believe that mortgage payment protection insurance (MPPI), usually sold by their bank, will offer them adequate cover."
In addition, another obstacle to this market is the general feeling of distrust of the insurance sector – due partly to the recent endowment mis-selling scandal, the recent adverse publicity on payment protection insurance (PPI) plans and the general consumer journalist message that providers are untrustworthy.
Lakey adds that IP should be a major success as it is the only product capable of offering a worthwhile non-cancellable income.
Roger Edwards, products director at Bright Grey, also believes IP meets consumer needs perhaps better than any other protection product. He says: "It should be sold more but in many cases it is not because selling critical illness insurance is easier – partially because that is a lump-sum product and partially because it is easier to get underwritten and in force".
According to industry experts, IP is a stagnant market that is often dwarfed by its inferior cousin, MPPI. Edwards says MPPI is "sold in great volumes by mortgage brokers and lenders and is very often mistaken for IP and in some cases wrongly marketed as IP by some websites.
"The MPPI application process is so easy in contrast to IP, where there are long application forms, inevitable medicals and GP reports, financial underwriting, occupation underwriting and no guarantee that cover will be offered," he adds.
Bernie Hickman, managing director for protection at Legal & General, concurs, adding: "For many advisers, particularly those selling insurance from one company, the simplicity, easy-apply process and apparent affordability of MPPI and accident, sickness and unemployment (ASU) cover makes this a common choice ahead of IP. The scrutiny that MPPI/ASU is facing from many angles could lead to an increase in popularity of IP, but this is unlikely while the product is perceived as being complex and difficult to apply for."
Another reason individual sales has decreased could be due to the success in the group sector. Findings from Laing & Buisson's Health & Care Cover UK Market Report 2005, suggest that overall IP demand "probably remained static in 2005 as demand for group policies bounced back, growing by 5.9%".
Declining demand
The report implies the downward decline in demand for IP is also due to a fall in demand for mortgage cover, as the housing market slowed in 2003 and 2004.
However, Lakey maintains that MPPI is outselling IP because it is seen as "simple" and it is "tagged" onto every loan and there is that subtle inference that if you do not take the plan you do not get the loan. He believes there may be an end to this soon following the regulator's probe into the PPI sector. "The Financial Services Authority's review of the PPI sector will, however, leave everybody running scared and single-premium MPPI and PPI sellers are probably going to disappear."
He adds: "Plans that insist that accident, sickness and redundancy must be lumped together are also immoral and will fall by the wayside".
While MPPI may be outselling IP by far, Peter Chadborn, principal of CBK, does not believe that should be the focal point. Instead, he thinks more emphasis should be put on understanding why IP is such a hard sell. He says: "Rather than just criticise that itself, the IP side of the market needs to look at itself and realise why the likes of MPPI are being sold in disproportionate volumes."
He goes on to say: "It's probably the most complicated product to research. For example, you need to do more than just go to a portal and chuck out the quote. I would always argue that you need to do that anyway, but some people could get away with just doing a quote and you need to have more knowledge of each individual company's contracts in order to advise it effectively. If you don't, the outcome is very often markedly different from what the initial research showed."
Adding insult to injury, Chadborn adds that the underwriting process is extremely complex. "Different providers' interests vary in terms of occupation regarding income structures. For example, a lot of people pay themselves in dividends but not every provider would allow this. Leisure pursuits and past times all come into play as they do in all sorts of protection but more so with IP. This is enough to put a lot of advisers off," says Chadborn.
He suggests advisers should be educated on the qualities of IP over a quick sale and that there is an opportunity to demonstrate the commitment to building a long-term relationship with clients.
Lacklustre performance, undersold product and declining area – if this was a child's school report, parents and teachers would hopefully be doing everything to encourage the child, so what can be said of providers and advisers working in the IP sector? While there is a decline in new sales, there is perhaps a glimmer of hope.
Such lacklustre performance is exacerbated by the half-hearted attitudes of clients as well. Lakey explains that earlier this year he wrote to every eligible client enclosing an illustration and a semi-completed application form. Unfortunately, he did not receive one single application back.
So what can be done to increase sales? Could amending the product help? According to the Defaqto report, there are six areas of the current product that could be revised without the need for a radical overhaul. They include consistent definition of deferred periods in months, standardisation of maximum benefit percentages, standardisation in defining 'other sources of income', refunding premiums in respect of over-insurance, standardisation of common occupation descriptions, and publication of claims data.
Lakey believes an update of the product is key. He says: "With the current design and claims management ethos it will remain an undersold product. These plans need to be restructured to allow consumer and adviser confidence and to ensure that they treat clients fairly."
The future looks set to fuse MPPI and IP. Interestingly, Lakey has also heard talk of "fashioning some IP/CI hybrid" but declares that he remains sceptical of such an idea. "Apart from this it is a moribund area. The MPPI/IP hybrids may prove popular but I somehow doubt it as they are not being promoted by any mainstream names," he says.
Realistically, Lakey adds: "The majority of non-specialist advisers will dip their toes in the water but run the risk of mis-advising because it really is a specialist market. Those advisers who do specialise have tried to foster a greater interest, but it is like pushing water uphill."
However, the year ahead looks as if there will be a flutter of interest that may generate some sales and enthusiasm for this market.
Bright Grey is looking to make changes in this area over the coming year. "We have heavily promoted our 'helping hand' service, which provides our IP policyholders with practical back-to-work help," explains Edwards.
He adds the service is aimed at allowing people to come to terms with immediate illness and that from an IP point of view, Bright Grey is looking at what service it can offer on top of that.
The ABI Protection Committee also plans to focus on IP, with an IP workshop already taking place. Nick Kirwan, chairman of the ABI Protection Committee, believes there are opportunities in the market and that IP has never been given such a shake.
The question, he continues, is: "Can we get the IP market to take up its rightful place in the market?" The workshop will examine what the world will look like if more people had IP. Speaking about the forthcoming workshop, Kirwan says the aim is to push attendees to think broadly.
He adds: "The workshop is necessary but not sufficient. It will give the industry a kick-start. The idea will be that advisers and providers have to pick up and run with it."
The ABI Protection Committee's work on IP together with the IP Task Force's efforts to highlight the importance of the cover, mean the year ahead should perhaps provide a glimmer of light to an otherwise dusty IP market.
