With the Pre-Budget Report came news that PTA may be scrapped from April. What will this mean for a term assurance market that was just gaining steam? Sam Barrett investigates Click here to download pdf
The protection industry is often accused of designing products that are over-complicated and difficult to understand but, if the fortunes of term assurance are anything to go by, simplicity is not necessarily key to a sale.
Little could be easier to understand than a product that, in return for a monthly premium, pays out a lump sum if you die. But, according to figures from Swiss Re's Term & Health Watch 2006, sales of term assurance are on a downward spiral. Continuing a trend that started in 2004, sales of new individual term assurance contracts fell to 1,584,208 policies in 2005, 10.4% down on the previous year and 26% lower than in 2003.
What is particularly concerning for the market is that the drop in sales is set against a background of price cuts, and 2006 was no different, with premiums falling by around 5% over the year.
But, although figures for 2006 will not be available until later this year, the industry is confident that they will show a recovery process has started. "I'm expecting sales for 2006 to be roughly the same as for 2005. I think the market has just about bottomed out and sales may even start to pick up," says Kevin Carr, head of protection strategy at LifeSearch.
Figures from the Association of British Insurers (ABI) support this. Over the first three quarters of 2006, £265m of mortgage-related term assurance was sold, marginally lower than over the same period last year when the figure was £266m. Additionally, for non-mortgage-related term assurance, there was an increase, with new premiums increasing from £209m to £232m.
One thing in particular has bucked the trend – pension term assurance (PTA). With premiums eligible for a healthy dollop of tax relief, sales have boomed. For example, at Legal & General, more than 50% of life assurance sales were for PTA, and at HSBC the figure is as high as 84%. "It's difficult to say whether this is straight substitution or genuinely new business, but I believe we'll see an increase in life assurance sales as a result of PTA," says Bernie Hickman, protection director at Legal & General.
However, this fillip is not likely to last. The announcement in the Pre-Budget Report, that stand-alone PTA will no longer attract tax relief, has seen the majority of PTA providers pull out of the market. "The report states that it was never intended to be a stand-alone sale and that there are tax avoidance concerns," says Deepak Jobanputra, strategic development actuary at Swiss Re. "This is very disappointing for the industry and for the £2.3trn protection gap. People like tax relief, which can be seen by the fact that over the six months since April, some 60,000 PTA policies were sold," he adds.
But while the announcement has caused chaos, Carr is philosophical about the announcement and does not believe it will harm sales of traditional term assurance. "I don't think people went out and bought life assurance just because they could get tax relief on it. The majority of people who bought PTA either already had cover or would have bought it anyway," he explains.
Other challenges have also dogged the market this year. Peter Chadborn, principal and co-founder of IFA CBK, says the biggest hurdle is insurers who do not like taking risks. "Some insurers are so keen to be top of the best-buy tables that they load or decline nearly every applicant," he explains. "Advisers need to know about this, otherwise they will find themselves spending more time looking for the best rate, which can make them look bad," he adds.
Another significant change this year has been an increase in the use of electronic applications and underwriting. "E-business is becoming the norm," says Rod McKie, head of marketing for protection at Aegon Scottish Equitable, where more than 70% of term assurance is sold the electronic way. "It makes the application process slicker and has benefits for customers, advisers and providers."
Benefits include the ability to customise underwriting to the customer, faster underwriting decisions and less administration. However, not everyone believes it has brought benefits across the board. "It's more efficient for the providers but I'm not sure advisers are too convinced of the benefits," says Nick Telfer, head of life and protection at Defaqto.
Carr sees online applications as a way for the provider to shift some of their workload to the adviser in return for an extra 10% commission. "Electronic underwriting doesn't make it any easier for the adviser or client and I don't think this has made more people buy protection," he adds.
Usability also comes under criticism. Chadborn says some application forms do not match the screens, which can make accurate data capture more difficult. If data is input incorrectly and this is not discovered until a claim is made then the adviser could find themselves liable for it. "At the end of the process customers get a copy of the application form and are asked to let the insurer know if there are any mistakes. This isn't enough to ensure the adviser isn't held liable," Chadborn adds.
Requesting a signature from the customer would address this and some providers are taking this approach. For example, Legal & General sends copies of the completed forms and disclosures to the customer and asks them to sign and return them.
But while some providers are taking this approach, it is far from the norm. "The ABI has been weak when it looked at this area. It should have insisted that it was a requirement," adds Chadborn.
Tele-underwriting has been received more positively. Less widely used, among those offering this service are Axa, Legal & General, Prudential and Royal Liver. "It makes sense to take some of the medical aspects of the sale away from the adviser," says Hickman. "Where this process has made the most significant improvements is when an applicant has a medical condition. Then, one of our trained nurses will ring them up to gather further information."
This can save considerable time and expense where previously a medical or GP report may have been required.
The year ahead
Commentators are expecting many of the trends already seen in the market to continue into 2007. Further reductions in premiums are likely, especially as the industry continues to focus on price as key to sales.
Premiums are also likely to fall due to changes in capital requirements, which came in at the end of 2006. "These will allow life insurers to hold less capital, which could allow us to reduce premiums," says McKie.
Longer term, other factors may force premiums up again. In particular, if proposals on non-contestability put forward by the Law Commission are adopted, there could be a dramatic effect on the market.
These address the problem of non-disclosure and propose that insurers will have three years from the date the policy starts to collect relevant information on the policyholder. After this three-year point, insurers will be unable to avoid paying a claim on the ground of non-disclosure or misrepresentation.
"This is going to affect the lower end of the market the most, with minimum premiums potentially rising by 40%," says Carr, basing the prediction on the cost of collecting medical information as well as the increased cost required for more sophisticated underwriting.
Although premiums will inevitably rise, there are benefits for the market. Claims declined for non-disclosure
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create bad publicity for the protection market, deterring people from taking out cover. A transparent claims process would give consumers greater confidence and could drive sales.
Bird flu is also a significant risk for the life insurance sector. Using figures from the 1918 flu pandemic and pop-ulation growth, it has the potential to kill up to 1.4 million people in the UK.
But, from a life assurance perspective, Hickman is not fazed: "It is something we scenario plan for but there's not a lot you can do about it really. Most players are heavily reinsured and we've made sure we've spread our risk across the board."
While these two challenges remain possibilities, there is a lot of agreement that the term assurance market must raise its profile to boost sales. "The industry needs to raise awareness of the value of term assurance. It's very much a grudge purchase rather than something that people actually value," says Jobanputra. "There are some initiatives going on but it won't change over night."
For Chadborn, the solution lies in the positioning of the product. "Term assurance is intrinsically linked to other areas of financial planning, like wealth management and Inheritance Tax planning," he says. "Demonstrating this could increase the product's popularity enormously."
Sam Barrett is a freelance journalist
