With income protection failing to break new ground, has it become destined to remain one of the niche products in the market? Johanna Gornitzki investigates Click here to download pdf
Last year saw the individual income protection (IP) market record another disastrous end-of-year result, with sales of new policies falling from 216,169 in 2003 to 162,061 in 2004, according to figures from Laing & Buisson's Health and Care Cover UK Market Report 2005. This fall followed a 6% dip in the volume of demand for individual IP in 2003, the first time the sector experienced an annual decrease.
Unfortunately, the trend seems likely to continue, as findings from the Association of British Insurers show that sales continued to drop in Q1 and Q2 2005. "New policies have certainly gone down and from a sales point of view the latest data is certainly not painting a great picture for the individual income protection market," says Nick Kirwan, protection market director at Scottish Widows.
Kirwan believes the drop in sales of new mortgages is the main reason behind falling IP volumes, as the majority of IP policies are sold in conjunction with a mortgage. Unsurprisingly, sales of the cover have therefore been directly affected by inflated house prices, which, in effect, has seen many first-time buyers kept out of the market - the very people that typically would have considered IP. And for those who have managed to climb onto the property ladder, the large mortgages they need to take out has left little room to pay for anything else.
"The average value of a mortgage is now much greater because of the multiples of salary allowed. This means that clients have less to spend on protection and feel pressure to keep the costs of cover down," says Sue Wilkinson, head of life and health propositions at Scottish Provident.
High price
Affordability, or the lack of it, is certainly a contributing factor to poor IP sales. "I think a lot of people shy away from the product simply because of its cost," says Dale Tranter, research manager for protection and pensions at Sesame.
The product has also been criticised for being highly complex, making it a difficult sale. Not only is the underwriting for IP more fierce than for other protection products, but it is also much harder to get a successful application through for an IP policy than a critical illness (CI) policy.
The various definitions of incapacity, ranging from the sought after option, 'own occupation', to 'activities of daily work', also add another layer of complexity to the product, making it a hard sale. "The major problem with income protection is that the very people who need it the most are the high-risk people who typically would not get 'own occupation'," says IFA Alan Lakey of Highclere Financial Services. Moreover, he thinks that consumers aren't fully aware of the product. "Most people have got a working knowledge of mortgages, but when it comes to optional products such as income protection they are frankly not that interested," he adds.
Rival products
IP also has to compete with other protection propositions for the same share of consumers' wallets. This has not helped sales. One product in particular, mortgage payment protection insurance (MPPI), has been blamed for stagnant IP sales. And true, the last couple of years have seen impressive growth in MPPI plans. The success of the product, which often only offers cover for up to 12 months, was largely due to the fact that it was seen as a simple and straightforward sale, only involving policyholders having to tick a box before receiving the cover. IP, on the other hand, while offering much more comprehensive cover, has always been much harder to shift.
However, following the introduction of general insurance regulation earlier this year, the selling process for MPPI has become more complex and intermediaries selling MPPI now have to tell their clients about what alternatives are available.
The new sales criteria was expected to dampen sales of MPPI and give IP the push it needed. So far, however, this has not been the case. Tranter is not surprised. "Sales of income protection are largely independent of MPPI sales and the two products are targeting completely different clients," he argues.
Agreeing with Tranter, Kirwan argues that a decrease in MPPI sales would rather benefit sales of CI or life cover than IP. "This is because income protection is the least favoured protection product when people are buying mortgages."
Strategies
So what can be done to increase IP sales? Product innovation and true adviser interest are both needed if the product is ever to escape dwindling sales figures, says Kirwan. "We really need to redesign the product, because its complexity has become a barrier for advisers as well. This could deter them from selling the cover. We need to make sure income protection insurance is on advisers' radars because, as with most protection products, income protection is sold rather than bought. Ultimately, we really need to change the product in order to change the hearts and minds of advisers," he explains.
Intermediaries also believe their role is pivotal to the future of IP. "Unless advisers are proactive it will never take off," says Lakey. He believes the industry needs to do more to promote people's need to protect their incomes. "We need to explain to consumers just how many people are unable to work due to illness or injury, and provide the same statistics that we do for CI insurance. That way, more people will become aware of the need for income protection," he adds.
Looking ahead, the future does not look too promising for the individual IP market, with the majority of industry experts predicting that it will continue to plod along in the same way it always has. "We have been expecting a rebirth for 15 years but it still has not happened," says Lakey.
This raises the question whether the industry has misjudged the potential of the IP sector and whether it is, in fact, always going to remain a niche market. "I hope this is not the case because it deserves to be one of the main protection products in the market," says Kirwan.
Slow improvement
Despite the gloomy outlook, he remains positive. "Sales will never increase as long as things remain the same. However, the good news is that I detect that the debate around changing the income protection proposition is starting to take place, and by bringing on change we could make the product more compatible.
"The process will, however, be more of a marathon than a sprint, so we are unlikely to see any immediate changes," he admits.
That said, no matter whether this coming year will be the year when the industry will start taking a serious look at remodelling the cover, there is still plenty that advisers could do to help increase sales of IP in terms of informing consumers of its existence. Because, after all, it does not matter how great the product is if intermediaries don't show their clients the true benefits of the cover.
