With sluggish sales, a tough economy and the government's reform of welfare provision, Owain Thomas writes that the timing is right for income protection to finally receive the level of attention it deserves
The government's spending review has made it clear that the contribution-based form of Employment and Support Allowance (ESA) for those in the work related activity group (the most commonly claimed form of the benefit) will only last a year.
When combined with already implemented changes making it increasingly harder to claim, it seems safe to say the Big Society mantra of self sufficiency now spreads into the welfare and benefits arena.
However, the government has yet to utter the magic words many in the income protection (IP) sector can't wait to hear: ‘you'd better insure yourself.'
Roy McLoughlin is senior partner at Master Adviser and also represents IFAs on the Income Protection Task Force (IPTF).
He believes for the first time income protection is on the political table and the welfare reforms are a boon to advisers who sell it.
"All roads for me lead to IP," he said.
"The government are putting their hands up and saying ‘sorry folks but benefits are going to be much harder to collect and claim, and sick notes are much harder to sign off for doctors. So there's a huge opportunity for talking to people out there.
"The one thing about us IFAs is you always need an excuse for talking to people and there's a big excuse now because this issue is on the front pages of all the papers," he added.
While the government is cutting back significantly on disability benefits, it isn't openly advertising the alternatives and nor is it likely to start doing so.
And this prompts the question as to who will raise awareness to the public about their newly increased risks and greater vulnerability to financial stress?
McLoughlin feels the failure of the Tom Baigrie led Consumer Protection Insurance Education Campaign and lack of subsequent action has left the industry lagging behind.
"The providers are missing a trick because if they had invested in more adverts and marketing in a subject that's very in the news and therefore a relatively easy market at the moment, it would pay off pretty much straight away," he said.
McLoughlin also cited the series of roadshows held by the IPTF to educate advisers in the nuances of the subject as a success in dispelling preconceptions about the product.
"Providers have also got a responsibility to help in the adviser education process," he said. "They've got to come out and help us spread the word. We need to acknowledge that IP does not have to be so fixed in its tracks. People say the cost is the problem, well I don't think it is. There is a perception in our heads that it costs a lot but we do not have to go the whole hog.
"IP can be flexible with shorter payment terms, longer deferral periods and smaller sums assured," he concluded.
It also seems that the importance of protection, and particularly IP, has caught the attention of the FSA, but this has been lost by many examining the present incarnation of the Retail Distribution Review (RDR).
Clive Waller, managing director of CWC Research is also co-chairman of the IPTF and noted that the latest consultation paper discusses advisers not understanding terms and conditions of critical illness and goes on to say they should be selling the full range of protection policies.
"There's an issue in the RDR that says investment advisers should take account of the three protection products and sell the right one to meet client needs," he said.
"In effect the FSA is saying that under RDR they expect investment advisers to sell income protection. I think that is a very big thing which has been ignored by most, mainly because most advisers have not read the consultation paper."
However, Waller agrees with the vast majority of those in the market that the impending ESA reforms are the key issue affecting the sector.
But while many people are calling for large scale industry co-operation or even partnership with government, Waller is keen to stress such an arrangement should be carefully controlled.
Bean feasts
"What we can't have is something which is seen to be a bean feast for the insurance companies," he warned.
"I know the big providers will be lobbying for something that will benefit themselves. That's not a good idea, there's got to be access for everyone and the pricing has got to be fair."
There are those that think this measure would suggest the group sector will come to dominate the protection market and while there are reasons group schemes work well, concerns also exist.
So Waller is confident that such an initiative would not signal the death of the individual market and notes that with the changes in demography and working patterns, there will need to be different sorts of groups formed.
"We are moving to a society that is less group orientated so for it to succeed it needs to change, otherwise an awful lot of people will get left out, and you can't have a government system which leaves out half the population," he added.
If the IP industry is to prove itself capable of filling the gap left by retreating state benefits, it will need to shake off the often-held belief that insurance companies do not like to pay claims.
This has been largely successful in the critical illness arena where claim approval rates are now hovering above 90% - a marked improvement over the last few years.
Such a demonstration by providers for IP would likely be essential in boosting public confidence that it is a viable and worthwhile alternative.
Both Waller and McLoughlin agree that work on producing claims statistics for all IP providers is crucial, particularly in the sale process when clients ask if a policy will pass the acid test, ‘is it going to pay out?'
And although not the sole deciding factor, the pair concur that a good payment record is a significant part of the decision making process when considering which provider and product to recommend.
From the providers' point of view, the will to succeed in this industry wide project appears present, something confirmed by Linton Penman, head of retail sales and marketing at Unum, however, achieving a standard measurement system seems to be the predominant sticking point.
"We're absolutely engaged and are taking a leading role in developing those standards," he said.
"That's been the issue that's slowed this down as different providers don't have the same data as everyone else, but I think it's just about there.
"It's a good thing and we just need to make sure everybody is measuring the same thing.
Penman is extremely optimistic for the future of the sector and is aware that the need to change the welfare system presents a huge opportunity to grow the IP market, but includes advisers in the industry's obligation to warn the public of their financial vulnerability.
"I don't think it will be easy because the British public have it firmly ingrained in their minds that ‘it'll be ok' so it will take a bit of time and effort to persuade them otherwise," he said.
"Tom Baigrie's initiative was very bold and extremely well intended, but it also showed that it's really quite difficult to get lots of different providers with different priorities and agendas to all work together. The biggest advocates for IP are financial advisers and if they are sitting down with clients doing a proper job of financial planning I find it hard to think how they can not mention IP.
"Wouldn't it be great if the industry as a whole could promote itself but that's quite hard to do, as Tom discovered. That doesn't mean we should give up, but IFAs need to do what they can and providers need to give them the support to help it happen," he added.
Neglected links
There is one issue that both the industry and government have largely neglected - the link between protection and the far higher profile pensions arena.
This was raised universally among the respondents as a key concern that needs to be given a greater profile.
It seems providers and advisers need to up their game in this respect if they wish to declare themselves as providing a truly holistic service.
Penman sums up the situation, explaining that income protection is, from his perspective, the first thing anyone should address.
"For most working people their number one financial planning decision should be to protect their income, then think about life or investing or saving money," he said.
"If you or I were to lose our income, having a pension in 40 years time is the least of our problems. We have all this focus on pensions and investments, but if we don't have an income we have no money to save," he concluded.
Hopefully the powers that be at all levels will use the present reform process to illustrate the importance of protecting one's income and help to shake the public's sense of complacency that the state will support them, no matter what.
