A rise in buy-to-let purchases during a turbulent five years in the housing market means rising property sales no longer signal a boom in the protection market, writes Peter Madigan
The links between the mortgage market and protection product sales have never been disputed. Just as the adage that protection is not bought but sold remains true, it is undeniable most products are sold on the back of a major life event.
Such occurances - births, marriages and deaths - are relatively rare. And while they lead people to look at the financial provision in place for their families should they die, often they do not cause people to take action.
Buying a house, however, and the financial advice that accompanies it, presents advisers with an unparalleled opportunity to cross-sell a protection product that will ensure the financial stability of the family if the breadwinner died.
Complacent
This model has been the foundation on which protection sales have been built for decades and undoubtedly some advisers have grown complacent, thinking because this is how it has been for years, this is how things will always be.
What some intermediaries do not take into account, however, is the near constant changes in the housing market. With protection sales inextricably linked to mortgage transactions, even the most minor fluctuations in the market have the propensity to impact massively on protection sales.
This relationship is not in question, but is there any tangible evidence of a direct correlation between housing and protection sales?
The changes in mortgage lending in the last five years provide an interesting opportunity to explore how much of an effect rising house prices and other factors are having.
The increase in average UK house prices in the last five years has been staggering. According to the Office of the Deputy Prime Minister (ODPM), the average house has risen in value from £101,550 in December 2000 to £185,788 in December 2005.
This growth peaked between 2002 and 2003 with an average increase of over £27,000 in just 12 months. The following year saw an average price rise of £24,000, although increases had slowed to a relatively small £5,000 increase by 2004-2005.
Meagre
This peak was not seen in new individual protection sales over the same period, though. Data from the Swiss Re Term and Health Watch 2005 revealed term assurance, critical illness (CI) and income protection (IP) sales all peaked between 2001-2002.
That year saw comparatively meagre national house price increases of £11,000. New protection sales, though, can not be relied upon to provide a definitive picture since the data does not differentiate between new and re-broked business.
Perhaps a better measure of the health of the mortgage market is the number of property transactions that take place annually. A rough correlation seems to exist between new protection sales and the number of properties that actually change hands. But once again the indicators are far from conclusive.
ODPM data shows a sharp increase in house transactions in England and Wales, from 1.46 million to 1.59 million between 2001 and 2002. Protection sales enjoyed a similar jump over the same period and the following year both markets experienced substantial declines.
This correlation loses credibility, however, when data for 2004 is included. Although house transactions rocketed from 1.34 million in 2003 to 1.78 million the following year, protection sales fell away over the same period.
Buy-to-let
Advisers think amateur property developers may have something to do with this.
"Landlords who buy to let simply do not invest in protection products like a homeowner does. If 10 houses were bought by first-time buyers you could expect to sell at least eight protection products in conjunction with those mortgages. With all 10 sold to let you wouldn't sell any protection," says Richard Verdin, sales and marketing director at Direct Life.
If it is hard to analyse why the market has behaved the way it has in the past, accurately predicting the future of the mortgage market - and, by extension, the protection arena - is a treacherous endeavour indeed. Interest rates are certainly going to play an important part, although Verdin doubts cutting rates will automatically mean a boom in protection sales.
"For people taking out a mortgage then yes, they may be more inclined to spend the extra money they have on protection, but for existing customers that extra cash will be spent on holidays and cars and all the dozens of things that people have on their wish list ahead of insurance," he says.
Perhaps a more important factor could be the boost offered by the rejuvenation of the stock market.
"There has to be an equilibrium to allow the first-time buyers back into the market and I can see that coming through the stock market.
"As its prospects improve we are going to see investors moving money out of property and into stock, allowing new blood into the market and hopefully boosting protection sales," says Andrew Cook, product marketing manager at Standard Life.
If the Bank of England base rate is cut later this year, as is widely expected, and the improved fortunes of the stock market demonstrate themselves to be sustainable, this could prove the break that first-time buyers and protection providers have been looking for.
ODPM data reveals that in 2002 the average first-time buyer's mortgage repayments accounted for 18.1% of household income, the lowest figure since 1997.
More good news is also emerging from lenders - Halifax has estimated house prices will grow by just 3% in 2006, marginally more than inflation.
Low increases are also predicted by the Centre for Economic and Business Research, which forecasts rises of 4.4%, down on the already slow growth of 5.1% witnessed in 2005. This slowdown, although bad news for homeowners, may lead to more mortgage transactions and give first-time buyers a much-needed boost.
The Bank of England reports that over 122,000 new mortgages were approved in December 2005, up more than a quarter on the same month the previous year, another encouraging sign for protection providers. This increase could, of course, be due in large part to buy-to-let purchases, but crucially a slowdown might provide first-time buyers a chance to secure an affordable mortgage. Their first step on the property ladder is vital to the overall health of the entire housing market, not to mention the protection sector.
Like most things in life, the mortgage market defies easy classification or definition. Its relationship with protection sales, although undeniable, remains complex and the actual mechanics of the link between the markets are obscure.
What we can say with a fair degree of certainty is that rapid increases in house prices, like the rises between 2002 and 2004, have been detrimental to protection sales, regardless of how many mortgage transactions are taking place.
It is only with sensible price inflation that personal incomes can vaguely keep pace with, that the long term health of housing, protection and the economy as a whole can be assured.
Happily, it seems this is exactly what we can expect over the coming year, which is good news for buyers, brokers and providers.
