The Government has announced a policy of cutting across all departments. Peter Barnett assesses what this regime of a thousand cuts means for the protection and health intermediary
When Cat Stevens wrote The First Cut is the Deepest in 1967 he could not have known that 43 years later he would be proved so wrong. In fact, the recent Budget showed that to combat the huge fiscal burdens we face, our new Government plans to cut and cut again at the public sector - and if the medicine doesn't appear to be working then the next cut may well be much deeper than the last.
In his budget George Osborne predicted a very hard ride ahead for all of us, particularly in terms of Public Sector jobs, and went on to suggest he is actually looking at cutting the welfare bill by more than the £11bn he had previously earmarked.
For if other departments struggle to find their 25% cuts then the Department for Work and Pensions' (DWP) budget may be looking at something closer to a 30% cut to make up the slack. The devil will be in the detail, which we will not know until October's Spending Review, but while nominally the NHS budget is ‘ringfenced' in fact this promise includes an existing £20bn cut in expenditure.
The British Medical Association (BMA) recently pointed out that in the Health Secretary Andrew Lansley's own Cambridge constituency, Addenbrooke's Hospital is planning to sack 170 nurses and up to 500 staff in total over the next year. In a survey the BMA found that 43% of those Trusts who responded said there was a freeze on recruiting doctors and nurses, and 40% said that patient treatments, including varicose vein operations and blood tests, were being rationed.
An outcome of NHS or Welfare cut-backs could be openings and opportunities for alternative funding and mechanisms, and Protection Insurance is certainly a good candidate for a key role in the mix.
As well as medically assessing all Disability Living Allowance applicants, in an income protection context one plan is to bring all existing Welfare-to-Work programmes together to help people back into work. A consistent theme is an emphasis on the greater involvement of non-public sector service providers.
In risk management terms one would think that the insurer's experience bank would be of significant value here in carving out business opportunities, both in the product context, with group business via employers, and in the services context with assessment, claims management and intervention products like absence management systems and Employee Assistance Programmes.
Regarding pensions savings, the Coalition has said it will simplify the rules and regulations relating to pensions. This includes a review of National Employment Savings Trust (NEST), particularly around issues like auto-enrolment, and the abolition of compulsory annuitisation at age 75.
While only a minority sport, the latter may also offer fresh opportunities to the industry. For, while it is rare for the need for serious long term care (LTC) funding to surface below 75 years of age, many older people with pension annuities are surprised to find that if they subsequently require care funding, despite having a large pension fund and a shorter life expectancy, they cannot use their pension fund to pay for their care.
Adding to the confusion
To their confusion they are obliged to fund their care through a completely separate product, such as an immediate need care annuity or via an equity release plan. If the pension fund were still unnanuitised then it may be possible to use that to purchase a more suitable care focused impaired-life type product, with the underwriting based on their new, and much shorter, life expectancy.
The proposed abolition of the Default Retirement Age (DRA) and the speedier raising of State Pension age (SPA) to 66 years may also provide interesting opportunities for protection providers. A key issue for employers will be how do they retire individuals whose capability is failing? If, as part of its annual performance appraisal scheme, the employer had taken its standard job skills and competency criteria and added a complementary physical and mental capability assessment, this capacity dilemma could be resolved - at any age! Such development must be of interest to both Permanent Health Insurance (PHI) and Income Protection (IP) providers.
In terms of LTC, as life expectancy increases along with dementia rates and the gap in funding for elderly care estimated to reach £6bn by 2020, a new commission on long term care, to report within a year, is to look at the options to pay for care.
According to the Care Services Minister, the Lib-Dem Paul Burstow, ‘all options will be looked at to pay for care [and] the key thing [is to] make it clear how much you as an individual will be paying in for your care and how much the state will provide.' To date, one of the major factors holding back the growth of LTC products in the UK has been the complacency of individuals regarding the risk of future need for care and of Governments' complicity in terms of overstating the levels of public care provision that will be available. If both these illusions are really to be finally shattered then the task of selling care products may well be made a whole lot easier.
Economic hurricane
For the FSA, the economic hurricane has already crashed ashore and proven terminal and the resulting regulatory structural upheavals, including a new Consumer Protection and Markets Authority, accompanied by ongoing limitations on the flows of capital, mean that financial services itself will not be immune from change.
It is reasonable to predict further merger and acquisition in the sector and the additional capital costs incurred by Solvency II, when it comes into force in 2012, are likely to make operating life funds even more expensive and providers with large annuities' books will look to raise fresh equity and reduce costs.
The raison d'être of the proposed Resolution takeover of Axa's life & pensions business is based on cost reductions derived from the merger of the Axa Business with Friends Provident. These reductions can only come from staff and/or location trimming. Similarly commentators allege that Aegon's plans to cut costs in its UK life and pensions operations could mean almost 1,000 jobs lost by the end of 2011.
This is likely to be only the start of a significant reshaping of the Protection market and its players, which returns us to the Cat Stevens theme. In terms of the short term outlook at least, with the potential for a double-dip recession to complicate matters further, we should all be prepared for a really ‘Wild World' over the next year or two.
Peter Barnett is a policy adviser in the House of Lords, an Advisory Board member of the Society of Later Life Advisers and Chair of the Continuing Care Conference
