What lies ahead?
The latest COVER Think Tank looks at the state of the protection market in 2005 and beyond. Johanna Gornitzki reports
Angela Faherty: The main focus in the protection market at the moment is the critical illness review. What issues has this raised ?
Nick Kirwan: Maybe I could start off with a bit of background. We have been seeing premiums for guaranteed critical illness go up by something like 60% over the last few years. I think some people have been waiting for and are looking forward to getting the review as it may help stabilise the market. From that point of view, I think it is important that the Association of British Insurers (ABI) did do something because if we had not, and just watched premiums go up 60%, then I think we would have been accused of sitting on our hands.
Angela Faherty: What reaction has there been to the proposals?
Peter Chadborn: We tend to respond to the information that comes out, and then react accordingly.
Nick Kirwan: I really do hope that IFAs will respond to this consultation and I hope people do not think that we are not going to take their views onboard.
Richard Walsh: The review is very wide-ranging but one of the key elements is the proposal to allow companies to offer different levels of cover for cancer. We currently have a set of common definitions, which we put together under consultation with the Office of Fair Trading (OFT). We have had a period of stability in the critical illness insurance market and I think many would argue that that period of stability has instilled confidence in the product. However, there is also a concern with future medical advances during the diagnostics and the treatment, which may mean that the current product may not be sustainable. What we are consulting on is whether or not there should be scope for innovation and what restraints from innovation there may be, and there were a number of options in the paper on that.
Nick Kirwan: There are three aspects to this paper. One is about trying to improve clarity, the second is about future proofing and the third is about the choice of two cancer definitions. We are recommending the first two changes, whereas the question of whether we should have another cancer definition is very much an open question. Here is an idea that would effectively make three product types available – critical illness as we know it, potentially a staged cancer product and potentially a budget product which would only use the harsher definitions.
Angela Faherty: What are people's feelings on this?
Tom Baigrie: The underlying view is that any change or development in the product, if it isn’t rolled out extremely carefully and doesn’t take consumer opinion groups and other opinion forums into account, could cause nearly as much damage in the short term as the good it may do in the long-term.
Sue Elliott: I think there are some positives in the review as I think it has improved clarity. For example, I like the new descriptive headings and the future proofing.
Tom Baigrie: A lot of the problems with critical illness are because you cannot explain all the definitions to a client. So as an adviser, no matter how ethical you are, you have to gloss over the minutiae of the definitions.
Sue Elliott: What about using the guide to the definitions that was released in November 2004?
Tom Baigrie: You could easily use that to protect yourself from future litigation, but that is not really what we are about.
Peter Barrett: This is highlighting issues at claims stage. You have got to explain what the cover is for, because at claims stage people think that if their policies have cancer cover it means they can claim for any type of cancer. If the review would make people more aware of what their cover is, surely that can only be a good thing.
Amanda Kerr: My concern is that the quality of the product is going to be questioned.
Alison Flintham: I think we need to get a balance between customer clarity and making sure that when people claim they understand the extent of the cover, while at the same time remember that if we are not selling any of these products then nobody is going to claim.
Peter Barrett: I think insurers have come up with various problems over the years and we do not want to make another one.
Morwenna Edwards: I think anything that gets people talking about critical illness cover is positive. There are an extraordinary number of people who come and see me who have critical illness policies yet have no idea what the small print says. I take away the policies and analyse the small print, sometimes I find they could get cheaper cover but this would mean giving up something else. Occasionally, they want to swap a whole of life policy for a term policy, but once they realise the real value of critical illness, nobody wants term. Everyone wants it to cover them for their entire life.
Angela Faherty: When will total and permanent disability (TPD) be looked at? What are the plans with that?
Nick Kirwan: Next year. There are some ideas on the table and one is to look at the TPD claims we have had in the past, categorise them under various headings, then group them into however many categories is appropriate, each of which would have specific definitions. So rather than relying on the general definition we currently have, we would have specific definitions for those illnesses. This would then replace TPD. One of the attractions with this is that it would put some clear water between what there is now and what may be in the future, because even if we made TPD absolutely perfect in the future and continued to call it TPD, it would still suffer from that hangover from the present confusion.
Morwenna Edwards: If you become condition specific on TPD, then that would exclude the advances in medical sciences.
Nick Kirwan: Things that are TPD now are less likely to be TPD in the future because of medical advances. I do not think we could ever come up with something that is completely bullet proof, but if we could make it significantly better then that would be a start.
Peter Barrett: Yes, it has to get better.
Angela Faherty: Moving onto income protection, do you think the market will ever get its day?
Amanda Kerr: I think it will get its day, but I think you have to look at it from an industry level.
Tom Baigrie: There is a more competitive attitude about income protection than there may be about critical illness. This is because income protection has a claims history going back many years, while the critical illness boom only happened a couple of years ago. We are not comparing like for like. I think for me, the issue with income protection is that it has fundamentally one definition. Now, we could work on that definition for a very long time. Whatever we achieve, it has got to be simpler and therefore clearer than the 19 or 25 multiple TPD definitions that we have to come up with on the other side of the coin.
Angela Fahert: So what is the answer?
Tom Baigrie: I would like to see the huge amount of industry creativity that the ABI is currently putting into remodelling critical illness cover – a task that is probably never going to be resolved until medical science finishes its work – being put into improving income protection, in particular on the claims side. This is because the handling of income protection claims leads to the vast majority of problems with this product. Income protection is a basic product that is much easier to improve than critical illness ever will be.
Richard Walsh: As with critical illness, with income protection we have a Statement of Best Practice and we also have a consumer guide. The Statement of Best Practice is largely devoted to dealing with claims issues, while the consumer guide is about taking the consumer through the choices they need to make when buying the product. What we have not done is to move anywhere towards a common definition. Income protection is due for review next year, but we will need to be careful as to what we do in terms of commonality as it has to address consumer detriment issues and not in any way restrict the market for the sake of it. And that is a balance that we are trying to achieve.
Peter Chadborn: One of the simpler reasons why more critical illness is sold over income protection is that most people think of protection when they get a mortgage, and the current income protection is a more complicated sale. It is easier to get life cover with your critical illness insurance.
Morwenna Edwards: I think there is confusion among consumers regarding the difference between income protection and accident, sickness and unemployment (ASU) policies. A lot of this stems from the fact that we have a whole new group of people who are selling income protection, who have a background with selling mortgages, and that causes a lot of problems.
Angela Faherty: I think the problem is that people do not understand income protection, and there are a lot of mortgage advisers that perhaps do not understand the product either.
Nick Kirwan: Yes, I think we should try to make income protection easier to understand.
Tom Baigrie: At the moment, the conditions under which advice is given is to some degree dictated by the pricing levels non-advisers can achieve. In other words, for advice to be properly given it has to be done pretty short and sharp in order to match those kinds of prices, because those non-advisers are in fact sponsored by the same major providers that sponsor advice. I think there is a fundamental problem that advice has to compete with its cheaper sister over the phone or via a website. Another thing is that income protection is not and has never been ASU. That is a con and you should not be able to sell ASU as income protection on the web or anywhere else.
Nick Kirwan: Why did advisers latch onto critical illness and not income protection?
Tom Baigrie: Bancassurers really led the way when critical illness cover was launched, and the boom in this market– with huge sales figures – got everyone moving. Advisers have to follow a vogue. While income protection is simpler than critical illness cover, it is harder to sell.
Nick Kirwan: Because people are not naturally excited about financial products they would really only go to certain lengths and spend so long searching to find out about them, and beyond that, they just shut down because it gets too difficult.
Chris Cummings: Maybe Tom’s wishes are about to come true. The FSA has launched a scheme looking at ASU and its problems in combination with mortgage sales and we are eagerly looking forward to the publication later this autumn.
Tom Baigrie: Nick made a point earlier about the consumers’ resistance to investigate financial products and I think that is a very valid point in terms of making things difficult to sell, except that in a regulated industry it is our job to explain and take the consumer through that barrier. Otherwise we would be letting them down and in the end we would have to pay for it. However, that has to be the adviser's skill. I think the industry is more than capable of turning around income protection and I think we are seeing income protection sales growing very fast at the moment and I do not see why that could not continue.
Angela Faherty: Looking at pension term assurance, what threats or opportunities may this give rise to next year.
Richard Walsh: This is a really interesting question. I would say that there are no reasons why you should not be able to sell this product under Insurance Code of Business (ICOB) rules. There is no logical reason for this distinction.
Tom Baigrie: If we took a little poll around the table on how long pension term assurance will last in terms of the matter of budgets from April 2006, how many think it will make it through that round? About half of you believe so.
Nick Kirwan: Can I put some numbers on this. If you believe that the term assurance market is about 1.1 billion policies a year, and if you assume that the average tax rate is slightly biased towards higher rate tax payers, with the average tax rate of 35%. If you then assume that something like a third of these policies would become pension term assurance, then the gross cost to the Treasury would be around£50m a year. However, do not forget that life companies will not be able to set their expenses against tax so insurers will pay more tax through the life offices tax option, which has to be netted off against that. So the net cost, I estimate, would only be around about £12m a year.
Tom Baigrie: That is only a tenth of what other actuaries estimate.
Nick Kirwan: OK, but even if it is a tenth, which is lets say,£120m, the pension market that sits alongside has £4bn worth of regular claims – with£1bn-£3bn worth of regular premiums last year, meaning the tax relief from pensions is over £1bn a year. Compared to that, the tax relief on pension term assurance is nothing.
Tom Baigrie: So you think it will last?
Nick Kirwan: Yes. Sue Elliot: I think the new pension rules are going to affect companies differently, depending on their current package solutions.
Tom Baigrie: We are expecting a lot of new providers to come to market.
Nigel Bradshaw: In due course, pension term assurance will settle for a share in the market. I think what is more interesting is what will happen with people churning, with more business moving into pension term assurance. I think we are going to see a lot of that happening and in a short space of time.
Nick Kirwan: I think it will probably take longer than you would like to imagine. There is a lot of inertia. There are an awful lot of people that could save money on term assurance right now, by changing to a cheaper premium for example, but they don’t. However, if we do not as an industry use pension term assurance as a way of reaching out to new customers to help close the protection gap then that would be a missed opportunity. I do think it is a big opportunity for us in the industry and I do hope we will focus on that. Let’s try to break into this protection gap.
Peter Chadborn: Yes, in particular when it comes to the corporate market. We talk about the protection gap but it is massive in the corporate market.
Richard Walsh: I think there is a real issue with the corporate agenda and a huge opportunity to move forward. The Government is very interested in discussing how to improve the health of the working population. We are having discussions with Lord Hunt who is working directly through David Blunkett and Patricia Hewitt on the agenda. In the past, we have seen employers buying corporate private medical insurance and corporate income protection because they recognise that the State would not provide it and the NHS is nowhere near recognising the need for employers and their employees. We hope the Government will recognise that, with the right intervention, it could maximise productivity in the UK. If we could make progress in this area then it effectively means that the protection gap, and the role of the state and the private sector, would become clearer and hopefully that will lead to a growth in private provision.
Tom Baigrie: That is all good news, the only thing that intrigues me is that we seem to have to wait for the Government to make a decision before we do anything about it.
Richard Walsh: If you look at the corporate private medical insurance market for example, back in 1997 tax relief was abolished on private medical insurance, but despite this disincentive the corporate private medical insurance market continued to grow whereas individual private medical insurance has stagnated or slowly fallen. So I think employers still see the benefits.
Nigel Bradshaw: I think the State has to come clean as to what it provides.
Amanda Kerr: Yes, that is actually a quite important point. Market research that came out recently revealed that most people think they are already covered by either their employer or the State and that is very worrying.
Chris Cummings: We know from our own contacts that there is a lot more interest in work-based advice.
Nick Kirwan: There are lots of untapped opportunities for protection advisers here.
Angela Faherty: Is distribution another problem?
Peter Chadborn: I think it is. In fact, when you can buy your life assurance as a commodity when you do your weekly shopping it dilutes the importance of it in the eyes of the consumer.
Angela Faherty: Do you not think that perhaps having these pamphlets in supermarkets may increase awareness?
Peter Chadborn: I don’t know. I think it would be interesting to know whether more people have bought life assurance because it is more readily available or whether they just bought it elsewhere.
Nick Kirwan: But isn’t loss of confidence in the financial services industry part of the reason why people buy from brands like Tesco?
Morwenna Edwards: But then they don’t get to see the value of our advice.
Nigel Bradshaw: One of the problems is that we are always trying to find the best product for the customers. Shouldn’t we be happy that they are at least getting some cover?
Tom Baigrie: No, I disagree. If you bought £100,000 of life cover to protect your family because you haven’t heard of income protection or you haven’t heard of critical illness and that is what you found when you thought about protecting your family, I think you are actually marginally worse off than if you were sitting there thinking "I don’t know what to do, but I know I need to do something." If you are in the latter category, then you are actually lucky enough to be able do to something to protect your family. If you are sitting there with the£100,000 of life cover thinking you have done the job, you will never get to protect your family properly.
Nick Kirwan: I think that there is a real argument for speciality and there are a lot of specialist protection advisers who really do this job very well and do give good advice and do make sure the policies are in trust and so on. But if you look across the whole industry, the sums assured that people buy from advisers are generally no higher than the policies they buy from Tesco in terms of the amount of cover. They will get more cover if they go to a specialist adviser but that is a different argument.
Tom Baigrie: On the other hand, it seems to me that the protection gap may partly have been caused by the lack of trust in the distributiononly providers and their claims handling. How do you solve the protection gap? By giving good advice I would say. You make sure your distributors are doing the right thing for your customers and their customers.
Nick Kirwan: I think the whole industry needs to constantly work on where we can win the trust back.
Morwenna Edwards: I think one of the problems we have got is that the regulator has probably done more harm than good.
Nick Kirwan: There is no doubt that the FSA has put a huge amount of red tape on the industry and we all spend our time and resources catching up with the latest regulatory issues rather than designing a new product.
Chris Cummings: It all boils down to reputation. With our current regulator, they produce new rules, which are like stones in the pond. The ripples spread out and as they spread they break down consumer trust and confidence in our industry. Advisers and insurers now need to work on re-building that trust.
