With premiums shifting by as much as 30 per cent as a result of the EU gender directive and the income minus expenses (‘I-E’) tax changes, the individual protection market has experienced significant upheaval over the past 12 months. But as some normality returns to the market, insurers are keen to capitalise on some of the lessons they have learned.
Removing gender from protection premiums meant there were obvious winners and losers. While shorter life expectancy and a higher risk of serious medical conditions meant men stood to see their life assurance and critical illness insurance premiums increase, a lower probability of long-term absence meant income protection premiums would increase as rates were equalised.
For example, although exact movements are dependent on age, figures from LV= indicated that, on average, male premiums for life assurance and critical illness would fall by 10 per cent and 5 per cent respectively, with income protection premiums increasing by 25 per cent. Similarly, although average female premiums were set to fall by 30 per cent on income protection, they would increase by 20 per cent for life assurance and 10 per cent for critical illness.
However, while the anticipated reductions in some premiums potentially left some room to rebroke policies after the gender directive came into force, once the I-E tax changes were thrown into the mix, the opportunity to do this was reduced. “Some premiums were set to fall as a result of the gender-related changes, but I-E meant that overall premiums increased,” says David Williams, director of group protection and a member of the protection leadership team at Friends Life.
Pricing progress
While actuarial departments worked hard to determine new pricing for 2013, market forces meant repricing activity was inevitable as insurers battled for position.
Mark Jones, head of protection at LV=, says this is now beginning to calm down. “There was a flurry of repricing activity in the first quarter and, to a lesser extent, the second quarter as we tried to fine tune to accommodate the new risk of gender mix but this has certainly settled down in recent months.”
Now that pricing has stabilised it is possible to see how the market has shaped up. While the trend has largely been upwards, some areas of the market have seen more significant hikes in the cost of cover.
According to Highclere Financial Services, which compared premiums from October 2012 with those in July 2013, while a 30 year old female non-smoker would have paid £25.07 for £100,000 of level term with integral critical illness from Legal & General last October, her premium had fallen slightly to £23.77 this July. Conversely, if she smoked, the cost of cover would have increased from £31.93 to £37.86.
The difference is even more marked for an older smoker. For instance, the same cover would have cost a 40 year old smoking female £73.04 last year. But, with the premium now at £88.48, she would have been expected to pay more than 20 per cent more this year for the same cover.
Some premiums have escalated even more steeply. For example, the figures from Highclere show that the premium for a 40 year old female smoker has increased from £71.73 to £102.96 on Bright Grey’s Lifestyle Protection Plan. However, for a non-smoker, the increase is smaller, with the premium rising from £48.84 last October to £58.32 in July.
Broaden the cover available and premiums increase further still. For example, the figures from Highclere show that the premium for a 40-year-old female smoker has increased from £71.73 to £102.96 on Bright Grey’s Lifestyle Protection Plan, which includes critical illness cover as well as life assurance. However, for a non-smoker, the increase is smaller, with the premium rising from £48.84 last October to £58.32 in July.
Alan Lakey, partner at Highclere, says that, overall, smoker rates have been the most affected as premiums have settled. “Older smokers have taken the brunt of the premium increases,” he explains. “The under-30s – smokers or non-smokers – have only seen their premiums increase by a matter of a pound or so but, for older ages, smoker rates have increased by 50 per cent plus,” he says.
Sales activity
The upward pressure on pricing coupled with the cut-off point for gender specific premiums has also affected sales volumes with insurers experiencing a huge surge in business in the run up to 21 December. Figures from the Association of British Insurers (ABI) show that while sales of individual protection products were steady during the middle two quarters of 2012, at £176.6m and £180.3m, new business increased to £208.2m in the final quarter.
But, with the new pricing in force for the start of this year, sales have been much more subdued. ABI statistics indicate that industry sales slumped 25 per cent in the first quarter of 2013 to £156.3m.
Results from individual insurers support this. Legal & General saw a 25 per cent reduction in sales of individual protection products in Q1 of 2013 compared with the same period the previous year. This meant sales for the first half of 2013 were down to £65m against £72m in 2012 .
Likewise, although it reported a 41.3 per cent increase in total gross written premium compared with the same period in 2012, Ageas Protect saw its new annual premiums fall by 5.3 per cent to £8.5m in the first quarter of the year as the changes in premiums took effect. Friends Life’s results followed the same pattern with Mr Williams describing it as “feast and famine”.
But, while this created workflow issues for some insurers as they dealt with the rush in the lead up to the introduction of the gender directive, overall many have found that business levels for the six months straddling year end were comparable to the previous six months.
Advisers are also reporting changes to their business levels. For instance, Mr Lakey says that, new business aside, it has been a quiet year. “I did expect this. Last year was very busy because so much business was rebroked. This year my protection business is mainly in three areas: first-time buyers, people increasing mortgages and former smokers who gave up last year,” he says.
Business revival
An increase in business levels is likely though as the property market continues to recover. Figures from the Council of Mortgage Lenders (CML) show that in the second quarter of 2013, lending to first-time buyers returned to levels last seen in 2007. Furthermore, the 25,300 loans made to first-time buyers in June represented a 30 per cent increase on the same month last year.
In support of this renewed stimulus, there are signs that insurers’ business levels are beginning to return to normal. In the second quarter of this year, for example, Legal & General’s individual protection sales figures were up 6 per cent against the same period last year.
But, although insurers are pleased to see some normality return to the protection market, many anticipate further changes. Friends Life’s Mr Williams expects more product innovation and is surprised no one has launched the anticipated ‘pink and blue’ products. These would circumvent gender neutral pricing by providing cover for gender-specific conditions such as breast, cervical or testicular cancer.
What may be stalling this type of product development is a broader requirement to raise awareness of the need for protection. “The wonderful thing about the gender directive was that it provided the perfect excuse to talk to customers about protection,” says Phil Jeynes, head of account development at PruProtect. “People do not think they need protection so we need to generate ways to create this conversation ourselves.”
So far this year product development has focused on doing exactly this. For example, LV=’s enhancements to its critical illness plan added in higher payments for more serious diagnoses but it also extended the range of conditions that would trigger a payment to include several that are not life threatening.
This type of development helps to make protection more relevant to a younger customer, who can find it difficult to appreciate the need for cover for serious conditions such as cancer and heart disease. As a result, other insurers are expected to announce similar initiatives in the next few months.
So, while the move to gender-neutral pricing may have resulted in a temporary stall in sales, the transition has taught the insurance industry an important lesson. By developing ways to make products relevant, insurers can keep the protection message alive.
