OpinionMay 28 2014

Closing the protection gap

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My sources at mighty Swiss Re tell me that at the last count the protection gap in this country – the life assurance protection gap to give it its proper title – stood at a not inconsiderable £2.4 trillion.

The figure is a little out of date – three years to be precise – but I would hazard at a guess that it has not shrunk one little bit since 2011. In fact, I imagine the recession, which we are now thankfully climbing out of, has widened the gap further. £3 trillion? £4 trillion? Whatever, it is a mighty big chasm.

The gap, so Swiss Re has said, is equivalent to around £100,000 a person with the amount of under-insurance greatest among single parents, couples with children and those aged 35 and under.

The protection gap is equivalent to around £100,000 a person

The existence of this chronic degree of under-insurance may explain why all of a sudden a few of those involved in the protection insurance industry are beginning to put their heads above the proverbial parapet.

The virtues of protection insurance are being sung loud and clear for the first time in a very long time - maybe the first time in my working memory, despite the splendid isolated vocals of protection diehards Alan Lakey, Peter Le Beau and Kevin Carr (the three tenors of protection insurance).

Of course, cynics might think some of the noise is in response to the chancellor’s strangulation of the annuities market, forcing life assurers to suddenly start looking at alternative profit generators such as protection insurance. But let us give the insurance industry the benefit of the doubt for once. They do seem keen to close what is a worrying gap.

In recent years, Aviva has been one of the few insurers to blow the protection insurance trumpet, spending a lot of money on somewhat controversial “after death” adverts starring Paul Whitehouse.

I am not sure how successful the adverts have been in encouraging people to buy life cover, income protection or critical illness policies but Aviva is not for turning. Spurred on by the formidable and gutsy protection director Louise Colley, it has just published a useful report, Rethinking Protection, which includes half a dozen proposals designed to help protect UK families.

They go from the very reasonable (including protection needs within personal finance lessons as part of the national curriculum) through to the near impractical (introducing protection auto-enrolment alongside the pension auto-enrolment regime). But I take my hat off to Ms Colley and her protection team for thinking outside the protection box.

Certainly some of the proposals - requiring protection needs to be discussed when a mortgage is taken out, ensuring new parents are made aware of the value of protection insurance and making sure protection needs are considered as part of divorce or separation proceedings – are straightforward and make great sense.

As Ms Colley states in the foreword to the report: “Putting these proposals into practice gives the UK a chance to achieve real financial security, drastically reducing the number of underprotected people and ensuring that hard working families are not thrown into unnecessary financial distress by events beyond their control.” Hear, hear.

I hope she has success in progressing these ideas within the corridors of power. Certainly, they stand a better chance than the idea mooted earlier this year by Zurich Life of a £50 tax rebate for everyone who has – or buys – an income protection policy.

Of course, Le Beau and Carr continue to do their bit for the income protection cause through the auspices of the Income Protection Task Force. In the next couple of months, their “seven families” initiative, supported by Disability Rights UK, will kick into life.

In a nutshell, seven families where the breadwinner is suffering from long-term illness will receive monthly payments for a year (charitable donations) equivalent to the financial uplift they would have got if they had bought an income protection policy and benefit was being paid.

The idea is that by monitoring and highlighting the transforming impact of these payments on the seven families’ lives (as well as the benefits of supporting counselling and rehabilitation), the virtues of income protection will be brought to a wider audience. I wish the initiative great success.

Even the Association of British Insurers is keen to do a bit of flag waving for the income protection cause. Last week, it was eager to give me first glance of its claims data for 2013.

The data was indeed impressive – a lot more impressive than it used to be – with 97 per cent of claims being paid last year. For critical illness and income protection, the claim acceptance rates were 92 per cent and 91 per cent respectively.

As Helen White, the ABI’s head of protection, was keen to point out: “The insurance industry pays out £8.4m every day in individual life, critical illness and income protection insurance claims, making a real difference to people’s lives at some of the most difficult of times.”

It is a powerful message which we should hear more often. When sold properly, protection insurance can be a force for good.

And it is refreshing to report that the number of complaints about term assurance, income protection and critical illness received at the good offices of the Financial Ombudsman Service all fell in the last year.

So, to you great independent financial advisers out there in the shires, a simple message. There has never been a better time to wave the protection insurance flag. Help close the protection insurance gap. Now.

Jeff Prestridge is personal finance editor of the Mail on Sunday