Friendly societies have been protecting individuals’ income through their Holloway plans since the 1880s. But, while these original plans are beginning to show their age, the UK’s friendly societies are demonstrating their experience when it comes to innovation in the income protection (IP) market.
Against a modern IP plan, a Holloway scheme can look rather unusual. As well as premiums that increase with age and no differentiation between smoker and non-smoker rates, they also include an investment element, typically into a with-profits style fund, which becomes payable when the plan ends. This was originally intended to provide a lump sum towards retirement, although increases in life expectancy over the past 100-plus years have rather lessened the extent of its contribution.
The other significant difference is that there are no occupational classes. Rather than offer a cheaper premium to a lower-risk, office-based employee than to a manual worker, Holloway plan premiums are based on age alone.
Manual benefit
This broad brush approach has made them popular with advisers. “The approach of the friendly societies makes it easier to place some of the more unusual cases that would be loaded or declined by the mainstream insurers,” says Garry Webb, branch manager at Roxburgh Financial Management. “Until a few years ago they were the only real option for an own occupation policy for manual employees.”
This has changed, with many of the mainstream insurers moving away from work task-based policies to offer own occupation cover to tradesmen and other manual workers.
For example, in October 2013, Bright Grey launched a new IP product removing work tasks and extending the own occupation definition to around 95 per cent of customers. It was quickly followed by Aviva, which announced later that month that it would write all individual policies on an own occupation basis, with this definition applying throughout the life of the policy and the duration of any claim.
LV= also fell into line with its fellow friendly societies earlier this year. In March it stopped offering the work tasks definition of incapacity on new policies and now only offers own occupation. This meant that as well as offering this more generous definition to 325 occupations that had previously had task-based definitions, it was able to provide IP to an additional 225 occupations.
Into the 21st Century
While the friendly societies have put pressure on other insurers to offer more generous cover, they have also felt the need to modernise their own products. Although Holloway schemes are still available, many have launched more modern IP plans.
With these, although the investment element is usually the number one casualty, they have retained the other characteristics – no occupational classes, the same rates for smokers and non-smokers and age-related premiums – that have defined their products.
This was the case with British Friendly Society, which launched its BFS Protect plan in 2011. This is flexible, offering full cover but also the choice of one, two or five-year payment periods.
Meeting adviser demand
Steve Wanstall, head of sales at British Friendly Society, explains, “We wanted to develop a plan that was suitable for the intermediary market. Only a very small number of IP plans are sold directly to the public.”
Regulation has also forced change in the friendly societies’ product portfolio. In particular, when the Retail Distribution Review requirements were introduced at the beginning of 2013, the investment element included on the old fashioned Holloway scheme, became a stumbling block for distribution.
John Bridge, director of sales and marketing at Cirencester Friendly Society, says this was the impetus behind its My Earnings Insurance product. “We made the investment element of our Holloway Plan, Income Assured Plus, optional nearly 10 years ago and around 95 per cent of customers chose not to include it.
“But, whether it is included or not, advisers still need CF30 to recommend it, so we found that this knocked out around half of our distribution channel, including mortgage brokers,” he explains.
As well as ditching the investment element, Cirencester’s My Earnings Insurance enables advisers to tailor the cover to suit their client. Premiums can be level or age-related and there is a choice of deferred periods from day one cover through to 52 weeks. Cover can also be taken out on a split-period contract, where a proportion of the benefit is paid at the end of one deferred period with remainder kicking in after a second deferred period.
Finance free
Friendly societies have also spearheaded the development of financial underwriting-free products. First off the blocks was Exeter Family Friendly, which launched Bills & Things in 2010. This
is a short-term IP plan giving up to £1,000 of cover a month for either one or two years. The contract can run up to age 68, regardless of the number of claims.
Like other friendly society plans, it is written on an own occupation basis with premiums age-related but there is no need for financial underwriting. Mike O’Brien, head of sales and marketing at Exeter Family Friendly, says that as well as appealing to people looking for short-term cover, this makes it particularly suitable to certain types of workers.
“If someone has recently become self-employed it can be difficult to prove income, or they might have earnings that are set to increase significantly as they get established. It can also work well for people who work part-time to raise a family. Their income may only be low but, if they were ill, someone would need to look after the kids and the house,” he explains.
Premiums are based on age and the level of cover. For example a 30 year old would pay £17.48 a month for £700 of cover for a one-year payment term, or £17.81 for a two-year term. For a 40 year old, £1,000 of cover would be £28.74 a month for up to a year, increasing to £31.04 for up to two years.
Many of the other friendly societies have followed Exeter Family Friendly into this space. For instance British Friendly offers its Breathing Space plan, paying up to £250 a week for one, two or five years, and LV= its Personal Sick Pay, paying up to £1,000 a month without financial underwriting on either a two-year term or full cover.
On LV=’s plan, a 30 year old taking out £1,000 of cover with a four week deferred period would pay £14.85 a month for a two-year payment period with reviewable prices or £15.75 for guaranteed prices. For a full plan the premiums would increase to £24.95 and £26.46 respectively.
Key differences
But while there is plenty of evidence of innovation among the friendly societies, it is also essential to understand how their product features affect cover. Tom Conner, director at Drewberry Insurance, says the age-related premium is one of the key differences. “You do need to compare total premiums over the term to determine which policy will work out as the most cost-effective,” he says.
As an example, see Table, while Exeter Family Friendly is the most expensive at age 30, by age 50 it is the cheapest.
The other key difference is the lack of differentiation between smoker and non-smoker rates. Although this may seem foolhardy given the understanding of smoking-related diseases, the friendly societies argue that smoking is not a significant risk factor for IP. Serious conditions tend to take hold after retirement and the coughs and colds smokers suffer from before that point are under the radar for IP claims.
But, although these differences may seem unusual against the standard insurer product, as they enable cover to be extended to a broader range of clients, friendly society IP products have a valid role to play in protection.
And, with innovation in this part of the market putting pressure on the mainstream insurers, there are benefits for all IP customers.
