Protection products can help to safeguard an individual’s financial plans, ensuring that, if the unexpected does happen, everything from the mortgage to the kids’ education will be covered. But in spite of this, millions of UK consumers do not have any protection in place, leaving them financially vulnerable.
Just how large a problem this is was demonstrated recently by research from Royal London. It found that 52 per cent of UK mortgage holders who earn an income – equivalent to 5.2 million people – do not have a plan in place to cover repayments if they became too ill to work for three months or longer.
Instead, when asked what they would do if this did happen to them, the majority (59 per cent) said they would reduce their household expenditure with a further 51 per cent saying they would use their savings to fill the financial gap. But these strategies are seriously flawed. According to Legal & General’s Deadline to the Breadline report, with the average UK household savings just £1,250, a typical family would only be able to survive 29 days. “It is quite frightening how many consumers overlook protection,” says Mark Holweger, director of insurance at Legal & General. “The industry needs to make sure that people understand the implications of not having cover so they are able to make informed decisions about taking it out.”
Adding appeal
As this message is rather stark, insurers are looking at a number of different initiatives to encourage consumers to take out protection. One way that has proved popular is to offer free cover to potential customers.
This approach was spearheaded by Aviva, which introduced free new parent life cover back in 2009, providing £10,000 of life cover to parents up to their child’s first birthday. “It is difficult to get protection on consumers’ radars, especially as so many think death and illness just will not happen to them,” explains Louise Colley, protection director at Aviva. “With our free life cover for parents we are aiming to raise awareness of the financial responsibilities in a positive way and help advisers to increase the number of conversations they have with their clients about protection.”
Due to the success of the initiative, which is now also offered by the likes of Legal & General, Tesco and the Post Office, Aviva upgraded its cover in January. It now offers a year of free life cover worth £15,000 for each parent of a child under five years of age. The cover is available to all UK parents aged between 18 and 66 years including biological, adoptive and same sex couples, providing they have not been diagnosed with HIV or received medical treatment for cancer in the past 12 months.
Rather than use free cover to tempt new customers, insurers are also exploring other incentives. A prime example of this is Vitality Life, which offers a range of health and lifestyle benefits alongside its protection products. These include discounted gym memberships, discounted Fitbugs and other health tracking devices, and the freebie that attracts most interest, a weekly cinema ticket.
Providing these extras makes life assurance more attractive according to Justin Taurog, managing director for distribution and sales at Vitality Life. “Protection is often a grudge purchase but by giving customers something back that rewards them for being healthy it makes it a much more engaging proposition.”
Application initiatives
As well as making it easier to introduce the topic of protection to a client, the insurance industry is also working hard to ensure that lengthy application processes and premium increases do not derail a sale.
Initiatives such as UnderwriteMe and iPipeline’s Xrae allow advisers to factor in a client’s underwriting considerations at outset to deliver a more accurate price illustration.
The insurers are also exploring how they can deliver greater price certainty themselves. For example LV= runs a pre-underwriting helpline that receives more than 400 calls a month from advisers requiring insight into how it would treat a client’s application.
Insurers have also streamlined their application processes considerably over the last decade, taking out unnecessary questions and introducing tele-underwriting and tele-interviewing to gather medical information more quickly and accurately.
This has greatly reduced the number of applications that require further medical evidence. For example, although around a third of its protection business is income protection, less than five per cent of LV=’s applications require GP reports.
Data drive
But, while these initiatives have already transformed the process, Holweger believes there is more that insurers can do. “We ask a lot of questions but we could get some of the answers from data we already hold,” he explains. “When someone completes an application form it is very likely that we will already have collected details such as name, address and date of birth so it is pointless to expect them to provide them again.”
The use of data is expected to go beyond these key facts too. Big data, where insurers pull in information from readily available sources such as the government and the electoral roll could further simplify the form filling process.
But, while there is a push to reduce the amount of information a client has to provide for underwriting, there are also warnings about taking this to extremes. Colley explains: “The industry can point at the underwriting process as the reason why people do not buy but we have found that if you ask too few questions, consumers question the approach to risk selection.”
This principle can be seen across the range of life assurance products offered through different distribution channels. While the cost of a fully underwritten product will reflect the insured’s risk profile, someone with average or better than average risk will pay a premium for a light touch product sold direct online or over the telephone.
Sales strategy
Advisers also have a role to play in raising the profile of protection among consumers. Although a number of specialist advisers have successfully carved out businesses in this area, many protection sales come on the back of other areas of advice such as life assurance taken out alongside a mortgage.
But Dougy Grant, protection director at Aegon UK, is keen to get away from this afterthought mentality. “Everyone says that protection is an event-driven sale but I think it deserves to stand on its own merits. If a client is thinking about their savings aspirations, even the wealthiest will benefit from taking out protection,” he says.
By underlining the importance of protection in a client’s long-term savings and investment strategy, Aegon has successfully increased the amount of protection it sells through wealth managers. While sales across its protection business increased by more than 20 per cent in 2014, sales though wealth managers rose by 75 per cent.
The positioning of protection in the mortgage sale is also undergoing change. Almost sidelined by some advisers as a result of the more onerous requirements introduced under the Mortgage Market Review, more and more advisers are making it an integral part of the sales process.
For example, Pink Home Loans has introduced a formal protection review as a compulsory part of its mortgage advice process. Under this advisers are required to speak to clients about their sick pay arrangements and provide advice to fill any shortfall.
This repositioning of protection may serve to protect the adviser as much as the client. Justin Harper, head of intermediary marketing at LV=, explains, “It is not rocket science to see the link between affordability and protection. The regulatory landscape is all about best practice and the outcome for the consumer so I could definitely see the FCA regarding the sale of protection as a key part of the mortgage advice process.”
While the industry may be making changes that help to drive up sales, with the UK’s protection gap around the £2.4t mark, it is essential that more work is done. Developing its own initiatives, rather than having them imposed by the regulator, is without doubt the preferred route for the industry.
