ProtectionMar 9 2015

Protection has evolved, so why aren’t sales surging?

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People buy insurance to protect themselves against future events which may not happen, but that if they did would prove punishingly costly.

Cat insurance? Check. Mobile phone insurance? Check. Home contents insurance? Check. Income protection or critical illness cover in case you cannot work… not so much.

For as long as I can remember, experts have warned that the vast majority of us are under-insured. A recent report published by Royal London estimated a protection ‘gap’ among homeowners of as many of 5.2m people, who have no plan or protection cover in place to cover their mortgage repayments if they become too ill to earn.

While we think of nothing in insuring our belongings, we have to be coerced to insure ourselves. Indeed, Alan Lakey, partner at Highclere Financial Services, says that protection is a product that is ‘sold’ and not ‘bought’.

Only two people last year booked appointments with Mr Lakey to purposefully discuss income protection. He estimates that 96 per cent of all sales of critical illness accompany a mortgage.

Most of the industry also agree that more needs to be done to boost appeal to customers, ensure policies provide adequate protection against the illnesses and issues that befall customers, and to remove any lingering sense that it will not pay when needed.

The problem is that over the last decade or so the protection industry has made a number of positive changes, but industry experts state this has not made an iota of difference when it comes to sales.

Own occupation

Kevin Carr, Protection Review chief executive, says changes made include more product advertising, insurers publishing and promoting pay-out statistics, partial payments for critical illness and, critically, a move to ‘own occupation’ for income protection.

Protection adviser Lifesearch launched a guarantee in February that it will only recommend ‘own occupation’ income protection cover that will pay out if the customer is unable to do their own job, following negative press on products based on more abstract life ‘activities’.

‘Activities of daily life’ policies attracted quite a bit of criticism in recent years, following a high profile case against Scottish Provident.

Almost three years ago, Chris Hargreaves, winner of a Financial Ombudsman Service case against Scottish Provident over an ADL clause in his protection policy, launched an e-petition on HM Treasury to ban “fluffy definitions” in protection insurance policies.

“In the past, lots of insurers and advisers went down the ADL route but that has now changed. One of the big instigators for change was Chris Hargreaves. He did more with his onslaught on Scot Prov than we could ever have achieved. Own-occupation is the only way forward,” says Mr Lakey.

Addy Frederick of LV adds that a number of providers now only offer own-occupation income protection cover, which allows policyholders to make a claim if injury or illness prevents them from working in their current occupation.

“These policies offer the most comprehensive cover in the market and are simpler for both policyholders and advisers to understand when a provider will pay out and makes it easier for people to claim on. It gives clients and advisers certainty that they will receive a payout if they are unable to do their own job.”

Mark Myers, chief executive of British Friendly, adds: “While own occupation cover throughout the claim term is becoming more of the industry standard there remains pockets of ADL and suited cover which do us no credit.”

CI extensions

As well as a move to own-occupation, a number of providers have made changes to their CI plans such as increasing the type of illnesses covered as well as rewording plans.

Mr Lakey points out that it is not a coincidence that many firms are currently doing this, pointing to an Association of British Insurers working group that seeks to continually enhance and update definitions.

“Every three years, the ABI CI working party is meant to review wordings in terms of future proofing and to add clarity and transparency. As a consequence, every insurer is given a period of time – in this instance until December – to incorporate changes as a minimum into their own wordings.”

Instead of just meeting the ABI’s minimum requirements, however, insurers are choosing to upgrade plans more extensively as they will be spending thousands of pounds on new literature anyway, Mr Lakey adds.

Late last year, for example, Legal and General followed Ageas, Friends Life, HSBC and Old Mutual Wealth in updating a definition for blindness to exceed that set out by the ABI, which itself goes beyond the clinical definition.

The changes formed part of a series of updates that also saw L&G match the likes of Ageas, Aviva and LV with extensions to its definition of heart attack and stroke.

LV’s Ms Frederick emphasises that LV “continually makes changes” to its protection products to ensure good customer outcomes, but also to “make it more meaningful to advisers and their clients”.

“Many would benefit from taking out an income protection policy and we seek to make it easy for advisers to demonstrate the value of these products.”

Partial pay-outs

More and more providers are also now offering partial pay-outs to customers. This is where less severe conditions can be the subject of claims for a portion of the sum assured, with some policies even allowing the full cover to remain in place.

Ms Frederick says: “This change has seen more claims being paid when conditions are less severe, including early stage cancers, diabetes and Crohn’s disease. Typically a customer diagnosed with a condition under partial payout will receive between 12.5 per cent and 25 per cent of the full claim amount.

“At LV if we pay out a partial payment then your full cover remains in place. However not all providers do this and it’s important that advisers check the partial payments cover. Partial payments are good news for customers as claims can now be made for conditions which are not covered under a full payment.”

Importantly, in December the ABI sought to clarify for consumers the difference between ‘additional’ and ‘partial’ payments within policies, with any payout that does not reduce the sum assured now required to be referred to as an ‘additional’ payment for the avoidance of doubt.

Shock tactics

While there is no doubt that these changes have benefited the products and, in the long-term, consumers, Mr Lakey points out that sales have not increased as a direct response to the changes.

“What people should consider is: ‘how can my family pay the mortgage/survive if I died tomorrow?’”, Mr Lakey says, flagging up these kind of ‘shock’ tactics emphasise how important insurance is.

Lack of sale increases may also be due to lack of awareness, Mr Carr adds.

“It’s also important to make the public (and advisers) aware of those changes too. In this regard companies who advertise and carry out extensive PR should be commended for raising the profile of protection.

“Firms such as Beagle St, Vitality and Aviva have really pushed protection to the public and in doing so have given advisers a better way of broaching the subject.”

Indeed, the recent Seven Families campaign which highlights the real life benefits of protection has been credited with prompted a substantial increase in protection quote enquiries.

Protection must keep evolving in ways that allow the industry to prove the value the product offers, but all this is for nought if we do not directly engage people to take it on.

donia.o’loughlin@ft.com