OpinionJul 27 2016

A protection black hole

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Financial protection, as financial advisers well know, is one of the building blocks of effective financial planning. It provides a financial buttress against some of the unforeseen events that life can throw a family’s way – be it serious illness, an accident, or even death.

Sadly, it is a financial necessity that has never really caught on for a number of reasons. You can blame the bad smell left by the widespread mis-selling of payment protection insurance, which has ensured all forms of protection insurance – bad and good – now get routinely stigmatised.

So, whenever I write an article on the merits – and drawbacks – of protection insurance for the Mail on Sunday, most of the online comments are either vitriolic or incorrect.

“Advertising thinly disguised as editorial,” is one common remark.

Another goes along the lines of: “Buyer beware – they are useless unless you are out of work for more than 12 months. And the payments are limited to three months only. These insurances are largely a scam.”

This sentiment is expressed whenever we write about income replacement insurance. A comment based on the erroneous view that all financial protection insurance is moulded along the same lines as payment protection insurance – short-term cover that more times than not is unfit for purpose.

It is also a financial solution that is not sexy for people to buy and for advisers to sell. Homeowners are more interested in building long-term wealth than paying a premium for something they may never need to claim on. Similarly, most financial advisers are far happier wealth building for clients than recommending them to buy a critical illness plan, a family income benefit policy or income protection.

Protection is a financial solution that is not sexy for people to buy

The result is an alarming protection insurance black hole – and one that is not going away.

The latest statistics from Swiss Re say it all. Last year, just short of 1.7m individual financial protection policies were sold in this country – an increase of 0.9 per cent on the year before. Encouragingly, sales of income protection policies were up by 10.7 per cent to just above 107,000, although Swiss Re is keen to put this into some form of context by stating that the UK has the largest ‘disability protection gap’ across all major European countries of £200bn a year.

The summary comments made by the authors of the Swiss Re report (Maxine Udall and the hugely respected Ron Wheatcroft) are damning. “Whilst the need for appropriate financial protection has never been greater, the market is currently in a phase of decline and losing consumer, government, third sector, media and financial adviser trust.”

There is more: “Protection is moving to the edge of the adviser radar as they focus on large corporate auto-enrolment and – post RDR – wealthy client pension provision, at retirement freedoms, investments and buy-to-let.”

Hardly a great endorsement of the protection insurance industry. So, what can be done to transform the health of the industry or do we just accept that financial protection will always remain under the radar?

Well the Seven Families campaign, which draws to an end this month, has highlighted what can be done to raise the industry’s profile – and show it in a positive light.

Seven families were given income replacement for a year plus copious amounts of ancillary support. Five of the seven helped were given the confidence to go back to some form of work. Indeed, Swiss Re acknowledges that while income protection remains a ‘niche proposition’ Seven Families contributed to last year’s uptick in policy sales.

The positivity created by Seven Families cannot be allowed to wither on the vine (44 per cent of advisers believe the campaign was of ‘significant value’) . The industry needs to market itself better, show off its wares and be proud of the fact that it pays out some £10m every day to help people cope with financial difficulties caused by death, serious illness or injury. It also needs to boast about the fact that it meets more than 90 per cent of claims.

The Protection Review, under the masterful Peter Le Beau and Andy Couchman, does an excellent job of bringing the industry together and stimulating debate. It can – and does - demand change, but calls for a more proactive, consumer-focused industry often falls on deaf ears.

Whenever I deal with the industry, I sense its immediate reaction is to be defensive. It hides itself under a bushel and is frightened to say anything positive.

There are other issues it needs to address. It talks in a language the public fails to grasp (you try reading through a policy document) and is hopeless when it comes to dealing with disputed claims, showing an insensitivity that borders on the cruel.

It also needs to think outside the box a little. There are thousands of people with old protection policies that are no longer fit for purpose. This was highlighted earlier this year when Hein Pretorius was denied a pay-out because he had only lost one leg in a motor accident, not both as required under his cover. Insurers should allow such old policies to be upgraded by customers, even if it means higher premiums, so that PR disasters a la Pretorius are avoided.

So, lots of simple things the insurance industry could do to widen its appeal and close the huge disability protection gap.

Does it have the zest, the willpower, the get up and go to carry them out? Not on past evidence, but then who would have thought at the start of this year that Theresa May would be our prime minister and that we are heading out of Europe?

Jeff Prestridge is personal finance editor of the Mail on Sunday