Situation critical

Data from the latest instalment of Swiss Re’s annual report on the protection sector, entitled Term and Health Watch 2016, shows that the number of new income protection (IP) policies sold has soared by 10.7 per cent over the past year to 107,302.

According to the study, the upward trend is also applicable to the amount of sales of whole of life products, which grew 7.3 per cent to 294,074. The majority of these sales are ‘guaranteed acceptance’ policies, where no financial advice is given as part of the buying process,

In contrast, 2015 saw a 7.6 per cent fall in new critical illness sales to 430,127 – mainly driven by a fall in cover written as a rider to a term assurance policy.

Maxine Udall, marketing and research manager at Swiss Re, and author of the report, said: “It’s great to see new sales of pure-term life, income protection and whole of life cover increasing. The fall in new critical illness policy sales is mainly a result of lower mortgage-related product sales.”

Term Assurance

One of the more notable findings of the 28-page dossier relates to new D2C term-assurance sales, including policies with critical illness riders – which soared by 216 per cent to 115,633 last year, up from 36,586 in 2014.

The impressive increase in the ‘direct’ distribution channel is somewhat attributable to its redefinition in this year’s report from ‘other’ which was used in previous reports. As a result, some providers have changed the way they classify sales for the report – accounting for approximately 25,000 of ‘direct sales’.

Meanwhile, directly-authorised term, where regulatory responsibility for product advice and sales lies with the distributor – which includes IFAs, limited panels and firms that are directly-authorised and which arrange products on a non-advised basis – still makes up the lion’s share of distribution in this category, despite a fall in the number of sales by 2.4 per cent to 868,629.

Ben Sear, managing partner at Greater Manchester-based Martin-Redman Partners said: “Companies such as Tesco and Asda now sell life insurance. These brands are household names, so many people would trust the services they offer. Applications can be completed in a short period of time online and involve little paperwork. My concern is that many people are taking out a policy without actually understanding what it covers.”

He added: “There will always be clients who will appreciate the value of financial advice whether it is face-to-face or robo-advice. I do not think IFAs have been brilliant at selling protection. I think we focus more on investments, which is generally considered a more interesting area.”

Tied sales have also increased from 117,169 in 2014 to 149,244, while bank sales have experienced a reverse of fortunes, falling 48 per cent to 122,250.

Mr Sear said: “There is a huge lack of trust in banks. They are blamed for the financial mess that the country is in. Clients are aware of high-profile scandals, such as the payment protection insurance mis-selling scandal, and it is going to take a long time for consumers’ faith in banks to be restored.”

In 2015 there was an overall increase in the sales of life insurance policies that provide coverage for a certain period of time of 2.4 per cent to 852,725 compared with 2014.

The mortgage marketplace has traditionally been an important source of new protection business, but despite an 8 per cent rise in gross mortgage lending in 2015 to £220.3bn, fewer consumers are arranging protection on the back of their mortgage transaction, according to the report.

This has had a knock-on effect on new individual term sales of decreasing term assurance, which dipped by 5.6 per cent to just over £225,500.

In addition, the report also blamed the mortgage market review for the decline in protection sales.

One product provider quoted in the report said: “The elongated mortgage process makes it harder to introduce protection conversations and keep the customers’ attention, particularly with existing, complex propositions. This drives sales down, with fewer people willing to enter the conversation in an advice-led market.”

The report added that “far too few” people have cover in place to protect their mortgage in the event of long-term illness, highlighting a decrease in term with critical illness sales of almost 10 per cent to 403,000.

The report highlights that the growth in income protection sales has in part been influence by the charity-led 7 Families initiative, which raises awareness of the devastating impact of disability and long-term illness on families’ finances.

In spite of this, the total sales figure indicates that the product remains a niche proposition.

Steve Carlson, chartered financial planner at Cardiff-based Carlson Wealth Management, said: “Out of the three main protection products, income protection is often last on the list. A lot of people take out critical illness instead, but it is a lottery – you have to have a specific type of cancer, for example, for the policy to pay out.

“A lot of people are dubious about this type of policy because they do think they pay out. People are living longer, but many think they will never be seriously ill at some stage in their life.”

Most business continues to be written to ‘retirement age’, but 38 per cent of new IP business is written on a limited payment term basis, compared with 34 per cent in 2014, as people focus on the short-term, the report said.

It added: “It can only be a good thing that the number of people covered is growing, albeit modestly. Sometimes this can be driven by the lower cost of a limited payment term product. Yet, at a time when people are working later in life, are we using cost as an excuse to defer the problem?”

Looking ahead, the report stated that the biggest challenge for the industry was to adapt the ways in which it interacts with consumers. Ron Wheatcroft, technical manager at Swiss Re, said the adoption and use of technology is the solution for distributor and customer engagement.

However, Mr Carlson said: “Technology will simply commoditise protection, and people will just go for the cheapest option which may have larger deferral periods or shorter payment periods. The lowest premium is not necessarily the best answer.”

Myron Jobson is a features writer of Financial Adviser