Your IndustryJul 28 2016

Lack of competition in care funding market

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Lack of competition in care funding market

Even a decade ago, such products were scarce but realistically clients just could not see the need to pay years in advance against a future event that might not even come to pass.

Brian Fisher, long-term care marketing manager for Aviva, explains the demise of these products: “Pre-funded long-term care policies were available from the early 1990s until about 2004, by which time all providers, apart from one, had pulled out of the market.

“Sales of these products had been disappointing. They had reached a peak of almost 8,000 policies in 1996 but by 2003, had fallen to less than 3,000 policies across the entire market.”

No demand meant these products were economically unviable, the providers point out.

While immediate needs annuities, bought at the point of need, certainly meet demand, few life offices actively market such products.

For example, life and pension specialists such as LV and MGM Assurance do not operate in the market.

Appetite for innovation exists, it’s just being stifled by a lack of governmental clarity Janet Davies

While the Care Act 2014 sparked plenty of speculation about whether new products could be created to help bridge the funding gap for care, little seems to have been achieved in the years since the Act received Royal Assent.

Indeed, all respondents to this guide believe there is a distinct lack of innovation and too little provision. But why?

Apathy

As with the pre-funded care plans, general apathy among the UK populace when it comes to basic cover is partly the problem.

Steve Lowe, group communications director at Just Retirement, says: “Research from Just Retirement suggests 77 per cent of people aged 45 and above have yet to think about care or speak to their loved ones about this eventuality.”

Despite figures from Age UK suggesting an estimated 2.3m - 2.8m adults in the UK currently in need of care, people have not recognised the possibility they could require help in later life, or the fact the state may not be able to continue to support people fully should they need this type of assistance.

Mr Lowe adds: “People are not going to make provision for an eventuality they have not considered.”

Janet Davies, co-founder of long-term care fees advisory network Symponia, also believes the industry has not shown any great proactivity.

She says: “Far too many providers have sat on the sidelines waiting for a change of perception and/or legislation which sadly has not arrived.”

Consolidation

After the merger of Partnership and Just Retirement in April 2016, which put the combined market cap at £1.4bn, there are just two providers in this market: Aviva and the merged JRP Group.

A lack of competition and choice, certainly, but according to Ms Davies, this might not necessarily be bad news for your clients.

She says: “This doesn’t mean clients are getting an inferior product - far from it. It just means the margins and life expectancy interpretations are closer.” Ergo, clients are paying very similar premiums.

Lack of innovation

Then there is the regulatory environment where innovation can be costly and time-consuming.

Yet there needs to be innovation, says Joanna Fowler, head of product for Saga Personal Finance: “With an increasingly larger proportion of the population over-65, and more people likely to need care in the future, there is certainly scope for growth.”

Says Ms Davies: “Appetite for innovation exists, it is just being stifled by a lack of governmental clarity.”

Few providers would have sufficient, accurate data to be able to price this type of product without incurring an unacceptable level of risk Brian Fisher

However, Mr Fisher does not entirely agree there has been no innovation. He says: “Recent years have seen an innovative approach to the problem, with product providers including optional long-term care benefits to both whole-of-life assurance policies, and inheritance tax mitigation plans.”

Resources

According to Mr Fisher, the risk of getting it wrong due to a lack of resources, may prevent many smaller providers from offering immediate needs annuities.

He explains: “To derive a life expectancy for calculating an individual’s premium, the underwriters have to draw on accurate, specific data gathered from extensive experience of previous policyholders.

“Few providers would have sufficient, accurate data to price this type of product without incurring an unacceptable level of risk.”

In other words, it appears to be a Catch-22 situation: smaller providers do not have the sort of data to enable underwriters to calculate premia for independent needs annuities; yet because they do not provide independent needs annuities, they do not have the deep databanks that would enable them to underwrite such products accurately.

The risk, therefore, of incorrectly pricing a policy premium, is a huge barrier to entry. Add to this the expense involved with creating a new product in an uncertain regulatory environment, and perhaps it is understandable that few players operate already in this market.

Promotion

Ms Davies believes the first step is not to wait for someone to legislate before innovating: advisers and the industry which supports them should do more to promote immediate needs annuities.

She says: “Innovation is one thing but we have a perfectly good benchmark/product already available which isn’t being used anywhere near its optimal potential.

“However you voted, the Brexit aftermath’s dramatic change of guard will no doubt push care and its funding further along the to-do list.”

Mr Lowe agrees: “What is needed is a commitment from the goverment to raise awareness among people about their accountabilities to pay for later life care, rather than widespread product innovation, as people are not going to make provision for an eventuality they have not considered.”