Resuscitating income protection

Some two decades ago, the streets were regularly visited by ‘the man from the Pru and Pearl’ – door-to-door salespeople with a brief to sell as many protection policies as possible.

However, as financial services evolved and regulation became more stringent, the business model became obsolete, so ushering in a new era for protection sales.

The sale of new income protection, standalone critical illness (CI) and critical illness sold as a rider benefit, fell by 28 per cent to 542,742 by the end of 2014 from 754,832 in 2005, according to Financial Services Authority/Financial Conduct Authority data.

In 2005, product providers were required to provide the industry watchdog transaction level data on all sales of certain pure protection products, as well as regulated mortgage contracts, retail investment products to retail and private customers.

The latest figures for the first half of 2015 indicate that the downward trend is likely to continue, with only 241,809 of such policies sold.</p><p>The outlook for financial protection appears more optimistic if the sale of life and term insurance is taken into account.

The latest instalment of Swiss Re’s Term &amp; Health Watch revealed that a total of 1,683,841 new-term, whole-life, critical illness and income protection policies were sold in 2015 – a year-on-year increase of 0.9 per cent.

However, an unnamed industry product provider quoted in the report said: “While 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.”

Emma Thomson, life office relationship director at life insurance agency LifeSearch, said: “Most consumers do not understand the likelihood of being ill long term, becoming disabled, being diagnosed with a critical illness or passing away early. Some just don’t want to think about it.

“There is also a common misconception that the welfare state or their employer will look after them sufficiently if it does. Many of our clients have no idea what they’d get in sick pay or benefits when asked, with many of these vastly overestimating what they might receive, especially when it comes to sick pay.”

The study also revealed that while the directly authorised distribution channel – which includes IFAs – still makes up the lion’s share of distribution of individual term and critical illness, the number of policies sold in both categories fell in 2015 by 2.6 per cent and 4.6 per cent to 868,629 and 304,629 respectively.

The protection business, which has traditionally been the foundation of effective financial planning, has seemingly been relegated to obscurity by many advisers who tend to give greater focus to investments and pensions marketplaces.

Innovation

It would appear that the industry providers have taken steps to make protection more palatable for consumers and intermediaries alike.

In early August, AIG Life launched Key3 – a stripped-down critical illness product which covers against what it considers to be the three most common debilitating conditions: cancer, heart attack and stroke.

Speaking to Financial Adviser, Adam Winslow, chief executive of AIG Life, said that the product, which is also available with life cover, is targeted at young and less affluent adults who fall into the ‘generation rent’ bracket.

The products have been designed to sit alongside the provider’s existing and more comprehensive CI, and CI with term assurance covers which protects against 80 conditions.

Mr Winslow said the firm’s intermediary partners displayed an appetite for a simplified product that was not labour intensive from a due diligence point of view and had a price point that was likely to whet their clients’ appetite.

He added: “The basic level of awareness on all levels of finance is not as it should be, but we are trying to make it simpler and straightforward as well as cheaper for people to protect themselves against the most serious of conditions.

“The last thing mortgage advisers, for example, want to do after going through a lengthy mortgage application process with their client is to spend a great deal of time explaining the ins and outs of a CI policy to a client who probably only requires basic cover.”

Like conventional CI policies, the value of monthly premiums are dependent on a number of factors, including age, health, employment, the amount of cover taken out and whether the individual is a smoker or has smoked in the past.

Aviva told Financial Adviser earlier in the year that it planned to release news products before the break of the year. At the time, Louise Colley, managing director of protection, said future innovations would all be based on its Aviva Life Protection Solutions platform, which was launched  in April last year.

A spokesman for the firm declined to comment on speculation that the suite of products could include a stripped-down offer covering a small number of conditions, but said the new suite would be an “exciting development for the protection market.”

LV, meanwhile, has taken a different tack. It claims to be the only provider in the UK to offer specialist income protection products as part of a wider protection plan for people in occupations that are more expensive to insure, such as construction workers, nurses, teachers and the self-employed.

PruProtect was one of the pioneers in utilising personal data on its health and lifestyle to offer rewards and cheaper premiums to those deemed to be maintaining a healthy lifestyle.

The initiative has been continued under the guise of VitalityLife, after Prudential disposed of its UK health insurance and protection to South African insurer Discovery.

Alan Lakey, senior partner at Hertfordshire-based Highclere Financial Services, said: “Those who have brought a protection policy hope they are wasting their money, but appreciate the ‘peace of mind’ factor that having a policy in place gives. It makes sense for providers to sweeten their deals by offering things free, such as a radio, clock or a gym membership.

“There have been products in the past that protect against a small selection of conditions in the past. However, these products were not always cheaper than some of the more comprehensive policies offered by competitors.”

Myron Jobson is a features writer at Financial Adviser