Despite a drop in mortgage-related protection sales, the market is bearing up in the face of the recession. Peter Carvill investigates why some areas of TA are in fact skyrocketing Click here to download pdf (PDF, 1.1MB)
Considering the parlous state of anything to do with finance at the moment, it is a surprise to see the protection markets doing relatively well and, in some places, better compared with previous years.
Overall, according to Stuart Lawson, protection marketing manager at Axa, the market and, in particular, the demand for term assurance (TA) products has thrived: "It has stood up quite well in the face of the credit crunch. Obviously, a lot of protection is sold on the back of house purchases, and with the drop off in that area, you would have thought that would have had a big impact on the market."
There are, he says, two reasons for this: "Firstly, mortgage brokers are focusing more on protection as they are getting less processing fees through selling mortgages. That's a good thing because the number of people underinsured in the UK is still a big issue. And, secondly, because of a general market focus on selling protection. The wealth management markets are struggling and advisers are concentrating on personal and business protection policies. I think there has been a bit of a shift in the market and that's helped keep volumes broadly flat this year."
The Association of British Insurers (ABI) statistics for sales of non-mortgage-related TA bear this out - at least for the first two quarters of 2008. A comparison of these two points with the previous year shows that 2008 sales began robustly, were slightly down on the previous year and yet still showed great improvement from 2006. In that year, the number of new contracts began at 169,000 in the first quarter before showing rapid increases towards the end of the year. In the first half of this year, sales of non-mortgage-related TA remained steady at roughly the same level as the year before.
In respect to mortgage-related TA, the news is grimmer because sales have been falling steadily since the second quarter of 2006.
Back to non-mortgage TA, and the ABI reports a big increase in sales. Actually, that increase should be described as 'massive'. From quarterly figures of 210,000 and 205,000 new contracts, that number rocketed to 940,000 in the third quarter - an increase of 458.5%. And those figures are correct, the ABI explains in the results table: "There was a large increase in the number of non-mortgage-related TA contracts in Q3 2008. This was caused by one company selling a large amount of business to their current account customers."
It is COVER's understanding that this was due to a bank giving these products away cheaply in high volumes. This is supported by the statistics: the value of new premiums for Q3 2008 did not rise as steeply as the numbers of new contracts. In fact, the average premium cost for Q2 2008 (total new premiums divided by number of new contracts) was £419.50. In Q3 2008, this fell to £104.25. Using the quasi-scientific method of taking the increase in value of new premiums sold by bancassurers and dividing it by the rise in the number of new contracts, the result indicates that the average value of a non-mortgage-related TA product from a bank was around £17.70. The assumption in that equation is that all increases are related to that one particular bank.
"That is a massive thing," says Gerry Warner, market manager for protection at Zurich, "and if it comes down to a bank or banks, then that particular institution is having spectacular success. I don't know if it's cheapness or no underwriting but, if you look at the term market now, then cover is as cheap as it's ever going to get."
In last year's survey of term assurance, those interviewed spoke of a price war in the protection markets. According to advisers LifeSearch, there have been more than 50 rate changes for TA products since the beginning of the year. With this in mind, and taking into account the growth in sales of TA, is there still a price war being waged?
Some such as Roy McLoughlin, senior partner at Master Adviser, do not think so: "I wouldn't say it's that. Companies do come in and out of the market but I wouldn't call it a price war."
Warner concurs: "I think pricing activity has probably lessened over the last year. I wouldn't describe it as a 'price war' but where providers have got the margins to do so, they will amend prices to get business in key areas. Zurich has carried out several reviews over the year. We've made a change and then other companies will change their rates. The effect of that is that we don't get the business we want.
"We're not saying that any provider has made wholesale changes but it has been little tweaks here and there to get the required levels of business."
He finishes: "It may not be as busy as it has been in the past but regular re-pricing is part of our market."
As for the next year, the 'credit crunch' or, more accurately, recession looks set to be the main external force on the protection market. Originating from within the insurance sector is the advent of the Retail Distribution Review (RDR) which, despite not yet applying to the protection market (the key word here being 'yet') has not made its effects fully known at the time of going to press.
It is clearly stated however on page 73 of the RDR's recently released Feedback Statement that by 2011, "New rules and guidance on disclosure of costs of advice services and product costs comes into effect." What this could mean is that consumers will have to be made aware of the cost of a policy throughout its duration. For a product such as TA, this would prove troublesome as premiums can increase or decrease throughout the term of the policy.
Preparing for action
"There is something bubbling away as the FSA seems to be saying that providers of TA should, when providing an illustration of cost, be setting out the total premium over the term of the plan," says Warner, "This has only recently come to light. If the FSA says that when you're providing an illustration for a 25-year TA policy, you should be telling that customer exactly what they are going to be paying over the years. That could be misleading. The FSA seems to be keen on providers doing this from the middle of January but I get the feeling that the providers are not set up to do this and the ABI may be challenging the FSA over this."
When contacted, the ABI did acknowledge that there was an issue on this point. Jon French, assistant director of media relations at the body, said: "At the moment, the RDR does not apply to protection but this is one of the things that we need to speak about with the FSA."
Lawson, however, takes a more pragmatic view about the future implications of the RDR: "I think it's still early days. Where the market is going to go on it isn't clear, and it isn't clear how firms are going to react to the RDR as to which option they are going to choose. At this stage, it's a case of wait and see. So I think it's too early to tell. The RDR recommendations are still a long, long way away."
Whatever happens, though, it seems that the protection market and, in particular the TA sector, is going to be at the forefront of it. That is, of course, whenever it happens. Which, in insurance, is always the biggest question.
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Notes to table 1
Maximum age at entry - Bupa: 75 nb for 10-year term or less and 60 nb for 10-year term +
Minimum Term - Friends Provident: One year (One year for annual premiums and four years for monthly premiums)
Notes to table 2
Maximum age at entry - Bupa: For a term of 10 years or less the maximum expiry age is 85 and 10 years or more the maximum expiry age is 70. Maximum age at entry is 75nb for 10-year term or less and 60nb for a 10-year term or more.
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