Due in part to the Government's removal of tax relief on PTA, term assurance has failed to stay at the sales peak reached in 2004. Peter Carvill investigates why it has not reached its formerly lofty heights again. Click here to download pdf
The saying 'what goes up must also come down' is easily applicable to any aspect of financial services. There is a continual awareness of the cyclical nature of the industry that, as one market rises, another will fall.
A perfect example of this would be term assurance sales over the past five years. According to figures obtained from the Association of British Insurers (ABI), the number of term policies sold rose steadily from just over 9.5 million in 2001 to nearly 13.3 million in 2004. Since then, however, that total has dropped, and 2006 saw less than 12.2 million policies being sold.
One reason for this is the Government's removal of tax relief on pension term assurance (PTA). Nearly two years after the Government's initial mention of PTA in the 2006 budget, it is difficult to remember just how dramatic and tumultuous the effect of that single paragraph was. And, although the number of term assurance policies being sold has not dropped to 2001 levels, it is a section of the market that still has not fully recovered.
Corporate appetite
Recent developments have reflected a hunger for sales on the behalf of providers. Companies now seem to be competing flat-out on price, trying to appeal to the wallets of the insurance-buying public, and there have been murmurs within the industry that the market has become saturated.
One of these is Roger Edwards, product
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director for Bright Grey. He agrees that the market has become saturated. "Yes, but it shouldn't have. How can the UK population be under-insured to the tune of £2.3tn if the term assurance market has become saturated?
"The problem is that most providers are focusing their attention on grasping their share of the existing market – either by re-broking or by concentrating on a narrow group of customers. This has created the conditions for the fierce price activity. What is not happening is that providers are not trying to sell term assurance to the millions who have not got it, in other words new customers."
Johnny Timpson, head of market development for Scottish Widows, disputes the idea of market saturation but acknowledges there are real issues not being addressed. "The UK population has increased, aged and, you could argue, is in a number of areas in poorer health. Plus, consumers are more highly-geared than at any other time in history. But, despite this, the insured population has fallen. The issue that we face as an industry is in improving the financial education of customers so that they recognise their needs and the solution that we can bring to the table," he says.
Despite a potential saturation, industry commentators believe there are plenty of obstacles and opportunities in the market. According to many experts, the market is too focused on offering lower-priced products rather than trying to promote through quality, intimating that this approach has its genesis in the lack of consumer trust in the financial services industry.
facts and myths
"The main obstacle," says Edwards, "is that the whole infrastructure of the industry is geared towards perpetuating the myth that headline price is most important. The portals quote in price order, the comparison engines do so, and compliance departments in IFAs often insist on them selling the cheapest – or, if they don't they have to fill in masses of paperwork to justify it.
"Compliance departments need to look beyond the price issue and understand that there are other things that differentiate term assurance."
Iain Mallon, protection marketing director for Axa, thinks that there are opportunities for firms that can offer an improved underwriting service, shortening the time it takes to process and evaluate applications. "The two main obstacles are process and trust. While the best companies are turning policies around electronically in 15 to 20 days, some providers are taking up to 60 days, and these delays are unacceptable – particularly as consumers become more used to an 'instant' society."
Most experts believe price-cutting across the term assurance market mask the much larger issue of the UK's protection gap, a void that is still no closer to being filled.
However, they disagree as to whether the tag of 'price war' is entirely justified. Mallon says that while the market has indeed become more
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competitive, this is due to an improvement in marketing that complemented the lower prices for term assurance being bandied around.
Disagreeing, Edwards points out that price has been the driving factor this year and drawing attention to the fact that there has been no closure of the protection gap. "There is quite definitely a price war, but let's be clear about what that means. What hasn't happened in the term assurance market is an increase in demand as a result of the price activity. When prices fall, demand increases. That's normal competitive behaviour. We are in the middle of a price war that is not increasing demand and is not increasing the market."
falling down
Timpson concurs with this point of view although he remains ambivalent about whether falling costs are indicative of an all-out price war or whether they are simply the result of normal competitive forces. Speaking about falling life rates, he says: "This sounds great from a consumer standpoint but it's difficult to argue that this has been good for UK consumers as the insured population in the UK is falling at a time when they need our services like never before.
"Have we made any impact on the protection gap? No."
Speculating about the future, it appears that large improvements are needed in the term assurance market. Timpson thinks that good starting points for the providers that are serious about improving the market would be "educating consumers, reducing non-disclosure, selling to need across the piece with menu plans that adapt to address the customers changing needs over time while, at the same time, reducing business acquisition costs and improving persistency".
It seems that the need for improvement is now beginning to be recognised as there are stirrings that providers may be starting to concentrate on the benefits of their product to differentiate themselves rather than trying to sell a depleted policy at a lower price. This year may be the point where providers need to begin to come up to scratch.
All in all, the industry is hopeful about the market for term assurance and the roles providers play.
"There are signs that the market is beginning to demand change," says Edwards, "Some advisers are calling for shorter application forms and easier processes. There are also signs that more companies are taking the Bright Grey approach of offering more than just money, for example, Pruhealth and its discounts. If we can break out of the price spiral by doing some of the things I have outlined and more then the future is rosy."
For Mallon, the industry has to move and grow in order to thrive and survive. "Process innovation is essential to grow the market. A 30 to 40-day turnaround time is simply not acceptable. Turnaround times in line with the general insurance market – days rather than weeks – will make the job of selling life insurance more palatable." n
