Plummeting prices have failed to save the term assurance market from sliding new sales. Far from revitalising the sector, slashing rates could be making matters worse. Peter Madigan reports Click here to download pdf
The same story has been witnessed across the protection market in the last few years. Products that had otherwise enjoyed growing numbers of new policy sales year on year begin to witness slowing growth before sales start to fall. The picture is the same in the critical illness (CI), income protection (IP) and whole of life markets. Now it appears that term assurance, the one-time darling of the protection sector, is suffering a similar fate.
According to Swiss Re's Term and Health Watch 2005, sales of individual term assurance contracts dropped to 1,767,208 in 2004 from a record high of 2,136,738 new sales in 2003.
This drop appears strange considering the price of cover has fallen over the course of the last year, with providers frequently cutting rates in a bid to increase market share. In spite of this, sales continue to fall, as interim figures from the Association of British Insurers (ABI) for the first three-quarters of 2005 testify.
Although the ABI figures are not directly comparable with the Swiss Re numbers quoted above, the association recorded 1,148,000 new term assurance policies sales in the year to the end of quarter three 2005. This number is a substantial drop from the 1,442,000 recorded in the first three quarters of 2004. When definitive figures for last year emerge, we can expect the market to have experienced yet another slump.
Depressed market
Rate cuts have proved ineffective in reviving the market, but this begs the question, why aren't consumers taking advantage of cover at rock-bottom prices?
"The slowdown in the housing sector has
meant that fewer people are taking out term assurance to cover mortgages. This is a major factor because the term market is quite heavily dependent upon mortgage related sales," says Bernie Hickman, protection development provider at Legal & General.
The situation was further compounded by the introduction of FSA regulation of mortgages in October 2004 and general insurance in January 2005. "In addition to seeing the housing market slow down by around 50-60%, we have seen the market regulated for the first time which has meant a substantial portion of non-regulated advisers have disappeared. There are simply fewer advisers available to sell cover," says Roger Edwards, products director at Bright Grey.
Although regulation certainly has had a part to play in hindering new sales in 2005, it does not adequately explain the drop recorded in 2004. Some older IFAs may have chosen to retire early rather than put themselves through the aggravation of gaining FSA regulation - but could this trend really be behind such a dramatic fall?
"Advisers really need to look at other opportunities in the market, such as business protection or family income benefit," says Peter Chadborn, principal at Chadborn, Baker and Kearle. "There is a huge untapped market in this area with higher sums assured and higher premiums and, though you might find it tough to make the right connections, it is definitely worthwhile."
Providers agree that the key to reinvigorating the market and severing the term assurance sector's dependency on mortgages is greater diversification by IFAs.
"The only way to stimulate the market is through advice-based sales and driving home the point that cover is about more than just the mortgage. A policy may cover the mortgage, but what about the actual cost of living for the bereaved?" asks Ian Jefferies, head of protection marketing at Friends Provident.
Advice appears to be a crucial factor in resurrecting IFA's market share. Swiss Re reports that in 2004 direct sales forces accounted for 869,077 new term assurance policy sales, substantially more than the 751,518 sold through the intermediated channel. In part, at least, direct sales are detracting from the opportunity to cross-sell supplementary products, something life offices are not happy about.
"The negativity in the market is only coming from the brokers. They moan about supermarkets and that they cannot compete against direct rates but if all they want to do is whinge then they may as well give their customers to the supermarkets," says Sue Wilkinson, head of life and health propositions at Scottish Provident. "Advisers will only succeed in attracting customers if they can illustrate the value of the extra cost of their services."
Re-broken?
As prices have fallen in recent years there has been an upturn in the amount of existing policies re-broked at a cheaper price. Although there are no accessible figures to differentiate the number of new policies being taken out from the number of existing policies churned, evidence is emerging that new term assurance sales figures may be masking the fact that true market growth is only a fraction of the total new policies sold.
Swiss Re has calculated that the life assurance protection gap grew by an incredible £100bn from £2.2trillion in 2003 to £2.3trillion in 2004. This is despite the fact that 1,767,208 'new' policies with an average sum assured of £99,208 were taken out in the same year.
If all these contracts were truly new policies entering the market for the first time they would have taken a £175bn bite out of the protection gap. It seems safe to conclude that a substantial portion of the business written last year was churn business - news that will come to the chagrin of providers.
"The market is cannibalising itself. Advisers should really be looking to grow the market rather than stealing each other's business," says Edwards. "We are in a price war but cover cannot just be about price. A joint life policy may be a little cheaper than two single lives but on one you only get one payout and on the other you get two. Supermarkets may be cheaper but advice is about value for money," he adds.
Life offices are by no means alone in their frustration that price seems to be the biggest concern for clients and some intermediaries. "We have seen rates coming down for three or four years and that has led to re-broking activity. Some advisers have been selling and re-broking term assurance on price rather than suitability and this has meant customers have lost features and benefits," says Chadborn.
With A-day on the horizon there is a fair deal of optimism that the term assurance market may experience a surge of new business as clients take advantage of the tax relief offered by pension term assurance. While optimists believe the lure of even cheaper cover will be too great a temptation for many to resist, others believe it could simply lead to another flurry of re-broking, something that few would like to see.
"It costs roughly £300 to put a client on risk due to the cost of underwriting, GP reports and various other parts of the application process. It can take a provider three to four years to recoup that money but constantly churning business stops that process. Eventually re-broking is going to start driving up prices," says Wilkinson.
Rebirth
While providers claim it is up to brokers to take the initiative and begin diversifying in order to attract fresh blood into the market, there is an inescapable feeling that mortgages are the unavoidable staple of the term assurance market. Although areas such as business protection and family income benefit may offer alternatives that could be more profitable, they are a lot more time-consuming and see lower conversion rates.
Providers, for their part, in the race to lower prices to match their competitors, have achieved little and may have actually alienated some advisers by cutting rates at the cost of restricting benefits.
Insurers can hardly be blamed, however, for consumers' refusal to buy their products. While pension term assurance holds promise it seems foolish to think simply offering a further discount on price will change anything.
The suggestion that lack of access to advisers has been a factor also fails to ring true. In an increasingly consumerist and technologically savvy society it is hard to believe that people actively seeking cover would be defeated by the unavailability of a financial adviser and not go elsewhere for advice or buy direct over the internet.
With this year's 'new' sales apparently doing little to narrow the protection gap, we can conclude that people simply are not looking for cover. Rather than lambasting the supermarkets for not offering advice, perhaps providers and advisers should take a leaf out of the supermarkets' book and invest in aggressive marketing campaigns to raise public awareness of the importance of cover and the bargain that term assurance currently represents.
It is absurd to think a further reduction in prices alone will serve to stimulate the market. What is required now is action to ensure term assurance sales react to the opportunities offered by pension simplification and that the industry reaps the benefits.
A-day presents the term assurance market with an unprecedented opportunity to unite, intermediaries and providers together, to stop feeding off each other and start working to grow the market, something that is in everyone's interests.
Alternatively the providers can continue to slash rates to ever more unsustainable levels in the forlorn hope of attaining market dominance while advisers poach clients from one another to the greater detriment of each other and new clients, who ultimately chose the direct route rather than the IFA. Ultimately, it is up to advisers what kind of future and what kind of market they want to be operating in.
Facts and figures
1,767,208 new term assurance policies were sold in 2004, a substantial drop from the record 2,136,738 policies sold the previous year.
Although intermediated sales continue to lag behind, direct sales forces and policy sales were down across the board in 2004. IFAs managed to narrow the gap from 157,000 sales in 2003 to 144,559 the following year.
Despite 1.7million new policies having been written the protection gap widened by £100bn in 2004, probably due to the prevalence of re-broking in the term market.
Interim figures from the Association of British Insurers for the first three quarters of 2005 indicate that new term assurance sales declined at an even sharper rate last year than during 2004.
Source: Swiss Re Term and Health Watch 2005
