With sales almost reaching a quarter of a million for the first time in the product's history, could the income protection market be on the verge of substantial growth? Angela Faherty reports Click here to download pdf
Over the past two years, the individual income protection (IP) market has started to show sound beginnings for real sustainable growth. In 2002, the sector grew by almost 20%, with policy sales amounting to 245,063 compared to the 204,379 policies sold in 2001.
Prior to this, sales figures for IP showed the product was failing to achieve its full potential. Coupled with the phenomenal success of critical illness (CI), which continues to far outsell IP, growth in this sector appeared to have ground to a halt.
A stagnant market
A number of reasons for this lie in the complexity surrounding the product as well as the success of CI. The result meant that the IP market remained rather stagnant.
While the recent growth in the individual IP sector marks a significant step forward for the future development and potential sales of the product, the spurt in growth can be attributed to mortgage-related sales in the term assurance market rather than outright standalone sales.
"While the 20% increase in sales of individual income protection is very interesting, it is all down to sales in the mortgage market," says Ron Wheatcroft, technical manager at Swiss Re Life & Health.
"Take these sales away and nothing has really changed, there is still no growth in the standalone market. Whereas in all other areas of the protection market, standalone sales are increasing," says Wheatcroft.
Growth in the market is inevitably a good sign. However, heavy reliance on the mortgage market does pose a problem; if sales of mortgages begin to fall, so inevitably, will sales of IP.
Figures from the Association of British Insurers (ABI) already show that at the second quarter this year, IP sales have fallen from 96,000 in the same period last year to 77,000. And there is a possibility that by the end of 2003, the total number of IP policies sold will have dropped below last year's monumental figure.
A positive outlook
Nevertheless, the outlook for the individual IP market does look good. Mortgage-related sales have helped to highlight the need for IP and advisers working in the market appear to have greater confidence in selling the product than they did previously.
As a result, it is likely that mortgage-related sales will continue to dominate the sector for some time, as Ronnie Martin, protection director at Legal & General, points out.
"Opportunities for the future development of the income protection sector will remain with expenditure- related sales, like those tied to mortgages. People buying a house are more likely to recognise the need for income protection and advisers should continue to push this forward," says Martin.
Wheatcroft agrees, but stresses the sales opportunities are not being maximised and that the market offers far greater potential than has yet been seen. "Mortgage-related sales of income protection are easier than selling the product on a standalone basis as the need for cover can be clearly seen by the consumer. However, in terms of sales figures, we are still only scratching the surface at 245,063 sales.
"The market still has the potential to grow by up to four times of what it is now in both the group and individual sectors," says Wheatcroft.
With dramatic changes afoot in the CI market, IP may begin to emerge from the shadows and take its rightful place as a key product that meets the needs of customers much more effectively.
Reviewable rates
Over the last year, the future of guaranteed rates for CI policies has been called into question. Many providers have stopped offering guaranteed policies. Instead, the market has seen the introduction of reviewable rates as well as a number of changes to policy definitions.
NDF Administration has gone one step further by introducing a product with reviewable definitions, the value of which some in the market have questioned.
"Given the problems in the critical illness market at the moment and all the talk about how that product is going to change, we really have to make income protection more successful," says Roger Edwards, products director at Bright Grey.
"For far too long we have talked about income protection as a 'cinderella' product. I believe that income protection will sell more if people put some sales and marketing effort behind it, but in recent times they have not had to because critical illness has been so successful."
Kevin Carr, senior technical adviser at LifeSearch, is also confident that disarray in the CI market will help IP sales get off the ground.
"With rising premiums and a degree of confusion in the market about where the critical illness product will go next, we should see income protection sales increasing notably.
"The issues with income protection are that consumers simply prefer a clear lump sum benefit with as few exclusions and clauses as possible. Whereas, income protection expresses benefits monthly and premiums can appear expensive on the surface. Add to this the level of complexity compared to other contracts, and some clients are simply put off," he says.
As Carr suggests, it is the perceived additional information required and the underwriting process that makes IP – in the eyes of some customers – a more complex product than CI.
Before undertaking an IP policy, it is crucial to know what each individual's employer provides in terms of sick pay. Similarly, entitlement to State benefits, issues surrounding deferred periods and intended retirement age means a lot of consumers have opted for CI with the impression that it does the same thing as an IP policy.
"One thing advisers always highlight is that unlike critical illness – where you know that if you get an illness, you will receive £250,000 for example – with income protection, you do not know exactly what you will get until you claim. This is because your salary or State benefits may have changed since you took out the policy," says Edwards.
To overcome these problems, Edwards suggests the industry should work together to standardise what they do or do not include under their policies.
"While I am against standardisation in general, the industry should agree on certain elements. So everyone does not deduct State benefits and waivers, but does deduct mortgage payment protection insurance, for example," says Edwards.
It does seem that greater clarity in terms of product development may hold the key to continued growth and the future success of the IP market. The blurring of boundaries between products causes confusion for consumers, many of whom believe CI and IP to pay out for the same thing.
Product confusion
In particular, mortgage payment protection insurance (MPPI) and IP are frequently confused and it is here perhaps that changes to the product as it currently stands, can be made.
"A fundamental flaw in the market for me is the confusion and cross-over caused by mortgage protection, which is sold in high volumes by mortgage lenders. Clients can certainly be forgiven for confusing the two.
"I would like to see mortgage protection removed as a concept and replaced by one product known as income protection, which has either a one-year, five-year or until retirement benefit," says Carr.
While this would certainly help to re-align the market and perhaps make the options easier to understand, could it lead to higher premiums and restricted access for consumers? Opinion is divided.
"I think providers will start to think about widening the proposition as a way to reduce costs," says Wheatcroft, "we could see the introduction of five to 10-year benefits. Do we really need to pay up to the age of 60 or 65?"
Nick Homer, product manager for income protection at Norwich Union Healthcare, agrees that budget products will gain headway in the future, but is not convinced that this is what the market needs.
"One of the barriers with budget income protection products is that essentially it could make the product more complex. I think there is a perception that it will reduce the cost, but I do not think that is the case.
"A five-year term limits your ability to support claimants in the long term and the cost against the benefit is not as attractive and it may restrict the level of support that can be offered in terms of getting the claimant back to work," says Homer.
Looking ahead, the face of the protection market is likely to change shape over the next 12 months and the word from providers is that advisers would be wise to put IP at the top of their agendas. Sales of IP have been increasing and the industry is certain that this is a sign of things to come. Add to this the confusion in the CI market and the huge untapped potential offered by the IP market itself, and it is clear to see there is a wealth of business waiting to be snapped up.
