After a couple of booming years, the term assurance market has started to falter. Peter Madigan explains why Click here to download pdf
Term assurance was lauded as the success story of 2003. While both income protection and critical illness (CI) sales fell, term assurance surged ahead improving on the remarkable growth in 2002. Yet as advisers and providers were congratulating themselves, signs were beginning to emerge that the market was on the verge of a downturn.
According to Swiss Re's Term and Health Watch 2004, 2003 saw sales increase by just 85,000 policies on the previous twelve months, the lowest level of growth in the last five years. To put this figure in context, 2002 saw an extra half a million new policies written. Regardless of this somewhat lacklustre growth, 2003 remained a record year and this seems to divert attention from the signs that the term assurance market was already beginning to come off the boil.
"Two things sustained term assurance business in 2002 and to a lesser extent 2003," explains Stuart Bayliss, director at advisory firm, Term Direct. "The first was re-broking; going back to existing customers and replacing their existing cover at a cheaper price. The second option was to offer existing customers a lot more cover for a bit more money."
These offers were possible due to falling premiums and the low base rate throughout 2002 and 2003. As the rate began to rise toward the end of 2003 and into 2004, this re-broking option became unfeasible as premiums went up once more.
The problem was compounded further by growing speculation throughout 2003 that the rapid increase in house prices was becoming unsustainable. With decreasing term assurance inextricably linked to the housing market, faltering consumer confidence combined with rising interest rates depressed sales in the final quarter of 2003. Was the market rejuvenated in 2004?
"Term assurance sales for 2004 are down from the previous year as the slowing housing market, rising interest rates and premiums have taken their toll," says Neil Pine, mortgage and protection manager at Norwich Union Life. "The reinvigoration of the stock market is another factor we have to consider as investment moves away from property and the impact this subsequently has on term assurance sales."
Extra incentive
Figures released by the Association of British Insurers confirms the poor fortune of the market in 2004. By the end of the third quarter of 2003, new term assurance sales had reached 1,686,000 policies. By the end of Q3 2004, total sales had amounted to just 1,437,000 new policies. With some analysts predicting worse to come in 2005, the market looks set to experience its first annual drop in sales in a decade.
"We are not likely to feel the real impact of the problems now facing the market until figures for the last quarter of 2004 are revealed," says Ron Wheatcroft, technical manager at Swiss Re.
With 2005 shaping up to be an unhappy new year for the market, it is vital advisers find other means to sustain their term assurance sales. They have an extra incentive to reassess their role in the term assurance sector as the number of policies sold through intermediaries fell in 2003 for the first time in five years.
While some providers have dismissed the shrinking intermediary market share as a minor drop of only 3%, it should nonetheless act as a wake up call about their role within the market.
"Advisers' interest in the market predominantly revolves around selling accelerated critical illness cover as a rider benefit to term assurance," says Andy Sanders, senior consultant at Watson Wyatt. "IFAs aren't the first port of call for mortgage-related term business. They often secure their sales by getting the message across to customers that standalone assurance will not be effective cover if someone becomes incapacitated."
Some providers have suggested that intermediaries are better positioned than most to weather any stormy times ahead, if the housing market continues to slow or indeed, crashes. "It is mortgage-related term assurance that is suffering most at the moment and that is the segment of the market that sees the least adviser involvement," says Bernie Hickman, protection actuary at Legal and General. "People still have a protection need so advisers will continue to write new business against whatever negative influence the housing market may have."
Optimistic
When looking for factors that might emerge to rally the market next year, the outlook is bleak. "I can't see any big change emerging within the market in 2005 that will spur growth," says Hickman. "Prices shouldn't increase or decrease significantly. New providers entering the market could make an impression but it depends on how successful they are."
Other providers remain optimistic about the future, mainly because the term assurance market is far from saturated. "Growth in the market will continue because peoples' basic needs have not been met," says Wheatcroft. "We have calculated a £2.2 trillion protection gap in the UK; that's £45,000 for every British adult."
While no one disputes the extent of this protection gap, it is difficult to envisage a sustained increase in business just because a figure has finally been given to a deficiency that has always been there. Without an external driver, such as a decrease in interest rates appearing to spur the market, it is unlikely that the market can stimulate itself from within.
While mortgage-related term assurance stutters, advisers may be able to boost business by focusing with greater intensity upon selling term assurance with an accelerated CI rider. Swiss Re's data indicates that more decreasing term assurance is sold with CI than on its own, yet while standalone sales of all term assurance improved last year, the number of accelerated policies fell. Advisers have however, identified one development later on this year that could be crucial in helping them sell more term assurance with CI in 2005.
"The Association of British Insurers' decision to review the standard definitions for critical illness should be a positive development for advisers selling accelerated critical illness as a rider to a term assurance policy," says Hickman. "As the definitions become more stringent, premiums will come down and sales should pick up".
Possibilities also present themselves in the corporate sector as firms seek to insure the lives of 'key men'. The corporate arena has a similar under-provision to the individual market with Swiss Re estimating a £300bn protection gap. In addition, individual consumers also need advice on the role term assurance can take in managing any potential Inheritance Tax liability. This is fertile ground that could prove lucrative as a replacement for the lost re-broking activity of previous years.
Perhaps the simplest explanation for current poor sales is that the economic conditions of the last four years provided the term assurance market with a perfect environment to encourage strong growth. 2004 should be regarded as a return to normality as opposed to a fall, since the performance of the last few years was always going to be unsustainable.
Term assurance sales look set to fall further in the immediate future as not only do rising house prices slow down, but in some cases, may fall. Barclays has suggested that prices could drop 20% over the next three years, potentially good news for the market as first-time buyers seek to insure their mortgages. Predicted interest rate rises will compound this problem as budgets are stretched further. "The current environment means that we'll continue to see a reduction in business but it is impossible to say how long this will continue," says Pine.
Long-term predictions are harder to make. Some argue that if we are to ever truly attempt to narrow the protection gap, consumer thinking about term assurance has to change from insuring their mortgage to insuring their life. "Providers and intermediaries must work together to move term assurance away from being over-dependent on the housing market and toward making consumers think of it as essential financial provision in its own right," says Wheatcroft.
The party may be well and truly over for the term assurance market but it seems wiser to think of the market's performance in 2004 as a healthy correction rather than the start of a prolonged slump. Almost all providers agree that while the protection gap remains so large, there is plenty of new business to be written. It is simply matter of selling it.
