Nick Kirwan, chairman of the newly-formed Association of British Insurers Protection Committee, explains how product development will help IP receive the profile it deserves
Following the Association of British Insurers' (ABI) creation of the Protection Committee back in April, the roles of the critical illness (CI) and income protection (IP) working parties have merged. Here Nick Kirwan, chair of the committee, shares some of his thoughts on what the future may hold for individual IP.
Q. What are the main challenges facing the individual IP market?
When someone is taking out any type of protection insurance there are likely to be three main questions on their mind: 'how much do I pay, what will I get and when will I get it?' The best products are the ones where the customer can easily understand the answer to each of these questions and be clear on what they are buying. This can be seen if we take a look at life cover, for example:
• How much will I pay - a monthly sum based on the amount of cover you choose, your age, sex, health and whether you smoke
• What will I get - a fixed lump sum (or an amount to pay off your repayment mortgage)
• When will I get it - a sum will be paid only in the event of your death or if you get a terminal illness
The fact that it is so easy to answer these questions for life cover would perhaps explain why so many people realise the need for it, and are willing to take it out. When we try to answer the same questions for IP, we begin to see one of the problems with it - the answers are not as straightforward. For example:
• How much will I pay - a monthly amount, which, like other protection products, is dependent on age, sex, health and whether you smoke. It can also depend on factors such as your occupation and the number of miles you drive - these can have a significant effect on the premium and whether or not you can actually take out the product.
• What will I get - you get a monthly income where the amount depends on variables like how much cover you chose, how much you were earning immediately before the onset of the cause of the claim, your entitlement to state benefits at the time, other insurance that you may have and any income you still get from your employer.
• When will I get it - again, this may not be a simple answer. It depends on the definition of disability you either choose or are eligible for. The best (and most expensive) cover is provided where a claim is based on becoming too ill to perform your 'own occupation'. Alternatives include a work tasks basis, where the claimant needs to be unable to perform a number of everyday activities such as washing, dressing and feeding. Cover may be available on a 'suited occupation' basis, so if the claimant could not carry out work that is a suitable match to their original occupation they would get a pay out. However, what constitutes a suitable alternative occupation may be a matter of opinion. The income starts after a deferred period of your choosing and stops either when you recover to the extent that you no longer meet the definition of disability, you go back to work, you die or the policy comes to an end.
This complexity around IP is one of four main challenges that the IP market is facing at the moment. The second challenge stems from the fact it is not widely embedded into the mortgage market. When you consider that around 70% of all protection sales are on the back of a mortgage, it is no surprise the protection products sold alongside mortgages are the ones that have the highest sales. As IP is seldom thought of when selling mortgages it is obvious that sales will be lower than other protection products, such as life and CI cover. As a result, one of the main opportunities and critical points for IP is to find a way to raise awareness of the need for it alongside the rest of the mortgage sale.
The third challenge facing IP is that people often confuse it with mortgage payment protection insurance and loan payment protection insurance. Confusion is always a bad thing and many people wrongly believe they already have IP.
The last challenge is that the process for taking out cover is not as straightforward as other protection products. This has the effect of making IP time consuming to take out, which puts off advisers and consumers.
Q. So are these new problems or do we face the same problems as before?
The problems have not changed, which is why it is so important that they are tackled. As an industry, we know that IP is punching below its weight. The ABI has recognised the need for the development of the product. One of the first priorities for the new Protection Committee will be to look at individual IP and what the future holds for it.
Q. Are there any tangible solutions?
As with most products, there is scope to simplify aspects of IP and promote it better. However, the way we need to go about this is one for the Protection Committee, industry and other stakeholders to engage on and start to build a consensus for the best way forward. The first steps for this process will be getting all key stakeholders involved in a formal debate so we can be in listening mode - this is the same technique that was used to kick off the CI review last year. From there, we will gather proposals for evaluation before going out for public consultation. This sort of process always takes longer to complete than many people imagine, but it is worth getting everyone's thoughts on what we are doing. The good news is that we can build on some of the other good work that is going on in this area - for example, through the IP task force.
Q. With the work on CI out of the way, will the Protection Committee be focusing on individual IP?
IP will not be the sole focus of the Protection Committee's work, although it will form a major part of it. It is recognised that IP's turn under the spotlight is long overdue, so it can ensure that it remains a viable product for the future and takes its rightful place protecting consumers. However, we cannot prejudge what the solutions may be, as this is something that the industry, advisers and other stakeholders need to be engaged on.
Q. What changes are being proposed?
It is too early to tell what will come out of the Protection Committee's work on IP, and we will not reach the point of proposing solutions for some time yet. What we can say now is that we would like as many people as possible to feed into the process and, before anything gets implemented, there will be a formal consultation process.
Q. Is there a future for individual IP?
Absolutely. The need for protection has never been greater. You just need to look at the health of the nation to see why. Add financial health to this equation and we see a picture of a nation taking on huge financial commitments - debt levels have smashed through the £1trn barrier and show little sign of stopping. To top this off, there is a huge rise in the number of two income families, which means that people are relying on two incomes to survive - if one of them is no longer able to work then there will be financial repercussions for the family.
All this makes it clear that there is a very bright future for protection, but the big question is what part IP will play in this. The answer very much depends on the coming together of the industry to transform the fortunes of IP. Whether it stays as a product trapped under a glass ceiling or it breaks out and becomes the number one protection product in the UK remains to be seen. The outcome is likely to be determined in the next three to five years.
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