The majority of pure protection sales, it seems, have become inextricably linked to those on the first rung of the housing ladder. Jane Harrison and Richard Verdin investigate
It is widely accepted that, historically, somewhere between 60% to 70% of the UK's pure protection sales have been initiated as a direct result of a 'mortgage event', where someone is buying or re-financing a property.
So, when considering how to develop the protection market, it is fundamental that the industry considers the way the mortgage market operates, including product and service delivery by the mortgage providers and the expectations of those directly involved in giving mortgage advice.
Last year was an eventful one for both the mortgage and protection industries, with the mortgage market ending the year on a high with gross lending reaching record levels. This was despite the gloomy predictions at the end of 2005, with concerns that re-mortgaging would diminish and the driving force of the market, first-time buyers, would be increasingly excluded because of affordability problems.
The protection market has, however, stagnated following significant declines from the market peak in 2002/2003, with term protection sales for 2006 standing at around 70% of those previously recorded levels.
So, how can it be that markets where sales performance was once linked so closely, are now experiencing divergence? Has it simply reached the saturation point for protection products, or can it be that customers no longer want, or believe in the value of, the cover on offer? Or is it that advisers have simply stopped offering it?
Whatever the answer, what the industry can do to change this for the better is the next question.
Swiss Re's annual assessment of the protection gap destroys any concerns about saturation. Equally, the issue does not appear to be one of consumers turning their backs on protection en masse; rather it is one that they are not being offered it in the first place. The evidence from advisers like London & Country, who continue to offer full mortgage and protection advice, is one of protection sales rising at least at the same levels as mortgage sales and if you talk to the mortgage networks their frustration with 'mortgage-only' advisers is clear. So, why have so many advisers turned their back on protection?
There are four underlying causes:
n Regulatory risk - following statutory regulation, many in the market considered the risks of offering advice, particularly around more complex products like critical illness and income protection too great. Fear of the Financial Ombudsman Services is significant within the mature mortgage broking market. However, there are now a number of systems available in the market that can significantly reduce the risks involved to a level that, with training, eases many of the concerns expressed by mortgage intermediaries.
n Time - the effect of regulation on the mortgage sale means that advisers and customers alike are fatigued by the amount of paperwork involved by the point that protection would traditionally have been introduced. Again, there are now systems that can simplify and speed up the protection sales process, which together with a short-form tele-underwriting approach, can reduce the time spent advising on a comprehensive protection package to under 30 minutes.
n Remuneration - mortgage commissions are now at historically high levels and, relative to the protection commission on offer, there is less pressure for 'add-on sales', particularly when the market is so buoyant. New entrants are also put off by the prospect of 'claw-back' on protection sales. Again, with the use of appropriate systems, it is entirely possible to introduce a controlled, high quality, slick advice and sales process. This, together with the establishment of conservative provisioning for claw-back from the income received, can make the protection sale a very attractive 'pounds-per-hour' proposition for most mortgage advisers.
n Process - some of the medical questions posed on insurer applications are not the sort of questions many professional mortgage advisers want to be discussing with their clients, and the underwriting of protection products has become elongated and increasingly frustrating for advisers. Trying to match the progress of a protection and mortgage application is very difficult nowadays.
The issue of having to deal with medical Q&As during a mortgage sale can be removed by using the short-form tele-underwriting solutions available today. However, the problems posed through post-application underwriting processes need to be addressed if confidence is to be restored in those who have the greatest opportunity to influence customers' buying behaviour.
While it is true that both mortgage and protection providers have spent millions of pounds enabling the electronic side of their businesses, the experiences for users are significantly different. Mortgage providers' e-systems are viewed as helping lenders to automate many decisions, allowing applications to sail through in a matter of days.
Insurers' systems are viewed by many as having elongated the decision-making process, causing applications to become bogged down while insurers go about collecting additional third-party information that is both very expensive and largely irrelevant for the majority of customers on whom it is collected. This view is supported by a number of reinsurers' assertions of insurer practice in the market.
It would be unfair to say that the technological developments are completely dissimilar and in some circumstances the insurance industry leads the lending industry - it is just that for too many customers the outcomes within a reasonable time frame are significantly different. While the outcomes may well be ultimately similar, the lenders' approach is one of making good decisions as quickly as possible, while the insurers' approach seems, in contrast, to be one of making good decisions no matter how long it takes and it is this that is turning many mortgage advisers off selling protection.
A more pragmatic approach to risk management may well be the key with advisers calling for a more balanced approach from insurers. Intermediaries are in the business of providing services to their clients and they fail in their customers' eyes if they cannot reasonably influence the process and the speed at which decisions are reached - inexplicable delays inevitably damage advisers' credibility. Talk to some mortgage advisers today and they will accuse insurers of over-managing their potential risk to the point of destruction.
Insurers could benefit from a little lateral thinking around the positive developments that lenders have made in turning advisers 'on' rather than 'off' through their innovation. The developments that lenders have made that impress advisers are, for example, automated desktop valuations (for otherwise low-risk loans) and e-links to third parties, including surveyors and solicitors. Insurers on the other hand are still writing 'snail mail' letters to busy GPs who charge £74.70 to eventually respond.
Statistics vary across the market, but, in general terms, insurers are accepting cases without further evidence on around 50% of cases, demanding additional information (using a 20th century format) on the other 50%, with 60% to 70% of those being offered standard terms. Only a fool would consider this to be satisfactory.
In the mortgage market, traditional lender attitudes have been forced to change by the activities of aggressive new entrants, applying common sense over tradition. In the protection market, new entrants have capped their capacity at such low levels that their impact has been low.
There is no doubt that the mortgage protection market is ripe for regeneration. Stagnation and decline are in nobody's interest and those insurers only interested in their share of a declining market rather than growing the market will lose out.
Solutions
To solve the problems of today, the industry needs a change of attitude or, in 'modern speak', to push for a 'paradigm shift'; where an administrative task that does not improve an underwriting decision should be removed. Understand that slow decisions often become irrelevant decisions in the mortgage market.
Break the application process down, ensuring each element is handled by those trained and competent to deal with them - tele-application and underwriting processes were being used by lenders long before they emerged in the life insurance market. Finding new ways to reach good decisions quickly is the key to making the selling of protection contracts once more universally attractive to mortgage advisers.
The detailed answers to the issues faced by advisers do not lie in complex spreadsheets or algorithms, more likely the answers will be found by those who willingly and with an open mind expose themselves to the reality of the everyday trials and tribulations of the busy mortgage adviser.
Jane Harrison is marketing director at London & Country; and Richard Verdin is sales and marketing director at Direct Life & Pensions
