While there are both good and bad predictions for the future of the protection market, Matt Morris explains that promoting an honest and transparent image to the public will be vital for growth.
As 2008 unfolds and the rumours surrounding financial services seem to become more gloomy, it is comforting that the protection market is on a firm foundation - although it is not without hurdles that need to be overcome.
In January, the protection market received a much needed shake-up when the Association of British Insurers (ABI) published its new guidelines on non-disclosure. The association has being working with the Financial Ombudsman Service on the guidance, which will be fairer for those who are honest, and clearer for those who are not. It is a big step forward for the industry, and should result in more claims being paid and less cases being taken to the Ombudsman.
The main change is that there are now only three levels of non-disclosure rather than the previous four - deliberate, reckless, inadvertent and innocent. This list has been shortened to deliberate or without any care, negligent and innocent.
The ABI has made it clear that an innocent claim should be paid in full and a negligent one should result in a proportionate payout. A deliberate non-disclosure will lead to the claim being declined. The report comes on the back of the latest critical illness (CI) figures on declined claims, published at the end of 2007, which shows that less than one in 10 claims are declined for non-disclosure. The industry still has a long way to go, but this advance is very encouraging. At present, 84% of claims are being paid and this should now improve.
Fortis is also entering the market this year, and it is expected to introduce some innovative products. This should help to ease the loss of Standard Life, which pulled out of the market last year, and Scottish Widows, which will no longer appear on portals. Their departures have been disappointing but not totally surprising, as they had a small protection market share.
Meanwhile, life cover continues to fall in price and has never been cheaper, pension term assurance aside. Between March and September 2007, the market's best cost for life cover fell by about 9%, and that trend has showed no signs of slowing in recent months, meaning that it is a great time for consumers to buy protection.
These price cuts, combined with the current problems in the mortgage market, should mean that more protection - especially life cover - is sold throughout 2008. Mortgage brokers will be looking to bump their income from somewhere, and this could take the form of selling more protection to clients who have taken out a mortgage.
Positive news
Positive news came from the CI and income protection (IP) markets at the end of 2007. Although the Swiss Re Health and Term Watch report revealed sales for both of these products fell during 2006, the ABI 2007 figures show that IP sales increased from 24,000 in Q2 to 43,000 in Q3. This could well be due to a number of positive stories in the media along with consumer concern over the slump in the mortgage market precipitating a desire to protect themselves.
However, the protection industry needs to ensure that the public hears the good news. While private medical insurance is widely advertised, protection is rarely mentioned. If life offices invested more money in promoting this side of their business, it would undoubtedly reap rewards.
Instead of squabbling over a decreasing market and focusing on price - as they do with life cover - the big players in protection should be developing innovative products. Too many people either have no cover or the wrong type of cover because they are not given the right advice and do not feel protection is important. This has led to the £2.3trn protection gap. In an ideal world, everyone would have life, CI and IP but that rarely happens in practice.
What is needed is a product that is simple and relatively cheap, but still offers comprehensive cover to those who need it. In many ways IP was supposed to be that product, and it should undoubtedly be at the top of most protection shopping lists. However, people are shying away from it. The industry is working hard to boost sales and the IP Task Force has had some success in raising the profile of this cover, but no one is sure exactly how much of an impact this will have over the coming months and years.
Hopefully, the new Insurance Conduct of Business (ICOB) rules will help to boost IP sales this year. This means that those who sell protection directly must now warn clients that it is the customer, not the IFA, who is responsible for the purchase and they have no recourse to appeal to the Ombudsman if the sale goes bad. This could make the client think twice before rushing into buying a product they think they need when, in many cases, they would be better with something else. Life cover, payment protection insurance (PPI) and mortgage payment protection insurance sales far outstrip life and CI at present, and hopefully these rules will help to redress that imbalance over the coming year.
However, the Retail Distribution Review lurks on the protection horizon like a dark cloud. Although the Financial Services Authority (FSA) has said it will not cover protection, which is governed by ICOB, this seems inevitable when it is a piece of overriding legislation that will cover all forms of retail distribution of financial services.
Qualification levels
The main proposal is to divide financial advisers into different tiers, each tier requiring different levels of qualification. The top tier, professional financial planners, would have to be entirely fee-based or operate with a consumer-agreed remuneration model.
The problem with trying to do this is that, in the protection market, consumers are unlikely to pay fees for advice so banishing commission could be detrimental. In protection, advice varies greatly depending on the customer's health and charging fees on this basis could be discriminatory.
The protection market should be dealt with separately as it operates in a totally different way to savings and investments. The FSA's concerns over commission are not applicable to protection. It is true that if commission is being taken out of an investment, it restricts the investment and therefore the fund's growth, but this does not apply to protection because there is no investment element.
Finally, the FSA's record £1.1m fine of HFC Bank is very encouraging news for all those who want to see customers treated fairly. Far too many PPI policies are sold for the wrong reasons, whereas in the majority of cases IP would have been a more suitable product.
PPI is a one-size-fits-all policy that is riddled with exclusions, expensive for what it does and rarely meets the needs or expectations of consumers. If this fine leads to PPI being sold more responsibly, both consumers and the industry will benefit and those pushing it for massive profit will be marginalised. However, this is an industry that has been fined and criticised for a decade, and it is doubtful that much will change in the short term.
So from an adviser's perspective, there is a great degree of work to be done to ensure the protection market continues to serve customers in the best way possible, and cuts the £2.3trn protection gap.
The coming year should see improving declined claims rates and more innovation throughout the industry. However, this will only happen if protection is going to start raising overall sales instead of individual companies fighting over a share of a decreasing market. Life offices need to keep working hard to boost consumer confidence and raise the profile of the industry, and it is up to IFAs to ensure insurers are implementing Treating Customers Fairly measures.
Publishing all IP claims statistics and all proportionate payout information would be a good start. This will show that the industry is honest and transparent, and will provide a benchmark against which it can evidence improvement.
If providers are asking consumers to buy their products, it seems only fair that they reveal how much they are paying out and how much they are declining. n
Matt Morris is policy adviser at LifeSearch
