Following the recent publication of Defaqto's annual income protection report, Nick Telfer takes a closer look at the issues surrounding the misunderstood cover
The industry's indifference to providing an appealing long-term income protection (IP) solution has allowed other policies to steal a march.
Payment protection insurance (PPI), an inferior product in most cases, has taken a large chunk out of the IP market. According to the Council of Mortgage Lenders, over three quarters of a million new mortgage payment protection insurance policies came into force in 2005. Add to this those who, not always knowingly, take advantage of credit card and personal loan payment protection and it is glaringly obvious that IP's place in the market is totally out of line.
Accountability
It is easy to blame the consumer and distributor for the malaise but it is provider apathy that has probably been the single largest reason for the poor take-up of IP. In an efficient market, manufacturers faced with these facts would either change the proposition or pull out. Unfortunately, the IP market is not efficient and the industry has historically taken the line of least resistance and done nothing.
The good news is that there is a growing appetite to address things.
A major initiative has been the formation of the IP Task Force - made up of all stakeholders in IP, including insurers, reinsurers, distributors and consumer groups. Hopefully, when it publishes its first output it will provide an impetus for insurers and reinsurers to look again at IP.
IP is fundamentally a sound proposition that has become over-burdened with unnecessarily complex and inconsistent terms. The rules surrounding benefit limitation highlight this perfectly. Insurers suggest this is a minor issue because only a small percentage of policies are arranged up to the maximum. Could it possibly be that the complexity of this area is the reason? The reality is not enough people have IP and those that do are often under-insured.
Such complexity and inconsistency does little to endear it to either consumer or adviser. But there are a number of 'tweaks' that can be made to the existing product to bring some clarity and regularity to the market: standardise maximum benefit percentages; standardise definitions of 'other sources of income'; refund premiums in respect of over-insurance; standardise occupation descriptions; publish claims data; and define deferred periods in months.
Some will no doubt suggest that such moves are anti-competitive but it is difficult to see how this could be the case in a market that has consistently failed to actively compete.
These changes will not radically increase IP sales, but if the market is more transparent it would provide a platform for a more radical review of the product and, more importantly, demonstrate a renewed commitment from the industry to IP.
Distribution in the UK protection market is diverse. At one end there is a need for a simple product to suit non-advice and debt protection scenarios. Currently it is PPI that serves this market and as the regulator shakes the market up this presents an enormous opportunity for IP providers to develop a suitable product for this channel.
PPI is an equally intricate product that offers inferior cover and does not suit long-term financial planning. It has no premium guarantees, only pays benefit for a limited period, can be cancelled by the insurer and is underwritten at claim rather than at outset.
The reality is that PPI has been successful for two fundamental reasons; it can be slipped in as a secondary sale and is easier to get into force. If IP propositions can evolve to better integrate with other products and be easier to compare and administer then a quality proposition for the mass market could emerge.
For those looking to address a client's IP needs, a different proposition is required. For this market, a product that shifts the focus of 'product' away from 'cash if you are ill' towards a health management and rehabilitation proposition could represent one way in which the industry could regenerate interest. This could quite easily be achieved within the current product framework by providers formalising some of the claims management tools that are commonly used.
Under many policies the details of these are seldom discussed, creating the perception they are there for the insurers' benefit rather than the clients. If claims management functions such as early intervention, counselling and rehabilitation were developed into tangible plan benefits, this would be an enormous step towards moving the industry away from just offering insurance to an era when it provides tools for advisers who look to fully address their clients' protection needs.
Nick Telfer is head of life and protection at Defaqto
