Speculation is rife that the protection market is in the grip of a rate war. Johanna Gornitzki examines whether this is true and, if so, what the consequences could be for the industry
Price changes in the protection market have become more frequent in past months compared with previous years. Since January 2005 there have been 50 reviews of critical illness and life cover in the protection market, amounting to an average of more than one a week.
Many of the alterations have come in direct response to weakening sales figures, which have forced providers to try to find new ways of attracting business. This has certainly given the appearance of a rate war. However, whether the frequency of the changes could be interpreted to indicate that there is an actual price war going on is disputable.
Arguing that the market is currently undergoing a battle, Roger Edwards, products director at Bright Grey, says: "We have indeed been seeing a rate war in the protection market, largely driven by declining sales and companies trying to retain their market share as a result." This notion, however, is slated by the Association of British Insurers (ABI). "What we have here is competition between providers, which is caused by the natural fluctuation in the market," says Richard Walsh, head of health at the ABI.
Whether or not it is fair to say there is a rate war occurring in the market, there is no denying that, recently, more providers have been increasing the amount of repricing they undertake (see table opposite). What is prompting these frequent changes?
As mentioned previously, poor sales results, largely due to a declining mortgage market, have put pressure on life offices to find alternative ways to get consumers interested in protection. Adding to the pressure, there have also been a number of new competitors, like AXA and Royal Liver, entering the market. This, together with other providers' decisions to improve and enhance their web systems to make it easier to buy protection online, has made rates very competitive.
Investor pressure
According to commentators, the fuse for the competitive climate that now exists was lit by the larger providers, which went down the rate-cutting path largely because of pressure from the City. These insurers have to demonstrate good market share and generate high volumes in order to make more money. Rate reductions quickly became their favoured tool in their bid to protect short-term sales targets and to satisfy policyholders. This, in turn, forced smaller firms, like protection-only provider Bright Grey, to follow suit. "It's like a spiral effect," explains Gerry Warner, protection development manager at Zurich.
So has cutting rates helped providers gain more business? Walsh seems to think so. "This is a win-win-win situation for insurers, intermediaries and consumers alike. The rate cuts means more business for both insurers and intermediaries, and consumers are also benefiting as they will be offered more affordable premiums," he says. While his view is not entirely backed up by protection experts, the majority of the larger insurers all agree that the consumer is the number one winner in the price war.
But is the deal they are getting really that great? Alison Turner-Holmes, protection marketing manager at Skandia, does not believe so. "In my opinion, too many providers change their premiums too often. On many occasions their premium reduction is a matter of pence to make them the cheapest provider on the Exchange and so bring in business based purely on price alone," she says.
"If you look, for example at the critical illness premium tables, you will see that the 'cheapest five' companies are all within pennies of each other's premiums (see table), and they are the providers that battle it out for those top five places," she continues.
Agreeing with her, Peter Chadborn, principal of IFA firm Chadborn, Baker & Kearle, says the difference in price between various providers has gone down dramatically. "It used to be £10 or more, but is now just a matter of a pound or two. Therefore, on the bulk of protection business, there is no longer anything in it," says Chadborn.
False economy?
This does not spell great news for consumers who think they are getting a good deal by choosing the cheapest premium. Worse still is that this may not be the worst outcome of fierce pricing. Some commentators have expressed concern that while price cuts on the surface look like a clear winning formula for clients, they could in reality have made rates more expensive. It has already been noted that some of the larger providers have tightened up their underwriting terms as a result of lower pricing. For a lot of consumers lowered rates would therefore not necessarily mean cheaper premiums.
Tom Baigrie, managing director of LifeSearch, says: "In order to lure customers with seemingly cheaper premiums, more and more questions are being asked of applicants when they apply for life insurance and as a result more and more consumers are being hit with increased premiums, wider exclusions and more frequent declines."
A minority of consumers have always been hit with higher premiums due to various factors, such as high-risk occupations, health problems or dangerous hobbies. However, as price cuts have become more common and underwriting effectively harsher, this minority group of 'non-standard' cases has grown bigger. LifeSearch estimates that as many as one in three customers buying protection are currently considered non-standard. And many cases that were considered clear-cut five years ago are no longer seen that way.
"Life offices are finding more and more ways to cut premiums, but we fear the number of people that will actually receive these lower premiums is decreasing by the week," says Baigrie.
Legal & General - the insurer that made the most changes this year - disagrees with claims that fewer people are able to buy protection at standard rates. "The application forms have tended to become a bit longer, to deter the number of non-disclosures in the sector. However, the vast majority of people still get their quoted premiums," says Bernie Hickman, protection actuary at Legal & General.
The ABI also does not think these two developments are related. "Insurers are taking into account more health information and that is why slightly fewer people are getting ordinary rates," says Walsh.
Refuting the ABI's view, a recently published Swiss Re report shows that there has been a rise in the declinature rate of term assurance claims, from 6% in 2001 to 11% in 2004. The study suggests that the results "reflect a tightening of claims management in the early years of policies consistent with competition in the commodity term market". Mark Johnson, head of sales and marketing at Swiss Re Life, says: "A rise in price competition will affect the risk management. There are definite downsides, including tougher claims assessments."
Slipping standards
Consumers are not the only ones negatively affected by price hikes. In some instances, the numerous rate alterations have also had an adverse effect on some insurers' service levels. For providers it is all about striking a balance between remaining competitive, while at the same time not gaining too much business. If a firm becomes too successful in terms of winning business, it could have a negative effect on its service levels as it will be unable to effectively cope with the demand.
Insurers therefore need to try to balance the volumes coming in and going out. Some have done it successfully and some have not, and where it has not been successful service levels have been deteriorating.
Intermediaries have also suffered from the recent rate cuts taking place, with many of them having seen their earnings capacity being reduced as providers head towards their lower margins. As a result, advisers now have to sell more to make the same amount of revenue. The harsher underwriting is also costing them time and money.
On a more serious note, intermediaries also think the increased pricing competition have had an adverse effect on them as advisers, because they do not tend to base their recommendation on price alone. With its intense focus on price, the rate war has led consumers to believe that this, rather than the quality of the product, is the most important factor to consider when buying protection.
As Baigrie points out: "Many think protection is just about price. Therefore, they apply for the very cheapest. But unless they are young and perfectly healthy they will be knocked back with a loading, an exclusion or a decline - and may be put off buying completely."
Sharing Baigrie's sentiment, Chadborn thinks it is a shame that price is to a large extent the main driver in the insurance industry. "Protection products are not simple commodities. A good product should sell because it is good, not just because of its price," he says.
Looking ahead, most protection experts do not think the level of price cuts that the market has been experiencing this year can continue forever. While there may be slightly more room to cut in some sectors - especially the critical illness market, which saw guaranteed premiums rise sharply a couple of years ago - it is fair to say that the margins remaining are not that thick. Some providers will of course have deeper pockets than the rest and be able to stretch themselves a bit further.
That said, it is important to recognised that insurers will never fully cease to make rate alterations, because as long as we do not see a monopoly in the market providers will continue to compete on price.
It should, however, be questioned whether the price insurers, intermediaries and consumers have to pay for constantly chasing the lowest price has become too high. Although some providers deny there is any link between fierce pricing and harsher underwriting, evidence suggests that more and more consumers are being labelled non-standard as insurers continue to cherry-pick their customers in order to keep their costs down. This has led to more cases being declined - and that is bad news, not just for those specific customers but for the industry as a whole. While in the short term some may benefit from intense rating, in the longer term no one will.
Alternatives
It is clear that protection providers need to find other ways in which they can compete for market share. This has been recognised by the sector, and providers have already started to look at new ways to differentiate themselves.
Enhanced service offerings and innovative ways of conducting business, like tele-underwriting, are two things insurers have shifted their attention to. Solutions are plentiful and should not be overlooked.
While differentiating products by price may be the easiest way to lure consumers into buying protection, intermediaries and insurers should be careful in using this as 'bait' because in the longer term it could have an adverse effect. Instead, the industry should continue to highlight just how essential its products are.
So what's next? With pension term assurance likely to become a bestseller post A-Day, many providers are expected to enter this market. Most companies are unlikely to play their strongest cards at first so there will inevitably be some repricing going on. That is only natural. However, if any lessons have been learnt, insurers will steer clear of starting another rate war and instead focus on the quality of their propositions.[TB]LIFE AND CRITICAL ILLNESS PRODUCTS: MAJOR RATE CHANGES 2005PROVIDER DATES TOTAL OF RATE NO OF CHANGES NATURE OF CHANGES CHANGESAXA May,Jul, Cut rates for 65% to 95% of its guaranteed Oct Life or earlier CI (with or without TPD) 3Bright Jan,Jun, Cut rates for level life, decreasing life,Grey Jul level and decreasing GCIC. It also cut rates for decreasing reviewable life and CI in Jun 3BUPA Mar A 5% reduction to guaranteed CI with life 1Friends Jan,May, Decreased rates for life only (level andProvident Jul,Sep decreasing term assurance) in Jan and Sep. Decreased rates for decreased term assurance (life only) in Jul and cut accelerated guaranteed CI (level and decreasing) in Jul 4Legal & Jan,Mar, Decreased rates for life only on sevenGeneral Apr,May, occasions and cut rates for guaranteed CI and May,Jun, reviewable CI on three and four occasions Jul,Aug, respectively. However, rates were increased Sep,Oct in May and Aug 10Lincoln Mar,Sep Rate changes went as low as a 59% reductionFinancial in Mar when the firm relaunched its FinancialGroup Foundation product for the IFA market. Rates were reduced by another 14% in Sep 2Liverpool Jul Rate reduction across the board of between 2%Victoria to 5% for CI and reduction of some of its term assurance policies 1Norwich Jan,Apr, Rate changes mostly in relation to termUnion Apr,Jul, products and mortgage life insurance. Mainly Sep,Oct cuts 6PAFS Nov Reduction of between 5% and 12% on level term assurance and decreasing term assurance 1Prudential Apr,May The company relaunched into guaranteed CI in Mar. Cut rates in Apr and May 2Royal Jun One major rate change when it introduced itsLiver new product range 1Scottish Mar,May, Reintroduction of guaranteed LICI in Feb.Equitable Jul,Jul Mainly a reduction of level and reducing lifeProtect protection in Mar and Jul. Largely reducing guaranteed & reviewable life with CI in May and a decrease of 3.5% on GIV business in Jul 4Scottish Feb,Jul, Rate changes mostly in relation to death orProvident Sep earlier CI benefits. The majority of rates were decreased with only a small number increasing 3Scottish Jan Decreased rates for level term assurance andWidows mortgage and business cover 1Skandia No Cut rates for level life, decreasing life, changes level and decreasing GCIC. It also cut rates for decreasing reviewable life and CI in Jun 3Standard Jan,Feb, Decreased rates for level term assurance andLife Mar,May, in some cases for level term accelerated CI Oct and mortgage protection 5Unum- No -Provident changesZurich Feb,May, Rate changes mostly in relation to term Aug products. Mainly cuts 3SOURCE: COVER magazineSELECTED LEVEL TERM POLICIES: PREMIUM COMPARISON DEATH PREMIUM BENEFITCOMPANY PRODUCT PER month S/A (£)Legal & General Elect term 13.01 150,000Norwich Union T/A Elect 13.23 150,000Standard Life Level 13.33 150,000Scottish Equitable Term Ass 13.44 150,000Liverpool V MIMI MIMI E-Prot 13.49 150,000Prudential E-term Ass 13.71 150,000Friends eSelect 14.00 150,000Royal Liver Prot Menu 14.02 150,000Bright Grey Level Term 14.80 150,000Lutine Level Term 15.87 150,000SOURCE: The Exchange
