Protection business in 2012 and 2013 will be affected by events this year and some fundamental changes to the way customers policies are priced into the next. Richard Verdin explains.
All of which reduces insurers’ margins which may or may not be made up with promised efficiencies of volume. However, there is only one cake and in many cases, if nothing else changes, customer premiums are bound to be affected.
As far as I-E is concerned, setting up new protection policies by insurers carries a cost (administration, underwriting and commission) with the income derived from doing so recovered over time from the regular premiums.
Some with investment income in their life fund still benefit from the I-E regime which in effect reduces the rate of tax applicable to protection business as the expenses (E) are offset against investment income (I). The tax relief/credit (often called the protection offset) is currently passed on to the customer through lower pricing.
The effect of the changes planned at the end of the year is to remove this benefit which, in turn, will increase customer prices. The change impacts new customers only, existing policies will be unaffected by the change.
This will have the effect of increasing annual premium income per case for those customers who buy on the basis of cover. However, we know many customers buy their protection to a budget, so we won’t see the full increase in premium work its way through to a market increase in value.
The major impact, and the one advisers must plan for, will be on transaction levels. Many estimate that around 25% of life only cases are re-broked, with the vast majority of those on the basis that a switch represents better value for the customer.
If that is not true, because prices have risen, then many rebroking opportunities will be lost to advisers. Now you can argue over whether that is a more or less healthy state to be in, but the fact is that transaction opportunities and therefore market volume and advisers’ income will be hit.
The final impact of the removal of I-E will be to make standalone critical illness cover (CI) more viable as a product than it is today.
Today, accelerated CI (Life and CI first event) is available at a lower cost than standalone CI because it is classed a life insurance under I-E. Post-I-E, it will be more expensive and therefore less popular, although the arguments around the problem with survival periods for heart attack victims and others will continue.
As a result of action taken through the European courts by Test Achats, from the end of the year it will be illegal to price products differentially based purely on an individual’s gender.
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