The poor performance of IP has forced providers to play catch-up with other offerings and bring the cover into the 21st century. Nick Telfer explains how IP is in desperate need of a makeover.
Income protection (IP) is the only product that comprehensively provides protection against the catastrophic consequences of ill health. As such, it has a pivotal role to play in financial planning.
Unfortunately, the IP proposition consistently underperforms as other policies that provide similar cover continue to outsell it. The success of payment protection insurance (PPI), at least in terms of sales, is clear evidence of consumer demand for disability insurance. As the image of PPI becomes increasingly tarnished, there is a real opportunity for the financial services industry to rise to the challenge and take some long overdue action to reinvent the proposition. But the question is who is going to take the lead?
One of the historical problems with IP has been that the majority of insurers have failed to demonstrate a commitment to the market, preferring to make hay from piggy-back products like critical illness (CI) cover and PPI.
Cosmetic changes
Products have traditionally been designed around a consistent template that is riddled with an array of complex underwriting and benefit rules. Continual tweaking of these rules by insurers endeavouring to differentiate their propositions has resulted in a market overshadowed by complex and inconsistent product terms. This acts as an extremely efficient antidote to any adviser and customer interest.
Over the last 18 months, the IP Task Force, led by Peter Le Beau and Clive Waller, has worked hard to raise the profile of the cover and stimulate the market into action.
For many years, the IP proposition has been a one-size-fits-all offering. As consumers become more demanding and distribution more polarised this approach to proposition development has limited sustainability.
PPI's potential fall from grace presents an enormous opportunity for IP insurers to take a larger slice of the mass market. To make the most of this challenge, an affordable proposition that combines the transactional simplicity of PPI with the long-term benefits of IP is needed. In addition, the product should be unencumbered of the complexity and inconsistent baggage of the current IP market.
At long last, there are signs that at least some insurers are recognising that continued tinkering with a failing proposition is no longer an option and are showing much needed commitment to the IP market.
Technological advances and the use of new underwriting techniques such as tele-underwriting are increasingly being used to improve the efficiency of the application process within the existing product model. While these developments should be applauded, there is still room to develop the IP concept into something that better suits the demands and needs of the 21st century adviser and consumer.
Pioneer Friendly Society has to a large extent been the torch bearer for a new era for IP. In January, it launched its Pure Protection policy, building on its experience as a provider of a 'Holloway'-style policy. Pure Protection provides day-one cover with no differential pricing for gender, occupation or smoker status. Removing the differential pricing means that the price the customer pays is more likely to be the price the adviser initially quoted.
More recently, Pioneer, recognising the need for propositions designed to meet the needs of specific customer segments, launched its professional IP policy. The policy is designed to provide IP cover for those working in one of 100 defined professional and low-risk occupations, including IFAs and insurance workers. Although premiums increase with age, the underlying rates are guaranteed and, like Pure Protection, there is no occupational or gender differentiation. Most importantly, up-front financial underwriting removes some of the risk of the benefit being restricted on claim.
the way forward
In September, Zurich launched its new protection proposition, which included an integrated IP and CI benefit. Perhaps the protection industry has at last realised that the separate silo approach to different covers is a thing of the past and that the way forward is to offer consumers a more joined-up proposition.
These are just a couple of examples of recent product developments that show it is possible to move away from the traditional product confines to reflect changing demands.
It is essential that, if this trend for innovation is to continue, all stakeholders show greater commitment and enthusiasm to the IP market - not least the insurers themselves.
In the short term, they must commit more resources to training and motivating advisers to speak to their clients about IP with greater confidence. Looking forward, they need to look at their current product and ask themselves a simple question: "If I were building an IP policy from scratch would it look like this?" With very few exceptions, the answer would surely be 'no'. n
Nick Telfer is principal consultant,
protection at Defaqto
