With little product innovation at the moment, protection providers are being forced to compete with price. Lucy Quinton explains why the changing rates of last year look set to continue
This year has seen the protection market, always fiercely competitive, up the ante in regard to rate changes.
According to industry resources, the market is currently on track to have seen more rate changes this year than in any other. LifeSearch's regular bulletin has revealed that in comparison to 80 rate changes in 2007, there have been 78 rate changes by the time COVER went to press in late September.
Roy McLoughlin, senior partner at Master Adviser, acknowledges the situation as a positive one, although the rapid adjustments means advisers are having to check portals every few days in order to remain updated.
In terms of which company was most proactive in cutting costs, Matt Morris, policy adviser at LifeSearch, says Legal & General is likely to have been changing its rates the most with lump sum life cover being the most adjusted product.
All change
Frequent rate changes occur for three reasons: competition, technology and a lack of product innovation.
In the first instance, firms want to appear cheaper despite underwriting becoming harsher. Secondly, rapidly improving technology is making it easier to issue frequent updates for products. And, lastly, providers are being forced to compete on price because there is little change in how the products work to make them attractive to consumers.
Morris predicts that the situation is only going to continue in this direction as technology becomes more widely used: "As it keeps developing, it is easier to change prices more frequently."
The collective opinion is that price competition will continue to be as intense over the coming years. Rod McKie, head of marketing for protection at Aegon Scottish Equitable, says this is because protection is an attractive market for providers and new entrants, which will only encourage further competition.
Consequently, there are will be lower premiums that appear to benefit customers but at what long-term cost?
"It has been well-documented," says McKie, "that the protection market is too focused on chasing the current market instead of trying to significantly bridge the protection gap. While finances remain tight, it will always be difficult to break out of this behaviour."
Although the industry argues that customers should not buy products based solely on price, with a recession imminent, that argument is most likely going to be lost on the ears of the British public. According to Morris, low prices are good for consumers but the real cost may be in product innovation and improvement: "The more new products that come out to challenge the status quo, which I believe Real Life cover does, the more the industry will be forced to compete on areas other than price."
But is such competition a bad thing? From one perspective, choosing solely on price negates the need for an adviser. Not only that, but policies with cut-down prices often have cut-down terms and conditions that can see a claim reduced or even turned down.
But on the other hand, some protection is better than none at all, and there is still that £2.3trn protection gap that receives a lot of press but never comes near to closing.
Price competition will continue like it is for the next couple of years. Good or bad, the arguments regarding its benefits and detriments will carry on. Despite the topicality of the subject as economies around the world bear the shudders of recession, the protection industry will conduct the arguments long past the point of tiring out its participants without approaching a consensus or, more importantly, a solution.
