Chairman of the ABI income protection working party, Bob Ratcliff , tells Angela Faherty his views on why this market has failed to flourish
Having spent the majority of his working life in reinsurance, it is fair to say that Bob Ratcliff knows a fair bit about the insurance industry.
He is European life and health claims leader at GE Insurance Solutions, chairman of the Association of British Insurers' (ABI) income protection (IP) working party and is very passionate about the IP market.
"Market penetration shows that about 15% of the working population of this country is covered by group or individual income protection. That is not enough," he says.
Protection gap Ratcliff says that the majority of claims in 1985 were for cancer, whereas nowadays they are for anxiety and back pain – the most common cause of long-term employment absence.
A worrying trend for such an under-insured population.
"There is less stigma attached to mental illness these days. We do not see the extreme cases, such as bipolar or schizophrenia, what we see now are those people who are anxious because something has gone wrong in their lives," he says.
"85% of the working population are not covered by income protection, the industry needs to take responsibility for making people understand that they have a gap in their protection needs." But as chairman of the ABI IP working party, does Ratcliff not feel it is his responsibility to help increase this number and come up with a solution? "We have had so many conversations with clients and IFAs about the way to grow this market and in all honesty, nobody has come up with a solution. If only I could tell you that I know the magic answer," he says.
While he does not have a quick fix solution, Ratcliff has his own beliefs as to why sales of the product have failed to take off.
One reason in particular, is what he terms the 'reader's digest' concept.
That is, when faced with a choice between regular instalments and a lump sum, consumers will always opt for the latter.
"People frequently hear about heart attack, cancer and stroke and they believe that is what will affect them, whereas the reality is that they will most probably put their back out. If you look at what causes illness for at least six months, it is anxiety, depression, and lower back pain – all of which are not covered by critical illness," he says.
Lack of understanding among consumers may be one barrier facing the IP market at the moment, but another is distribution.
Ratcliff points out that as most people's main form of contact with a financial institution is a bank or mortgage lender, IP does not get a look in.
"If you look at the people successfully selling income protection, with the exception of HSBC, it is mainly IFAs. The fact is that not enough distributors sell it." While some would say it is the role of the IP working party to rally the troops, drive product development and increase sales, Ratcliff is reluctant to take charge and lead the IP cause.
He says the ABI working parties were originally established to drive transparency and make it easier for customers to understand the products.
"We are here to provide technical support to the ABI and industry. We have produced a key features document, a consumer guide, claims guidelines, and have worked with GRID on creating a technical guide to income protection. We are happy working in the background," he says.
Ratcliff adds that while the CI working party has been at the forefront of industry debate in recent years, he does not believe that is a route the IP working party should take.
"The critical illness working party chose to drive standardisation, the other parties have chosen not to. The income protection working party does not want to create a onesize fits all product, we want insurers to be given the freedom to develop their own products, and that has always been our stance," he says.
Hybrid products However, Ratcliff does admit that adopting a more public persona has been explored.
"The working party had a conversation recently about whether we wanted to help the market develop an income protection product and help to increase sales. But I really do not think that is what we should do and the members agree. The working party is quietly working in technical support, we will not be pushing product development nor will we be trying to persuade insurers to come to market. We do not think that is the role of the ABI," he says.
Ratcliff does believe that the regulatory changes will help put IP back on the agenda and help the market grow.
But he also has reservations about the way in which protection is sold.
He says with so much of the protection market being related to mortgages, an economic recession would stifle the sector.
"It could also be argued that some IFAs have relied heavily on the mortgage market for protection sales, but if interest rates go up, and fewer people buy houses, then they are going to have to try to change the way they sell. And that may prove difficult. As an industry we need to try and encourage advisers to change so they are not solely relying on this method," he says.
While critics have often attributed IP's lack of success to the product itself, Ratcliff disagrees.
He admits the product has some flaws, but creating a hybrid IP/CI product is not the answer.
"People have compared income protection with mortgage payment protection insurance and critical illness and talked about hybrid products. But in all honesty, there has not been a viable solution. There is no reason why you cannot develop a hybrid product. From a reinsurance perspective, there is nothing to stop it, we talk about this all the time with companies and we could price for it. But it comes down to whether this is a product that can be developed in terms of value expectations and cost offset and one which IFAs would be comfortable to sell. And so far, that is something no company has managed to work out," he says.
And as for the future of the market, what does that look like in the eyes of the ABI IP chairman? "It would be good to say that we can get that 15% of people covered with income protection up to 30% or 40%, but I cannot see it happening. I think we have to keep working hard at informing people about the benefits of the product and, as far as we are able to, remove the barriers to purchase. I don't think it is a pricing issue, or the product itself. Yes, there are a couple of features in the product that could be a bit more userfriendly, but I think it is consumers not understanding the need and distribution that are the main challenges facing the sector." Despite these obstacles, Ratcliff remains optimistic.
"There are great opportunities ahead. Insurers are more interested in diversifying this product, new regulation means that it has to go higher up the agenda for advisers, and the Government is saying too many people are claiming incapacity benefit and are looking at reforming this. These are certainly grounds for optimism," he says.
