New territory

Advisers working in the protection market are acutely conscious of the squeeze being put on income streams by increased competition and the advent of the '1% world.' As a consequence, many are now looking to combat this by expanding their product portfolios and looking to develop profitable long-term relationships with clients.

One product that fits in well with current protection portfolios is personal accident (PA) insurance, a general insurance product that has been around for a good number of years, but is now not as heavily promoted.

PA pre-dates critical illness (CI) and most IFAs are aware of its existence. However, a number of providers have reported that it is a fairly static market. Nevertheless, IFAs looking to increase their protection sales should remain aware of its benefits because it can help to open up new markets.

A key selling point of PA is that it is generally cheaper than critical illness and income protection and so it can be targeted at a younger market that may not be able to afford these more comprehensive products. It can also help advisers build long-term relationships with their clients.

An easy concept

From an IFA's point of view, one of the main benefits of PA insurance is that it is quite straightforward to explain what areas are covered. PA insurance will pay a specified lump sum, or a multiple of an annual salary, if the insured suffers death, permanent total disablement (PTD), or loss of eyesight or limbs. As with most general insurance products it is bought on an annual basis. This gives IFAs the opportunity to go back to a client and discuss the protection each year, and maybe add to their cover.

As the name implies, PA insurance provides cover in the event of accidents and illness. Lindsay Taylor, UK and Ireland accident health manager for Chubb Insurance, says: 'It is quite a simple plan. If the policyholder suffers a permanent and total disability or death due to an accident they will receive a lump sum payment. However, they can also add illness cover to this which would pay a weekly benefit if the disablement is temporary.'

Giles Berkshire, personal accident underwriter at Compass Underwriting, says that if the client chooses to add in sickness benefits they should be aware that, unlike an IP policy, PA only pays out for a maximum of two years. Berkshire says: 'PA covers loss of earnings accidents or injuries, and if someone is seriously ill and unable to work again or dies it will pay out a lump sum. But if the situation is not permanent, the policy would pay a weekly income for a period of between 12 and 24 months after a deferred period of seven to 14 days.'

Due to these limitations, PA is often cheaper than CI and IP, which makes it an attractive product for those on a tight budget. Andrew Santori, development underwriting manager at Royal & SunAlliance, says: 'PA could be an entry-level type product because some cover is better than none, but it is very much about the aims of the individual. If their key priority is income security it could be a useful top-up to other products.'

The client's profession is taken into account when calculating the premium. The cheapest rates are usually offered to those in non-manual occupations such as clerical staff or accountants while those in the building industry or window cleaners would pay higher premiums.

Hazardous occupations

However, there can also be a number of lifestyle factors that affect premiums. Ashley Bond, office manager at Agency Underwriting, says: 'There are usually further stipulations attached to the plan if the policyholder engages in high-risk activities such as rugby and skiing, and if the claim is made because of them then we may increase the deferment period to 14 days. We stipulate a maximum age of 55 for taking out personal accident and illness, and 65 for personal accident because of the increased risk of illness.'

Simon Burgess, managing partner at Goodfellows, says PA can be used if the client finds it difficult to get cover because their lifestyle makes it difficult to get insurance of any kind. 'Realistically the most common use of PA is for professional sports people or those in high risk occupations, such as stunt men, who might ordinarily be excluded from the usual protection policies,' says Burgess.

When PA is used in conjunction with an IP policy, the premiums of IP can be reduced by increasing the deferred period to 12 months and using PA with illness protection to cover the gap. Taylor says: 'PA can be used in conjunction with other products, but while clients may graduate to a CI, an IP or a life policy to gain more comprehensive cover they would not be able to replace the lump sum disability cover.'

Better than nothing

Ronnie Martin, director of protection at Legal & General, says: 'The premiums with personal accident insurance are cheaper than CI because the cover is not so wide. The added benefits from CI are dramatic because there is a full and comprehensive list of illnesses that are covered including permanent disability. But like all sorts of cover it is better to have some cover than none at all. So when people are taking out a mortgage or another large loan they may not be able to afford CI at first, but they could take out personal accident insurance and step up to CI later. It is all about affordability and matching the needs of the client at different times.'

However, one of the main drawbacks with PA is that it will not cover as wide a range of conditions as CI or IP. Also maximum benefit levels are lower Santori says: 'One major consideration with PA is that the sums assured tend to be limited to around £100,000 or £200,000, which does not provide that big a fund for the future if a claim is made early.'

PA will also not be suitable for disabilities that may recur because it is an annual policy and insurers may exclude such risks at renewal or even refuse to renew the policy.

So which group of clients is suitable for PA insurance? As has already been discussed, PA is relatively low priced so it is going to appeal to younger clients who are on a budget. It can also be used as an employee benefit, because it allows employers to support their employees after they have paid their statutory sick pay. Taylor says: 'Typically a company buys PA for its employees, or a certain number of its employees. Contractually the employer is the beneficiary but it is typically paid to the employees or their families, and it is marketed as an employee benefit. It makes a good employee benefit because there is a relatively low premium cost but a potentially high benefit in comparison.'

It is also suited to the self-employed who may not receive an income if they cannot work. Trevor Scrivener, PA underwriting liaison representative at Heath Lambert Group, says: 'Companies often provide some type of employee benefit, so it is more common for self-employed individuals who would not receive any money if they could not work to take it out. PA and sickness is a cheaper option, it is good value and better than nothing.'

When an employer takes out a group PA policy they can often get a low premium rate. This can help small to medium-sized businesses offer an employee benefits package when other packages may not have been affordable. Santori says: 'When group PA is taken out as an employee benefit there may be less selective underwriting due to the spread of risk, and it may again be cheaper. But depending on the size of the scheme they may get experience rated, depending on claims experience.'

The need to increase levels of business is not going to change. IFAs working in the protection arena are going to have to widen their offerings. The only drawback is that IFAs wanting to sell PA will have to join the General Insurance Services Council. But this may be a worthwhile move. Products such as PA can be used to increase the number of clients at the lower end of the market, and also to help develop long-term relationships that could prove profitable.