Does the protection market have misplaced hopes about how products will fare in the advent of the credit crunch?
For those of us still waiting for an opportunity to get onto the housing ladder, pub conversation of recent years has generally followed a usual pattern with talk talking swidftly from new movies and music to the beyond belief expensiveness of UK property, declarations of moving abroad to buy and, finally, the simultaneously glum and optimistic predictions that the decade long buoyant economy is soon to come crashing down loudly around us. For the protection industry, despite proclaiming the contrary, the credit crunch has the potential to severely hurt providers and advisers.
Stripping away the buzz-talk that has given the industry the much harked-about catchphrase of ‘the protection gap’, this concept is little more than a term referring to an ongoing untapped opportunity in the UK for providers and advisers to increase profits. And if the general public has been reticent to buy protection, there is nothing forthcoming that suggests the situation will improve. In fact, the opposite is true: despite the ongoing proclamations about closing ‘the gap’, the coming economic turmoil has the potential to alter the landscape from a gap to a chasm.
Recent figures from the Council of Mortgage Lenders compared the states of the mortgage landscapes of 1992, the eve of the last major economic downturn in the UK, and late last year. In fifteen years, the percentage of households six months or more in arrears fell from 3.54% to 0.48%. This is good news on the surface yet Axa has calculated that even if the rate of homes in arrears rises to just half of 1992 rates, the actual number of households experiencing problems will exceed 200, 000. And with recent news claiming house prices are falling at their fastest rate since 1991, it seems the UK economy is set for the same conditions that decimated the American market.
Politically, the tightening of household budgets has become the elephant in the room that no one is talking about. Increased fuel, food and utility costs exacerbated the condemnation of the government’s abolition of the 10p tax rate which forced the Treasury into giving ground. Factor in as well that the average debt, excluding mortgages, for the average household in the UK now exceeds £9, 200 and it is now time to get very, very worried about the next couple of months.
As budgets tighten, items seen as luxury expenses are the first to be dropped. Protection will undoubtedly be one that is cut. There is no good news here.
In 1942, Winston Churchill said: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." The credit crunch is far from over and its effects are yet to be fully countenanced. But one thing is sure – there is worse to come.
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