Income protection still sits in the shadow of critical illness, with consumers remaining unaware of how disability can affect their lifestyle. But, Adele Burton says IFAs can play a key role in bucking this trend.
Income protection (IP) is failing to generate as much interest as the industry originally anticipated, but it is a market which is far from saturated with an enormous potential for growth.
The market has seen a lull in the number of policies sold over the last year with research from Swiss Re showing that the number of income protection policies sold in 2000 reached 184,000 ' slightly down on 1999 when the figure tallied 189,000. Considering only one in 10 of the UK population has an IP policy and most of these are taken out via group or employer schemes, there is a gap in the market which needs to be filled.
'The sales message of income protection is easy to put across and everyone thinks it's a good product to have. But the problem is, when people begin to look at the policy they think it is complicated and the underwriting takes a long time,' says Roger Edwards, head of products at Scottish Life.
'Over the last two years, companies have tried to move away from this by cutting back on exclusions, making definitions clearer and removing clauses such as the change of occupation clause,' he added.
Meanwhile, Jerry Warner, marketing development manager at Standard Life, says we have not seen a huge change in the income protection market because customers still do not perceive it as value for money and are failing to recognise the effects a long term illness can have on their lifestyle.
There is a definite call from providers to promote awareness of IP, which in the past has tended to fall in the shadow of critical illness cover (CI).
'People are attracted by the windfall lump sum provided by CI. With IP they don't foresee themselves being off work for a long time and so do not see the benefits of it. There are large numbers who will be off work for more than six months at any one time and people don't believe it will happen to them,' says Warner.
This is backed by research from the Department of Social Security which has shown that people are 19 times more likely to be off work for six months due to illness or injury, than they are to die before the age of 65.
Income protection may have suffered to some extent from the success of CI as they do overlap in some ways. However, Edwards thinks clients should have both.
He says: 'In an ideal world people should have a combination of both IP and CI. Policies are now being developed as menus whereby people can combine the two together.'
Recent debates over the level of State benefits and whether the State actually provides enough has also increased awareness.
Nick Homer, product marketing manager at Norwich Union, says: 'IP still needs to be sold and we are reliant on the distributors to highlight that need. The education of IFAs for the need of IP, what people get from the State and the chances of becoming long term incapacitated are all real issues of why people need protection.'
The problem is that consumers do not put IP on top of their agenda alongside protection such as life assurance, which again highlights the need for IFAs to promote the product.
However, while other areas of the protection market remain in the headlines, such as the current debate over whether re-qualification periods should be introduced every three years for incapacity benefit, IP is also kept at the forefront.
As companies try to generate interest in the IP market many have been targeting specific expenditures such as cover for mortgage repayments. Homer says there has been a lot of growth around the mortgage- related market especially in bank assurance distribution and there is recognition for the need of long-term protection. 'Three years ago only about 10% of IP policies sold were mortgage related where as last year it was nearing 40%. There has been a shift in distribution.'
Edwards agrees and believes mortgage products could be beneficial to IP. He says: 'The success of CI was down to sales on the back of mortgages and we are seeing this on IP.'
The Government's pledge that it wants at least 50% of people to have their own independent mortgage protection by 2005 is also sure to boost growth within IP, not just mortgage payment protection insurance (MPPI).
Warner says: 'MPPI is not being taken in large enough numbers which has encouraged other providers to offer products which offer long term piece of mind. If we cannot persuade people to cover their salary, at least we should try to persuade them to cover their mortgage. So the IP market will be the growth area in the next few years.'
Despite many IP providers remaining subdued about the size of the market, some say that they have seen growth over the past year, a factor which is expected to continue.
'There has been considerable growth over the past year, the market has grown by about a third. A lot of it is down to providers specifically targeting different needs or helping advisers understand the product,' Edwards says.
Joanne Hindle, director of legal and external affairs at Unum, says revenue for income protection policies at Unum has increased by about 10% over the past year, however, this is an element she credits to increased awareness among employers.
While there has been some growth over the past year, more still needs to be done to promote IP and Edwards believes the industry needs to assess areas which cause concern such as making the underwriting and claims processes easier.
Mark Edwards, personal market leader at Royal SunAlliance, agrees: 'We should look at IP from a claims aspect. About two-thirds of the claims made are CI related, such as stress.'
Looking to the future, growth is expected to proceed. Hindle says: 'The market is only about 10% penetrated so there is scope for more growth. Events of last month in the US have also made people more aware of the risks that we face.'
The US disaster has also rocked the UK economy, which highlights uncertainty and promotes the need for protection.
'This year, there is not anything happening in the IP market, but uncertainty in the economy highlights the need for protection. People are less willing to invest so are more willing to protect,' Homer says.
He also says that people have now got more of an appetite for protection.
'Looking at the traditional adviser market; there are a number of CAT standard products. The income stream for advisers is not what it was in the past and in the future there is going to be more focus on protection products in general,' he says.
However, Warner believes more needs to be done before we witness sustained growth within the IP market.
'Without a push from the industry or an initiative from the Government, I can not foresee any real growth.' he says.
In order for the IP market to become successful, experts have called for simplification within the industry, to ensure customers actually understand the product they are buying.
Laura Shanks, product development manager at Scottish Equitable, says: 'It is important that providers try and help IFAs manage clients' expectations. Ensuring that clients do know what they are taking out and understand what could happen to them if they were to claim.'
Not only is simplification required for new customers, but regular checks on the existing clients' statuses need to be compiled to guarantee that they will get full entitlement if they were to claim.
'It's important that the client and the IFA assess the benefit amount on a regular basis. If it's found that the clients salary has decreased dramatically and can no longer justify £1,000 per month, the benefit will be capped,' Shanks says.
We are seeing a move towards menu-based products of which IP is an integral part. This comes from a demand for more flexible products. Hindle says: 'We are starting to see flexibility. More companies are looking for a different type of package rather than a standard off-the-shelf product. People want more variety, it is becoming a more mixed market place. Which goes back to consumers becoming more demanding.'
However, the market will only ever see growth if consumers are aware the product is available. Edwards adds: 'In the future, insurers and employers will start working together to create awareness within the industry. IP as a name is a misnomer, we need to develop the product and how it's sold in order to raise understanding and the number of people taking out cover.'
Adele Burton is a staff writer
