Sales of income protection (IP) rose again last year, boosted primarily by an increase in expenditur...
Sales of income protection (IP) rose again last year, boosted primarily by an increase in expenditure-linked sales. But despite renewed optimism in the market the take-up of IP remains disappointing relative to the likes of critical illness (CI).
One of the reasons why the IP market is showing signs of increased growth is that it is being taken out to protect a mortgage. Mortgage protection is now receiving more press coverage and as a consequence people are becoming more aware of the importance of protecting their homes. The Government, the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) have spent a great deal of time in the past 12 months raising public awareness and promoting the importance of mortgage protection. There is also growing dissatisfaction with mortgage payment protection insurance (MPPI) which will pay benefits for between 12-24 months, whereas for around the same price per month IP will pay benefits until the policyholder is able to return to work or retires. People are also beginning to realise that IP offers far wider coverage than its CI counterpart, which too can put much of its success down to mortgage-related sales. For instance, IP will pay out on any injury or illness that prevents the policyholder from working, as opposed to the specific conditions covered under a CI contract.
Room for improvement
According to Swiss Re, new IP policy sales increased by 21% in 1999 and expenditure linked purchases accounted for 36% of total sales. The increase in sales has been welcomed but, according to most providers there is still plenty of room for growth because the size of market remains modest. Nick Homer, product marketing manager at Norwich Union Healthcare (NUHC), says there is still a widespread lack of understanding and only around 11% of the population has this form of protection.
"From our research the major barrier is the lack of knowledge about the need for the product or what the product does. People still do not know what exactly they are going to get from their employer in the event of long-term sickness and people think that they are invincible," he says.
Increased need
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, according to the Department of Social Security. Recent Government estimations also show that in the next 20 years the number of people who are claiming incapacity benefits will rise from 1.5 million to 2.5 million - over 10% of the working population. Reforms to State benefits mean fewer people are eligible for benefits and the benefits themselves are lower.
Rod Macdonald, sales and marketing manager at Permanent, says: "Generally, the message is now getting through to the public that the State is not going to be around to provide for you in the way that it has done historically. IP should be the number one financial need that is addressed, before pensions, before life cover, ISAs or anything else."
There is, therefore, a very real need for consumers to provide for themselves. Rosalind Pearson, research and planning manager (personal finance) at Swiss Life, says: "IFAs should be aware that the number of people claiming incapacity benefit will continue to rise and people should really be making private provision. I think that IFAs have to get across the message - how can you possibly live on £60 to 65 a week?"
However, Mike Turner, product manager at Friends Provident, says it is essential to remember that although mortgage protection is very
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important, paying off a mortgage is only one of a number of demands made on a person's income. "It is the absolute minimum you should be covering, but the mortgage should be the starting point not the finishing point."
Poor take-up of IP has historically been attributed to its cost and complexity, and the continued belief in State benefits, and this has resulted in a number of initiatives designed to simplify the product and to raise public awareness. One of the most important developments last year came from the Association of British Insurers (ABI) when it released its Statement of Best Practice for income protection. The statement was part of a response to the report by the Office of Fair Trading on health insurance, which was published in May 1998.
The statement applies to income protection providers who are members of the ABI and compliance is a condition of membership. Of its 440 members around 200 transact long-term insurance business, and they account for almost all of the life insurance business written in the UK. The intention behind the statement is to make policy terms and conditions as clear as possible, particularly exactly what is, and is not, covered.
This is to ensure that IP is described in product literature in a way that makes the products easier to understand and allows consumers and IFAs to more easily compare the products of different providers. Geoff Brown, managing director of BUPA Healthcare Assurance, says: "The statement has certainly given IFAs and consumers more confidence in the product because there is now a standardised approach."
The various initiatives appear to be bearing fruit, but Macdonald says: "This is not going to get through to consumers overnight. There is now more chance of the message getting through than there has been for a long time but when the full impact of market reforms comes I think that will be the real catalyst for the market to expand."
Most providers have now ensured that their products are ABI-compliant, but as the tables here show there is still considerable divergence between the contracts available.
Table 1 shows how premium loadings for higher-risk occupations, smokers and women are applied to cover the perceived extra risk. Very few insurers do not apply a premium loading to smokers and 15% is the most common figure. However, of those insurers who stated their loadings, BUPA, at 33%, and Canada Life, with up to 35%, were the highest. Women usually receive higher loadings and the typical figure is about 50%. Swiss Life, however, applies a 75% loading to women.
The friendly societies are less likely to apply a high premium loading to smokers or women. The Holloway Friendly Society's Classic Plan and Pioneer Friendly Society's Income Protection Plan do not apply any loadings to women or smokers.
Table 3 shows the benefits for individuals in occupational class 1. For a non-smoking male aged 30 next birthday a benefit of £1,000 per month with a deferred period of four weeks typically costs between £30 and £45 a month. The cheapest premium is offered by the Medical Sickness Society at £26.26 a month, while the most expensive comes from the Holloway Friendly Society at £57.38 per month. Since last year the monthly premiums have fallen on average and there is not such a clear division between premiums offered by the life offices and the friendly societies. There is, however, still a wide difference in the benefit calculations. Table 1 shows that while the benefit calculations range from 50% to 75% of income and this divergence continues to make products difficult to compare.
However, the Statement, coupled with the renewed confidence in the market, has encouraged providers to revisit their offerings to ensure they meet more closely customers' needs. Swiss Life, for example, has reviewed its product following the ABI Statement and one of the key
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changes was the shift from 'any occupation' to an Activities of Daily Working (ADW) definition of disability. One of the problems with an 'any occupation' definition is that it can be subjective.
Pearson says: "When it comes to claims it can give rise to a dispute, whereas with ADW you have set criteria that can make these decisions more objective."
NUHC has completely relaunched its IP product and its new features include additional deferment periods of 56 and 112 weeks, which are designed to fit around existing mortgage protection to avoid overlap.
Homer says: "The golden opportunity stems around mortgage sales - when you are purchasing your biggest asset then people recognise that there is a need to protect it."
"With the new product we recognise that sometimes people find it difficult to relate to long-term incapacity and sometimes feel that they are not going to use this policy. So we have increased our hospital benefits significantly and we pay a fixed amount, whatever premiums they pay, of £75 per night for every night they spend in hospital after the first seven nights, up to 90 days and subject to the deferred period," he says.
Tunbridge Wells Equitable Friendly Society has also updated its literature to comply with the standards and shifted its product's focus to houseperson protection.
Jill Lewis-Ranwell, product manager, says: "Our focus has been on mothers' cover as they are often forgotten when it comes to income protection. It is not just about protecting income, it is also about funding the cost of having the work done that is normally carried out by the housewife."
There is a huge potential market for IP and, while the ABI Statement has made IP easier to understand, IFAs need to take a more proactive approach to promoting the need for IP if it is to continue to grow. But as Brown says, growth is likely to be steady rather than dramatic as people come to realise that they can no longer rely on the State. "As the Government moves away from increasing benefits I think that we will see a steady, rather than explosive, growth in IP," he says.
