The life industry is still in the midst of change as the controversy over endowments rumbles on and ...
The life industry is still in the midst of change as the controversy over endowments rumbles on and the nation awaits the advent of stakeholder pensions; but despite the changes afoot, the outlook for the term market remains positive as sales continue to rise.
The latest figures from Swiss Re's Termwatch show that new sales of individual regular premium business have grown as a percentage of the life market from 18.6% in 1994 to 32.8% in 1999. This figure is expected to rise further in 2001 as a greater number of products are sold alongside mortgage loans. Ian Beggs, senior press officer at Halifax, says: "People are looking more at flexible capital repayment mortgages to pay off their mortgage faster than they would if they had taken out an endowment. Well over three quarters of our customers now have a capital repayment mortgage and it definitely does create an increased demand for decreasing term assurance products."
The continued demise of endowments has meant that the growth of the term market is becoming more closely linked to mortgage protection. Figures from the Association of British Insurers (ABI) show that, by the end of the third quarter of 2000, sales of mortgage-related term assurance had over taken non-mortgage-related sales. Roger Edwards, product marketing manager at Scottish Provident, says: "The controversy surrounding endowments means that they are effectively dead now. Endowments included life cover, and now as people switch to repayment and other sorts of mortgage they are not automatically getting it. So this is an opportunity for IFAs to make sure that when their clients get a mortgage they have at least got life cover."
However, there are some concerns that as term assurance becomes more entwined with mortgages it will become more reliant on a buoyant housing market for continued growth, which means that interest rate trends will be of great interest to term providers. Rod Macdonald, head of sales and marketing at Permanent, says: "If you are working at lower rates then you are more likely to move. And so, on the basis that endowments are on the way out, there is now room for more innovation in mortgage products which require additional life cover. So, if the interest rates come down and interest in mortgages increases it will also fuel term assurance sales."
The market has also been assisted by the greater affordability of products as the cost of term assurance fell again last year and life offices continued to jostle for market position. Edwards says: "There is now a lot of competition in the term assurance market. A lot of companies have effectively come back into the market by making their rates more competitive which is beneficial to the customer."
This downward pressure on rates has again contributed to strong growth in the market. According to the ABI, sales of term assurance policies totalled 1.2 million in 1999, and by the end of the third quarter in 2000 they had already reached 1.1 million.
While a number of providers have cut their rates there is still a considerable difference between them. According to the survey, the cheapest monthly premium for a non-smoking male, 30 next birthday, requiring level term assurance of £75,000 over a 10-year term is £3.60 from Allied Dunbar, with some of the more expensive policies costing over £11. However, with a policy fee of £4.34 per month the Allied Dunbar plan, is not as competitive as it might appear. Many plans do not charge a policy fee so it is important to check both the rates and the fees before selecting a product. Premium rates for a female of the same age are generally slightly cheaper, but they tend to rise faster with age.
Another major contributing factor to the continuing rate cuts is the fact that mortality rates have continued to improve. The Termwatch survey has revealed that male and female rates have fallen at a similar pace and expresses surprise at this change as male mortality has been improving at a greater rate than female mortality. Advances in medical technology have seen male rates improve by around 30% while rates for females have only improved by around 20%. The removal of AIDS loadings has also helped push rates down, as the perceived risks from the condition have failed to materialise.
Mark Edwards, IFA personal market leader at Royal & Sun Alliance, says: "There has been a bit of a price war in the last year, with everyone looking to reduce their rates. Two of the reasons for this were that everyone in the life assurance market made assumptions about the effect of AIDS in the 1980s, but this has not hit insurers as hard as they thought it might. And second, the issues around mortality. There are various statistics, such as the census, but there can be a time lag between the facts emerging and insurers re-setting the market."
Most term assurance providers are confident that the market will continue to grow over the next 12 months, especially if the mortgage market continues to prosper. However, there may soon be a bottoming out of rate cuts as the benefits of external factors become accounted for in the price. But Edwards warns that IFAs need to remain aware of other factors, not just the headline rate. He says: "The market has been split by companies selling direct, entirely on price. The thing is, term assurance can be a good source of business for an IFA, but they need to build advice into the sale. If the cheapest product is all they bring to the sale, then people may as well go direct."
Ben Marquand is a staff writer
