With the future of critical illness (CI) still uncertain, is the protection market likely to see a boost in income protection (IP) sales over the next 12 months?
Market views
Matt Pitcher, Towry Law
CI has an uncertain future due to increasing rates of diagnosis and survival. Some policies have already removed conditions such as prostate cancer as the survival rates are now greatly improved.
Inevitably, if this type of cover does completely disappear or survives so that it only covers a few high-risk conditions, then this may prompt people to seek alternative forms of protection.
IP should not, however, be viewed as a replacement for CI because each product provides for different needs and benefits. CI pays a lump sum on diagnosis of a range of serious illnesses. It could be described as life cover that pays out in advance of death and is valuable in providing people with financial help at a time of major upheaval.
In contrast, IP steps in and continues to pay someone a 'salary' when illness prevents them from working. The conditions that trigger one payment may not necessarily trigger the other. People should ideally cover themselves with both policies.
Although IP is not a direct replacement, people want to feel like they are covered in some way. All protection policies exist to give people peace of mind so that if their health suffers, it should not impact on their standard of living.
If the loss of CI draws protection back onto the agenda for people and therefore prompts them to further insure themselves with a life policy or IP, where this is appropriate, then this may be the only good thing to come from this situation.
eter Hamilton, Friends Provident
IP is undersold – that much is pretty unarguable. I am not convinced there will be an increase in sales simply due to some of the uncertainties surrounding CI.
There will still be barriers – often more imagined than real – that we need to overcome. For some advisers, for example, there is a belief that the underwriting process may be too onerous, while some customers have a misplaced sense the State will provide an adequate income for disability.
IP and CI cover should not be seen as mutually exclusive – many customers will have a need for both. The latter will not, for example, cover two of the major causes of IP claims – back pain and stress.
The lump sum associated with CI has been a major factor in the growth in sales, but what is often overlooked is the fact that IP claims can last many years, and the total paid out can be huge.
There are more cases being promoted in conjunction with a mortgage, which also has to be a good thing. That said, the industry has also seen growth in mortgage payment protection insurance (MPPI) plans and there is a real danger customers with such policies will believe they have more protection than they have. Cover for 12 months may be sufficient in cases of redundancy, but many disability claims can last years.
IP sales need to increase regardless of changes in CI cover. We may start to see products that combine the best of both.
Sue Elliott, Watson Wyatt
The UK's CI market is in a state of flux and providers are uncertain about the product's future. Although IP and CI are facing similar issues, the potential severity varies between the two products. For example, the possible financial impact of medical advances is projected to be extremely severe for CI – mainly due to the uncertainty in this area.
However, for IP, medical advances are largely viewed as positive. This is because preventative measures are likely to delay or even prevent an IP claim from materialising.
Similar issues regarding policyholder reasonable expectations are also present in both products; however, they are more at the forefront of our minds for CI where the 'reviewable versus guaranteed' debate continues. There is also the potential concern that policyholders may have been sold CI, when IP may have been more appropriate.
CI is, or will be, going through an evolutionary process, but it will be a slow one which will not happen overnight.
Given the challenges currently facing the CI market, the IP market has an excellent opportunity to develop and deliver a much-needed product to a far wider audience.
By focusing on the product's core benefit – providing an income when you are unable to work as a result of a disability – increased IP sales will make a valuable contribution to filling the 'protection gap.'
Ronnie Martin, Legal & General
Logic might dictate that current uncertainties over CI cover should benefit IP sales. However, the fact is it is never that simple. IP existed long before CI cover became a best seller in the UK. Yet there is no evidence of booming sales at that time.
The financial services landscape has now changed and IP products also have to change if they are to have any chance of rivalling the sales success of CI cover.
That success is based on the simplicity of message to customers, coupled with the clear need it meets for those in the housing market. Repaying a mortgage in full in the event of suffering from a critical condition has, in the context of protection products, massive customer appeal.
It is in the area of expenditure-based needs that IP can make progress. The challenge is to achieve customer appeal when addressing the question 'how would you meet your mortgage repayments if you were unable to work?' To do that, IP needs to be inclusive and accessible to more customers.
The good news is that progress has been made with some IP-based mortgage pay-ment insurance contracts. These offer 'own occupation' for occupation groups three and four during the first two years of a claim.
More steps in this direction are needed to further extend the product's appeal. Now could be the right time.
