There has been speculation that the protection market is undergoing a rate war. Although several insurers have denied this claim, the number of rate changes has increased lately. Could this have a negative effect on the industry, and how will intermediaries cope with the increased number of changes?
Market Views
Roger Edwards, Bright Grey
In 2004, sales of life assurance and critical illness (CI) fell significantly.
At the same time, several providers entered or returned to the market, resulting in more companies scrambling for market share in a declining sector.
The key short-term tactic for protecting market share is to cut prices and the number of rate reviews happening on a daily basis definitely suggest the industry is in the middle of a price war.
Five years ago, most companies could not reprice more than once a year.
Now, with industry comparison systems supplying daily downloads of hundreds of price points, companies are able to reprice more tactically than ever before.
This makes it difficult for advisers to keep track of which company offers the best rates, but it leads to some great deals for customers.
One problem though is that this activity suggests price is the only consideration, which should not be the case.
Another problem with constant rate reductions is that it encourages rebroking, which means that ultimately the market does not grow.
While short-term targets can be met, companies also need to be looking ahead and coming up with ways to grow the protection market.
Margins are thin in the areas where cuts have been the highest, and while some of this has been subsidised by the efficiencies of electronic processing, prices cannot keep on being reduced forever, and before long there could be casualties among the participants of the current price war.
Richard Verdin, Direct Life & Pension Services The term 'rate war' makes it sound rather bitter.
However, with an increasing number of product providers entering the scene and a market that has, and is likely to continue to reduce in size - competition is, and will continue to be, fierce.
It should therefore come as no surprise that insurers are repricing far more often than in the past.
The fact is that insurers' ability to reprice more often has come about because of improvements in technology and the increasing sophistication of the platforms used to provide comparative quotations.
In addition, the pricing of term products has become far more granular than it was only three or four years ago, as insurers' understanding of individual risks has improved.
There is therefore, far more fine tuning than previously as insurers' pricing actuaries find opportunities to lower rates to win more profitable business or increase premiums while maintaining their competitive position.
As far as advisers are concerned, price reductions help in the longer term, but price changes are always inconvenient in the shorter term, especially when it comes to dealing with recent and anticipated 'sign-ups'.
There are two key issues for advisers.
Firstly, they need to ensure that they understand the arrangements for pipeline business, including new business recently quoted, as this can cause issues between advisers and customers.
Secondly, since increased underwriting inevitably comes hand in hand with greater segmentation of risk, the whole process becomes more convoluted and therefore tiresome for those that just want some cover.
John Joseph, John Joseph Financial Services There is a sign that life and CI insurance rates are easing.
This may be due to longer life expectancy and better health, which in turn is due to more preventative control by GPs, public awareness programmes and a myriad of magazine articles telling us how to create a healthier lifestyle.
However, if the market is undergoing a rate war, it will benefit clients, as advisers can provide more cover at a similar premium or similar cover at less premium.
One of the potential problems however, is that some advisers may advise on premiums alone and suggest a client change cover without first looking at the ramifications of switching an old style policy for a new one, even though the new one may not provide sufficient cover.
While it is up to advisers to create the demand for a product, I hope prices are not being cut because claims are not being paid.
As providers continue to change rates, advisers should review their client files and see if they have carried out the reviews they intended.
Ultimately, this may even result in more business from existing clients rather than having to secure new ones.
Neil Pine, Norwich Union Life Based on our analysis of premium movements on the Exchange, the number of term rate changes in the first five months of this year is over 50% up on the same period in 2004.
This increase has been triggered to some extent by reinsurers coming back to the guaranteed CI market, which has in turn made it possible for some providers to return with more competitive premiums.
Increased competition, in a market contracting largely due to the decline in the housing market, has also caused existing providers to adjust rates more often to maintain their desired pricing positions.
Current market forces suggest that downward pressure on prices may continue and current premium levels look sustainable in the near future.
The longer term direction of premium movements is more difficult to predict and will be influenced by a number of factors.
These include future changes in mortality and morbidity experience and also the extent that potential increases in costs, such as VAT levied on medical fees, can be offset by savings achieved by providers due to processing efficiencies.
Although it is easier for advisers to operate in an environment of stable premiums, it is likely that current price competition will help sales by ensuring that protection products remain affordable.
When prices are changing frequently, it is important that providers help advisers by giving sufficient notification of forthcoming rate changes.
Transparency about the exact nature of the premium movements can be achieved by publishing the percentages of rates that are reducing and increasing.
