L ast year was a good one for income protection (IP) sales to individuals. Latest figures from the Association of British Insurers show premium income rising by ten per cent in 2001 to £69m.
This continues the steadily rising trend over the last five years. But average benefit secured under IP contracts has not grown at the same rate, because of the move towards protecting expenditure rather than income. Four out of ten individual IP policies are linked to a mortgage.
The buoyant housing market has helped insurers with strong links to banks, mortgage brokers and their own estate agent chains. Borrowers have never had a greater need for financial protection, with Britons amassing huge debts on credit cards and personal loans, as well as their mortgage commitments.
Meanwhile, the government has taken a tougher line on incapacity benefit. New claimants now have their entitlement to benefit reviewed every three years instead of the previous ad hoc system. All these factors have boosted sales.
Product innovation has been rather sparse. The main change has been the development of more menu-based contracts. Scottish Equitable, Liverpool Victoria, Bupa and Friends Provident are among the insurers that have followed the trail blazed by Scottish Provident’s Self Assurance policy. Earlier menu contracts were only a gluing-together of old term assurance, critical illness (CI) and IP covers. The latest versions dovetail much better and contain genuine new ideas. For example, Friends offers a waiver of premium benefit for personal and stakeholder pension premiums. This is because the stakeholder regime does not permit waiver within the pension plan.
Flexibility is the keynote of the new policies. Some can cover any mixture of single or joint lives, including housepersons. Independent financial adviser (IFA) Brian Lentz, the founder of Portfolio Insurance Consultancy, has noticed more househusbands wanting cover in households where the wife has group IP from her employer.
Lentz strongly favours the menu approach and predicts it will continue to grow. “The menu product puts in front of the client a range of options that the client has to positively decline, as distinct from the adviser never having raised them,” he says.
The only problem he sees is that menu products are “sporks” – a combination of knife, spoon and fork, which can only do one job properly. “I can buy individual products cheaper in many cases,” he observes.
A further development has been the launch of niche policies for professions. For example, Swiss Life has a plan tailored to meet the needs of doctors as their career progresses. It is available only through intermediary British Medical Association Services.
Another ruse is for providers to offer complementary services. Pioneer Friendly Society has teamed up with Exeter Friendly Society subsidiary Go Private to help customers wanting to self-pay for healthcare.
Friendly societies have made a comeback with plans that have no loadings for gender or occupation, and where a tax-free sum is paid at age 60 to claim-free policyholders. With day one cover instead of a deferred period, they appeal particularly to manual workers. Other providers have made IP more affordable to riskier occupations by altering their disability definition to an activities of daily working basis, instead of inability to perform any occupation.
Under reviewable IP contracts, insurers have the right to change the premium and the terms. Where providers have put premiums through the roof at review, a lot of churning is going on, with brokers looking more towards guaranteed premiums. Rebroking is also occurring when clients stop smoking.
Michael Webber, the principal of Health Insurance Shop, a new breed of telephone-based intermediary, says: “I tell clients that if they give up smoking I will get them a cheaper policy in a year’s time. I am willing to offer discounts but mostly I don’t have to, because I can offer a cheaper quote than the client can find elsewhere.”
Overall, IP has adapted to changing lifestyles but still does not cover all eventualities. What happens if one partner in a marriage becomes disabled and the other has to leave work to act as carer? CI is needed as well as IP. This is why IFAs see the future lying with menu contracts.