Adapt and survive, that’s the challenge every industry faces. With sales flatlining over the past decade, the protection industry has struggled to do both.
Now it has to adapt to a new threat: stubbornly high house prices have forced an astonishing number of people to renounce the home ownership dream for good.
More than six out of 10 tenants now believe they will never get on the property ladder, according to recent research from Castle Trust. Prices are too high, earnings too low, mortgage criteria too strict and buy-to-let competition too fierce.
That’s a big worry for young people, society in general, and the protection industry in particular. Taking out a mortgage is a classic trigger for a protection sale. It’s a great way for brokers to start talking to fresh clients, with as many as half of protection sales mortgage-related.
For more and more people, that conversation is now closed. They’re renting, they’re strapped for cash, they’re worried about their job, they’re wondering if they can afford to start a family. Frankly, they have other things on their mind.
Ironically, these are all pressing reasons to buy protection. So how can the industry grab their attention?
The first problem is that too many people believe you only need protection if you have a mortgage, says Claire Limon, group insurance director at property services group Countrywide. “This just isn’t the case. Tenants have monthly rental payments, just as homeowners have mortgage payments, and therefore need to protect themselves against loss of earnings following an accident or long-term illness.”
In fact, they need exactly the same protection as homebuyers, such as income protection, life assurance and critical illness cover. “The industry’s job is to make sure people know what they need and what’s available to them,” Limon says.
Over the 10 years to 2011, the number of homeowners fell for the first time since 1918, according to Government figures, from 69% to 64% of the population. Analysts expect the trend to continue for another decade.
The average first-time buyer could be 41 years old by the year 2025, according to research from insurer LV=, says head of protection Mark Jones. “This is a big leap from the 1980s, when people typically bought their first house at 29.”
Single people aren’t the only ones renting. “Our research suggests that 32% of tenants are living with their partner, while 20% have children as well,” continues Jones. “Yet just 3% have income protection, 4% have critical illness cover, and 18% have life cover, which means many families simply don’t have enough protection.”
Generation rent is a largely untapped protection market, and insurers and brokers need to find new ways of engaging with it, Jones says. “Many tenants will be desperately saving for a property, so money is tight. But protection often costs less than people think, especially when they are younger”.
Tenants have to pay for council tax, gas, energy and water bills, contents insurance, digital TV subscription, broadband, landline and a mobile phone, just like homeowners.
“Whether you rent or own, the message is the same. If you’re too ill to work, you may struggle to afford the roof over your head and your household bills,” Jones says.
Insurers and brokers need to develop new ways of talking to clients about protection, says Duncan Finch, managing director at Legal & General Retail Protection. “This means taking time to understand the clients’ lifestyle and financial burdens. The average first-time buyer is currently 35 years old, our research shows, but people say the best age to start a family is 29. Many people are having children before taking the first step onto the property ladder, and they need to be just as financially prepared as homeowners.”
“Ask your clients how their family would cope if one of them died or was unable to work, then discuss the importance of protection. These are tough questions, but every adviser should be prepared for the conversation,” says Finch.
One of the major causes of debt is suddenly losing your job, Finch continues. “Advisers need to explain the importance of having a contingency plan, to provide peace of mind and financial security should the worst happen. That’s just as important for tenants as homeowners.”
If people buy their first property later, and think about protection later, they have another problem, says David Hollingworth, broker at London & Country Mortgages. “Cover gets more expensive as you get older. Brokers can do their clients a service by persuading them to buy protection earlier, when people are younger and healthier, and their premiums will be lower.”
The number of people renting a property rose by 25% to 8.3 million in the last decade, Government figures show. This is a long-term trend, and the industry needs to develop a long-term response, Hollingworth says.
“We need to educate the public to see protection as a product that everyone should have, not just homeowners. We should be looking to engage customers at different points in their lives; for example, lettings agents could play an important role by raising awareness and referring new tenants to advisers.”
It’s a tough nut but the industry has to crack it. “If we don’t recognise the changing nature of the UK housing market, protection sales will only retreat further,” Hollingworth says.
Brokers need to understand why people don’t buy protection, says Peter Hamilton, head of UK propositions at Zurich UK Life. “The high perceived cost, a belief that ‘it won’t happen to me’, more pressing financial priorities, and failure to understand the risks and consequences of doing without cover are all to blame,” he explains.
Advisers then need to explain the benefits of protection, he says. “Brokers must find out what the client cares about most, whether that be their children, lifestyle, saving for a pension or paying the rent, then show how death, injury or illness might impact them. We need to ask clients about their dreams and aspirations, and explain how protection could safeguard them,” Hamilton says.
Even without a mortgage, there are still plenty of potential openings for that protection conversation. “New circumstances always mean new challenges, and a need for protection. It may be marriage, divorce, children, a promotion or new job, a change of business fortunes, an inheritance, retirement or death.”
Yes, money is tight. “But in tough economic times, people are more willing to look at protecting what is really important to them,” Hamilton says.
THE NEED TO ADAPT
The scale of the challenge is huge, says Ian Smart, head of product development at insurer Bright Grey. “Just 3% of people say buying insurance is an immediate priority, according to our Generation Now report, while 35% would prioritise paying their rent.”
What they don’t consider is how they would pay their rent if their income stopped. “This is particularly worrying when you consider some tenants also have young families to support,” says Smart.
The industry must adapt its communications to reflect its customers’ changing lifestyles. “We should highlight the importance of financial education, so people understand the dangers of living without protection, and how to make small changes in order to afford insurance. Challenging perceptions isn’t just in the interest of the industry, but consumers as well,” Smart says.
Insurers also need to make better use of other sales channels, says Steve Casey, head of marketing at insurer Ageas Protect. “We need to have clearer products on the online aggregation sites and make the process of signing up as easy as possible, so fewer customers drop out during the application process. Comparison site Payingtoomuch.com is making good progress in this area.”
But we shouldn’t give up on the housing market just yet, according to Casey. A wall of cash is heading towards housebuyers, including a share of the Bank of England’s £80bn Funding For Lending Scheme, and another £130bn from Chancellor George Osborne’s Help to Buy initiative. “Every little helps, and this could get the housing market moving again,” Casey says.
It may already be happening. First-time buyers are tentatively returning to the market, with numbers rising 3% to 16,400 in February. That’s the best start to a year since 2008, according to the Council of Mortgage Lenders. Numbers are up 17% on 12 months ago.
Protection consultant Kevin Carr is optimistic. “New mortgages aren’t the only protection driver; there is also marriage, children or moving home, so hopefully sales will hold up,” he says. “The early signs are that sales actually increased in 2012.”
The decline of housing sales may even have done the industry a favour, it seems, by alerting it to the multi-million strong army of tenants who need protection just as much as homeowners.