The income protection (IP) industry has seen a wave of unprecedented innovation over the past two years. Insurers have launched a range of products, from budget plans to those offering multiple covers and back to work benefits, which aim to encourage more people to take out cover.
Despite this, sales of IP have failed to materialise. The latest figures from Swiss Re show that although sales did increase in 2008, this was due to the launch of HSBC’s LifeChoices plan which only pays out for 12 months. When HSBC’s policy is removed, the figures show a decline in sales of 11.2% during the year. This begs the question: do consumers actually want the new products insurers are launching? Or should insurers concentrate on improving service and awareness rather than product innovation?
Peter Lurie, managing director of intermediary Proactive Medical & Life Ltd, is a firm believer in product innovation and says the steps that insurers have taken over the past two years are “fantastic”. In particular, he is a fan of PruProtect’s latest IP offering which includes two products – Primary and Comprehensive – both of which provide financial underwriting at the application stage, an own occupation definition of disability, optional unemployment cover, split deferred periods and access to Pru’s Vitality programme, whereby premiums can decrease if the consumer engages in a healthy lifestyle. The products also include recovery and back to work benefits. The recovery benefit pays £1,000 (Primary Cover) or £2,000 (Comprehensive Cover) for specialist care and support to help the individual return to work. The back to work benefit pays 25% (Primary) or 50% (Comprehensive) of the monthly benefit in the first month back to work and 10% or 25% in the second month.
“The whole idea of IP is to get people back to work,” says Lurie. “PruProtect’s initiative gives people, especially the self-employed, a head start by taking the stress out of going back to work.”
Another recent innovation is Pioneer’s Bills and Things, a short-term IP plan that is designed to cover regular bills such as mortgage, council tax and utility bills. Alan Lakey, partner at IFA firm Highclere Financial Services, describes Bills and Things as a “tremendous innovation”.
“The product has been designed around what the public will buy as opposed to what providers want to sell,” Lakey says. “The product pays up to £1,000 a month and the consumer doesn’t have to prove their income which opens up a big segment of the market.”
Fortis’ Real Life Cover also received praise when it was launched in July 2008. The product, developed in conjunction with protection intermediary LifeSearch, combines seven protection covers plus the added option of unemployment cover. The IP cover pays 1% of the sum assured each month, up to a maximum of the lower of 50% of pre-tax monthly income (if working) or £1,667 a month.
Martin Werth, managing director of Fortis Life UK, says: “It is great to have innovation and Real Life Cover is a fantastic product, but we are a new player with a new product engaging new distribution channels, which will prevent a dramatic increase in sales.”
Werth says IP is very difficult to sell because consumers tend to put it much lower down on their list of priorities than life and critical illness (CI) cover. Research by Fortis has shown that consumers believe they can manage the risks IP covers them for, such as stress and back problems, and only want to insure against risks they cannot control, such as death and critical illnesses.
“Real Life Cover gets noticed among senior management in IFA firms as a product that is meeting consumers’ needs. It’s converting that to a conversation with consumers which is harder because consumers are coming to the IFA with a need in mind – they want to review their term assurance – and the IFA has to extend the discussion and move on to IP to make the consumer consider more than life insurance,” says Werth.
He believes insurers should follow Fortis’ example by adding a temporary disability rider to CI cover, which is a more popular product. The consumer can buy the option at outset, for typically 10% of the CI premium, and if their disability lasts more than six months they can draw from the sum assured at 1% a month. Full benefit is paid on death or total permanent disability.
“The temporary disability rider costs significantly less than CI and IP combined and provides another way of engaging with the customer,” says Werth.
Similarly, Kevin Carr, director of protection development at PruProtect, believes the industry needs to focus more on building consumers’ understanding of protection.
“I don’t think the industry has a major problem with getting consumers interested in buying protection as millions of people buy payment protection insurance [PPI] and life cover every year – the issue to address lies in their knowledge and understanding of the products available,” he says. “Independent advice can and should be essential for most people, but at the same time many people want to keep things simple, which is one of the key reasons why PPI has been so successful in comparison to other products. Even though it is often inferior, it is so much easier to buy.”
Another reason why IP sales are falling is that a lot of advisers believe it is too complicated to explain and sell, what with deferred periods, indexation options, underwriting, and so on. This is a problem that could be exacerbated by recent product innovations.
Ben Heffer, principal consultant for protection at independent industry analyst Defaqto, says: “Innovation is welcome but if the industry is to increase IP sales it is about simplification. Innovation is great for IFAs who are committed to IP, but the real problem is that few advisers sell IP because they see it as complicated.”
Two ways of simplifying IP are limiting the policy term, as seen in HSBC’s LifeChoices policy, and limiting the benefits in a similar way to Pioneer’s Bills and Things. When Defaqto surveyed IFAs it found that most preferred an expenses-style version of IP and thought a limited term was counter-intuitive to IP.
Nick Jones, brand and marketing manager at Pioneer, says: “The danger of innovation is that providers need to balance affordability, simplicity and comprehensiveness. It should not be innovation for the sake of innovation. Some changes from providers are good and simple, but others make advisers’ lives more difficult. We have taken the simplicity approach and it is going down well.”
Another factor that can put advisers off is the lengthy and complicated quotation and underwriting process.
Richard Morea, technical director at London & Country Mortgages, says: “The length of time it takes for policies to go on risk is an issue for any protection policy. The adviser pulls their hair out because during that stage the customer might decide they can’t be bothered to take out the policy and cancel their application. Medical underwriting is where the delays happen – doctors take weeks to return a GP report and arranging medicals also delays things further.”
In addition, the premiums offered for IP are often higher than those originally quoted because of the significance of the individual’s occupation. Heffer says insurers need to review their occupation lists and see what duties are actually undertaken rather than purely focusing on job titles.
“If an IFA has to go back to their client with a premium that is £20 higher it is a difficult message to explain. It makes the IP sale much harder and more protracted,” he says.
Paul Hudson, chief executive of Cirencester friendly, an IP provider, believes that improving the fundamentals of the product is more important than adding new product features.
“Innovation has got to be a good thing if it services the customer,” he says. “But what sometimes gets missed is that people have to buy it. If it is innovation for the sake of innovation it may have a short pull but it may not have the durability providers are looking for. Insurers can add features to their product but if the service is slow, dismissive and unapproachable they won’t get the business.”
Proactive’s Lurie also believes in going back to basics. Although he likes the extra features providers have added, he says the majority of his clients want easy-to-understand products and a provider that is easy to deal with.
“There have been a lot of changes in the last two to three years, but keeping things really simple for consumers is the key winner,” says Lurie.
The recent wave of innovation is certainly good in principle. Insurers are trying to make their policies appeal to more sectors of society and, in doing so, stand out from the competition. But poor sales figures suggest that the focus needs to shift more towards building awareness, simplifying the product and improving the underwriting process.