What will 1999 herald for individual income protection insurance? The product formerly known as permanent health insurance has been in the doldrums for some time, and sales figures were fairly static in 1998.
But now the question is, will the year ahead witness a series of industry moves to boost sales, or is it likely to see more of the same slow, incremental growth?
Problems of definition still abound with income protection cover, but there have been attempts to standardise the terminology. Much of this has been prompted by the ABI second report on health insurance which sought to introduce a more consumer-friendly title for the product.
But while some providers, such as Norwich Union, are determined to ensure the product is now officially retitled, many others resolutely insist permanent health insurance should remain the official name.
Whatever the arguments, in an era of welfare reform, the Government is actively encouraging the individual to take more responsibility for their personal finances, and so insurers believe income protection is an area marked out for change.
Industry observers are of a consensus that much will depend on the fall out from the Government’s Green Paper on State benefit.
Diana Harding, business development manager for protection at Canada Life, and who specialises in the individual market, agrees reform is needed: “There have to be fairly draconian changes, but how aggressively these reforms will be pushed through remains to be seen.”
It is felt there is a danger that people may be discouraged from investing in the product if the Government pushes private provision too heavily. Tony Worthington, distribution development manager at Swiss Re Life & Health, echoes this point but remains optimistic. He says: “If the Government and the insurance industry get their message right this may encourage people to take out the policy.”
Simon Barwell, marketing manager for personal finance at Swiss Life concurs that the Department of Social Security’s (DSS) plans are important, but believes that it is the big providers with huge resources that will be in the best position to react to the changes.
But any differences in opinion among providers are more than outwayed by general agreement that the industry has to do more to communicate the benefits of the cover if sales are to show an upturn. “Providers have to do a more convincing job and convey the value of income protection. Too often customers are ignorant of its existence or confuse it with critical illness,” says Robert Berry, marketing manager at Norwich Union Healthcare.
This may explain why sales of income protection have been flat for some years, although Norwich Union Healthcare and Swiss Re Life & Health have registered some sustainable growth. Swiss Re has increased new sales of its individual income replacement policies by 12.6%, from 127,514 new policies in 1996 to 143,533 in 1997. Yet these are still below levels achieved in the early 1990s (see graph).
However, this statistic ignores a key difficulty facing insurers: selling income protection has always been problematic. And many observers acknowledge it can be a complex and confusing area of insurance.
Worthington highlights specific concerns: “IFAs fight shy of the protection due to complexities with underwriting occupations. For example, it is easy to assess an office worker, and, perhaps, a more dangerous profession like a scaffolder.
“But how do you assess someone like a teacher who is subject to a great deal of mental and physical stress? These are where the problems of interpretation arise.”
But insurance IT provider, The Exchange, believes it has a solution. The company provides an extranet, which has 2,500 occupations listed all with automatic ratings. When a consumer requires a quote the details are input and the software solution provides the occupational rating quickly and efficiently. The system is in the testing phase but it has already generated widespread industry interest. Clearly, providers need to do more to show potential policyholders how much better off they would be with private provision rather than needing to rely on state benefits.
Friends Provident, as an example, pays the following:
70% of first £10,000 gross salary plus • 60% of next £20,000 of gross salary plus
50% of next £40,000 of gross salary plus
40% of gross salary over £70,000. And product simplicity appears to be a central demand for 1999.
However, George Andrew, marketing manager of Scottish Widows, warns against the dangers of over-simplification of this type of insurance. “Income protection must retain a degree of flexibility – if it is made too simple the product may not appeal to the differing needs of its consumers.”
Harding at Canada Life agrees that clarity is needed. She points to the number of insurers that are educating their direct sales forces and IFA networks with CD ROM packages, reinforced with sales seminars and literature support.
Product clarity will also influence how the policy will be marketed. The Internet and digital TV have been mooted as future distribution channels. And income protection is already available on the IFA Web site provided by NU Healthcare.
“In the future IFAs will perhaps deal more with the high net side of the market – a sector which requires a personalised service. But the product can be sold direct over the Net as long as it is made lucid with less exclusions,” comments Worthington.
Other commentators remain more cautious about the potential for virtual sales in the near future. Barwell says customers need to be educated first. “Knowledge is the key – we don’t want consumers purchasing the wrong product. Buying over the Internet will not happen immediately. But the Net will play a crucial role in a service capacity for IFAs.”
Hi tech or low tech, there appears to be a consensus that income protection will figure more prominently in the portfolios of many providers in the next 12 months. But its development and consumer take-up is conditional on a number of key provisions.
Those interviewed stated increased sales would be take place as a result of:
Greater product clarity – clear key features.
Less exclusions in the policy detail.
Generating awareness among consumers and not just those consumers who read the financial press.
Distinguishing it from rival policies, eg, critical illness. But maintaining flexibility and ensuring it can be sold with critical illness.
Cultivating a knowledgeable IFA base.
Emphasising the cost – as the product is not as expensive as many consumers anticipate.
Policies must generate client trust – consumers have to rely on them, and sometimes a long time after they were first purchased.
Despite the needs of the market, the picture is improving for income protection cover.
For example, Canada Life says its sales for October 1998 experienced a steady upward trend. For the first and second quarters of the year, the insurer was equal fourth in terms of new premium income on sales through IFAs, and has achieved more than 10% of the total income protection sales in the individual income protection marketplace. Swiss Re points out total new sales are continuing to recover after a number of years in decline in the early 1990s. And, it says, insurers are also looking to provide better value for their policyholders with most providers increasing their annual benefits. The reinsurer adds that the increases in new sales are relatively evenly split between the IFA and tied agent channels.
So, perhaps income protection could find itself sailing into clearer waters in the next Millennium.