Rate of change
Rachael Adams considers a year with positive and negative potential
A difficult year could be in prospect for the protection industry as it continues to prepare for Solvency II, the European Court of Justice gender ruling and taxation changes. But 2012 also has the potential for an increase in protection business as the retail distribution review and auto-enrolment draw closer.
Kevin Carr Consulting managing director Kevin Carr says: “I am an optimist. There could be a lot of change towards the end of next year. In particular, rates could start increasing as the changes take effect.”
The cost of personal insurance covering everything from motor insurance to life cover will increase as the European Court of Justice gender ruling takes effect from the end of December 2012 and the industry has concerns that the ECJ will not stop at gender.
Carr says: “Rates will start to rise and it will have an impact on underwriting and product development as well but the biggest worry is that there will be rulings on age and disability too, which would stuff everything.”
Bright Grey products director Roger Edwards says: “We seem to have assurance that this will not happen but then 10 years ago I bet we said gender would never be an issue. Never underestimate the irrationality of politicians.”
The gender pricing ban is not the only change that will influence rates. Le Beau Visage managing director Peter Le Beau say the introduction of gender pricing may not be too bad as changes to the current corporate tax regime for life insurers may balance out the rate increases that are expected to accompany the gender ruling. The focus on price due to the increased use of comparison sites could also balance out any gender price increase.
He says: “It will push down term rates and if comparison sites continue to be important, term rates will come under even more pressure and we will see equalisation downwards.”
This emphasis on price will continue to have negative consequences for the protection market.
Le Beau says: “Products will get significantly compromised because a lot of them will compete on price rather than quality. The industry could become commoditised.
“One solution is to have a basic product and lots of optional add-ons, as with general insurance but advisers will certainly be pulled between price and quality.”
Quality will be the word on everyone’s lips in 2012, predominantly because of payment protection insurance misselling, but the new wave of alternative PPI products could reinstate this trust, says Edwards.
He says: “The issues with PPI were the poor selling practices and the low number of claims paid. A short-term income protection product is not much different but if it is sold properly and is surrounded by crystal-clear literature and a fair claim policy, it would be totally relevant.”
Carr agrees. “As long as these products keep improving, they are no bad thing for consumers.”
But Le Beau says another type of product is in danger of attracting negative coverage this year. He says: “There are already rumblings about these over-50s’ whole- life plans. People are living longer than anticipated and if they exit the plan, it is cancelled and they lose all their money. 2012 will be a year of damaged reputations if consumers are not getting good deals. It will not be a piece of cake to be a protection adviser in 2012.”
Le Beau hopes that a sea-change in the way products are structured will make things smoother. “If we simplify products, there will be a higher, faster completion rate. This is the biggest story of 2012. I think the penny is dropping now and people are seeing that simple products are the future.
“We will see new uncluttered product propositions and providers making under-writing processes as stream-lined as possible. They will be asking, do we need as much selection as we have had?”
Le Beau thinks this will make the critical-illness insurance market less of a conditions’ race and income protection less dependent on extensive underwriting.
Carr thinks we will see products developing in another direction. “We could start to see more targeted products, such as critical-illness cover that focuses on breast cancer and another that focuses on prostate cancer, which would be priced the same,” he says.
That is not the only positive development Carr sees taking place in protection this year. The impending RDR will also be good news for the industry.
He says: “Our Personal Finance Society research showed that 41 per cent of members will employ a protection paraplanner after the RDR, which is a good sign. I expect some IFAs to move into protection, not only because commission is staying but also because it is the right thing to do.”
Edwards thinks there will be an increase in protection sales but is more cautious.
He says: “Without doubt, there will be an upswing but I do not think it will be the tidal wave that some people are expecting. We will also see some advisers exiting, so this might balance the upswing somewhat.
“The key is being ready to engage with those advisers who are less used to selling protection.”
Other legislative changes that will affect protection include Solvency II and auto-enrolment. Edwards says the effect of Solvency II on protection pricing is not clear but Le Beau thinks it could have a positive impact.
Le Beau says: “It may prompt a different use of capital. The focus on reserves might also release cash that companies have been a bit conservative over. It will be a two-way street but Solvency II will definitely rationalise reserving for protection products.”
Auto-enrolment also offers opportunities, says Le Beau. “The employer becomes a real distribution option for protection advisers, as they may want to provide add-ons to pensions. However, if the economic conditions remain tough we cannot necessarily expect that to happen. There are no obvious hints of massive opportunities this year but if the climate improves we can expect to see changes in protection.”