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A rate worse than death

Prudential UK head of protection Paul Cowman looks at the rates tussle between the new entrants and the established players and how technology will be prove a major factor in sustaining rates

Two years ago, the protection market was in turmoil. If you had managed to get a consis- tent view on the sustainability of rates in the long term, you were definitely in the wrong job and are now probably working as a UN special negotiator.

Critical-illness rates had just been increased by around 40 per cent by most of the main life offices and several players withdrew from offering guarantees on their critical-illness business.

The whole market was moving in the same direction. Uncertainty was the only cer- tainty and one key issue – the sustainability of rates – drove this over a period of time. Twenty-four months on, the status quo has been restored. The market seems to have renewed confidence in the rates offered and many of the players which withdrew are back and in a more bullish mood than ever before.

You could be forgiven for thinking that those who predicted the return to guaranteed rates are smugly sitting back with a knowing told you so look. In our experience, this is not the case. Trying to get a consistent view on the sustainability of protection rates remains difficult.

Some industry commentators believe rates will go up in the short to medium term due to the increased cost of regulation yet we have seen unp-recedented reductions in premiums over the last two years. On average, life companies have lowered their rates.

There are clearly different views on this topic but the downward movements experienced in recent months indicate that rates are sustainable in the long term. There are clearly market forces at play. New entrants are striving to hoover up market share and gain pole position in a distribution-domin-ated market and this is driving down rates.

The incumbents are not giving up their shares lightly and there is a sense of gamesmanship as some of the existing players adjust rates to maintain market position. This state of affairs does not account for firms which have re-ent-ered the market keen to have a competitive offering and inc-reased visibility. The question on many lips but not often uttered is: Are these reductions the calm before the storm – a means of trying to get market share ahead of an upward movement in rates?

The answer to this question is neither black nor white. We need to look to the longer term and examine the cost of writing this type of business which has been an important factor but now, more than ever, the processes used by life companies are under scrutiny.

The development of online technology-enabling cases to be accepted without having to be handled manually is becoming increasing important. The ability to reduce the cost of manufacturing will be a strong determinant in the future sustainability of long-term rates.

The two reasons for introducing these developments are as a positive customer experience factor and hygiene factor in the panel selection of many providers and as a prime red-ucer of costs. The tools will continue to drive out more cost savings in the short and medium term, making the rates sustainable as well as introducing to the mix the possibility of even reducing the overall cost of protection.

Further pressure on the sustainability of rates can be expected next year due to the expected increase in costs which could be applied when VAT is added to the capture of certain medical evidence. This will require life offices to use these tools to reduce the amount of business that needs additional medical evidence before being accepted on risk.

These rules-based systems will allow life companies to manage this much more effectively and reach decisions on a one and done basis. This is another influencing factor on the sustainability of rates.

We find further influencing factors by looking at the main basis of the rates through mortality and morbidity expectations. Of particular interest is any expected trends in either of these that will cause rates to increase. We have seen years of mortality improvements which have manifested themselves in reductions over a sustained period but there is a strong view that these mortality improvements are slowing and we may have seen the best of these rate reductions come through already.

The continued mortality improvements have benefited older lives more than younger lives as the latter are more contemporary, involving non-smoking and fitness in gen- eral. Older lives have benefited from life-extending medication, operations and overall higher levels of treatment.

These continued medical advancements, better treatment of serious conditions and the fact that people live longer but not necessarily healthier are having a pull effect on critical-illness or morbidity rates.

We have seen in recent years a re-entry of several reinsurers into the critical-illness market with competitive guaranteed rates. This has allowed many life companies to either enter or come back into the market following the turmoil of 24 months ago. At that stage, many withdrew or signific- antly increased premiums due to concern over the sustainability of guaranteed rates. Generally, though, the sustainability of rate pricing has improved in the period.

Opinion is also divided in the reinsurance world. Reinsurers offering guaranteed rates maintain that they are comfortable to offer such terms in the long term and believe they have claims management under control and are pricing for a known risk. The flip side is those who do not strongly believe they have a better handle on the issue and an awareness of long-term problems.

Where does this leave us? We have identified that there are different forces at play here but the market dynamics are driving increased pressure on rates. The long-term view is these rates are sustainable but we have gone past the period where we will see significant improvements in mortality experience and/or morbidity.

The competitive pressure will continue to drive sustainability around rates which, as we have seen even in a short two-year period, have bene-fited the consumer. We expect that this will continue to be reflected in the long term.

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