Is there a danger that advisers will regard pension term assurance as a default option for life cover regardless of suitability?
Carr: It is fair to say that some advisers recommend life insurance based only on price when issues such as health, single life, family income benefit and trusts should always be considered.
Witcombe: No, I do not think there is. PTA is a more comp-licated product than tradit-ional life insurance and I feel that term insurance will remain the default option across the industry as a whole. PTA is an excellent addition to an adviser’s toolkit and is particularly useful for higher-rate taxpayers as the net premiums tend to be very competitive.
Goldspink: There is always a danger that advisers will go for the cheap option although it is usually clients who want the cheapest premiums. Advisers just need to ensure that clients understand that premiums do form part of their annual contribution allowance for pensions.
There are a number of products now being released that provide an option to revert to a standard life plan with no further underwriting should a client be near their maximum funding. However, they will be unable to exercise this option again and convert the plan back to a tax-efficient policy. Standard Life, Norwich Union and Bupa have all recently published claim statistics. Is the industry a better place now that more companies are publishing this data? What impact is it having?
Carr: The biggest issues facing the critical-illness market are declined claims and lack of consumer trust. By publishing these statistics, the industry is trying to be more honest, transparent and informative to consumers and advisers. Companies which publish their statistics should be applauded.
Witcombe: The fear that any client has when taking out insurance is that the insurer will not pay out in the event of a claim. The more that insurers can do to make the process transparent, the more confidence this will generate. If one insurance company is seen as having a better claim history than another, this will help it to generate new business and make advisers feel confident in their recommendation.
Goldspink: The more information provided to clients, the better. In the modern world, everything is becoming far more transparent, which helps prevent misleading advice. It can only improve the quality of advice provided.
Recent market research suggests that 20 days is the average time it takes for all protection product applications to be processed while the average time for income protection is 42 days. Is service in the market improving?
Carr: Significant developments have been made in areas such as e-commerce and teleunderwriting but application forms have never been longer, underwriting has never been harsher and, too often, life office administration is slow and frustrating. Many offices are over-underwriting life insurance to be on the safe side and, as a result, we have a risk industry which is becoming risk-averse.
Witcombe: Perhaps at the lower end of the market. However, where the amount of cover being applied for is relatively high, insurance companies are becoming increasingly Draconian in their approach, particularly with income protection applications. It seems to be questionnaire after questionnaire and is quite offputting for busy clients. I sometimes wonder if insurance companies want the business.
Goldspink: Processing times are improving in general but this is due mainly to the fact that the majority of insurance companies have introduced online processing.
Almost 70 per cent of Norwich Union’s critical-illness claim statistics were cancer-related but just 1.5 per cent of incapacity benefit claims were cancer-related. Does this suggest that income protection should be a higher priority than critical illness?
Carr: We have long believed that income protection covers a wider need than critical-illness cover. Critical illness has benefited from standardisation, has been marketed as a mortgage protection product and consumers tend to prefer a lump sum.
Witcombe: Not necessarily, although I believe that income protection is a more valuable type of policy for many people. If cost is an issue, you can increase the deferred period to keep this down but still have a high level of cover if you are off work long term due to serious illness. Critical-illness cover can seem quite expensive, particularly for older clients. The appropriateness of each is down to personal choice and circumstances.
Goldspink: In an ideal world, clients would choose to have a combination of both. The lump-sum benefit would take care of mortgage debt, pay for home alterations and so on while income protection would replace their salary, ensuring that their standard of living is maintained as well as it can be if disablement has been suffered. The client’s existing savings are preserved.
Bright Grey has extended the maximum term available for critical-illness cover to 40 years. Is this a very significant development in the market?
Carr: It is certainly a positive move because many people are taking mortgages for longer than the typical 25 years and getting cover for longer periods can be difficult. That said, the maximum age at entrance is 34 attained, which means the 40-year term is only available to those under age 35. The cost of guaranteed critical insurance is falling for the first time in around three years and we could begin to see sales stabilise after three years of decline.
Witcombe: Not really, although I think Virgin’s simplified cancer-only critical-illness policy is innovative and a significant development. I would prefer to see these policies simplified and made easier to understand so that consumers can feel confident they will pay out. I doubt there are many people who really need 40 years of critical cover and, if they did, I cannot imagine it would be cheap.
Goldspink: This reflects the fact that not only are people living longer and are more active in retirement but, due to high property prices, mortgage terms are greatly extended.
Rates are still being cut. What do you believe the long-term consequence of this price war will be?
Carr: Everyone keeps saying this price war cannot continue for ever but it shows no sign of halting. The irony is most consumers do not know the price of protection until they get a quote and only become price-driven by those who compete on price alone. The long-term consequence is falling sales and an under-insured population as people buy less of the wrong product under the guise of simplicity and convenience. There is little point in fighting for share in a shrinking market.
Witcombe: Competition is healthy and price cuts are a result of this. As long as insurance companies are not cutting corners by removing certain illnesses from their policies, this has to be of benefit to the consumer. My fear is that insurance companies will start to accept less people on their standard rates and require burdensome medical and financial underwriting for anyone who cannot tick all the right boxes.
Goldspink: Cuts can only be sustained if technology to process the claims is improved and becomes more efficient. In the long term, clients will factor in customer service and put a higher value on this when deciding on which insurer to propose a plan with. IFAs already use ratings from independent credit agencies in respect of financial strength and it will not be long until this is applied to customer service as well.