What is behind the recent drop in complaints to the Financial Ombudsman Service for income protection and critical-illness insurance policies? Chadborn:
Chadborn:One would hope it is the recent trend of life offices reporting their nonpaid claim data. If this is the case, I would hope that one of the consequences has been for IFAs to have looked for ways in which their advice processes could be improved to increase their clients’ understanding of the contracts they are entering into. However, it is too early to call this drop in complaints a trend so we should not be congratulating ourselves just yet.
Lakey: A cynic might suggest that consumers have been too busy complaining about their mortgage endowment plans but the reality is more likely that consumers and advisers are gaining a better understanding of what exactly constitutes a criticalillness and income-protection plan claim. The ABI critical-illness working party has been trying hard to clarify the definitions, which results in a better under-standing of the concepts. Many advisers are looking again at protection plans and this may well have increased client understanding.
It may also be that the claim underwriters and reinsurers are looking more favourably on borderline claims as a result of the numerous critical television programmes and newspaper articles concerning refuted claims.
Morris: There are two main reasons for the recent drop in complaints for IP and CIC. First, the Icob regulation which came into force in 2005 has ensured that advisers and providers have to offer greater information at the outset, which leads to fewer complaints later on.
Second, there does appear to be an improvement in consumer trust as a result of the regulation, which has been boosted by the publication of positive claim stats from companies such as Pioneer and Standard Life. This should encourage more companies to publish their stats, especially on the income protection side.
How significant an impact will the abolition of the age 70 rule for life policy sales have on the sales of these policies?
Chadborn:I do not think the impact will be that great. I suspect that many sales made in this area were for people who needed inheritance tax planning advice and so they would have sought advice from a Cob adviser who could advise on the other related areas of IHT planning and were not restricted by this rule.
Despite this, I welcome the removal of this rule because there are an increasing number of people with a mortgage running beyond retirement and therefore still have a protection need. The more channels from which advice could be sought should mean more of these needs are addressed.
Lakey: I do not believe there will be a discernible change in new business figures. The majority of serious protection players are fully authorised and the age 70 rules did not affect them. Mortgage brokers and other niche players will now be allowed to arrange plans past the age of 70 but it is not likely that these will be significant. Many have questioned the sense of such a move (allowing non-specialist advisers in) but this has to be balanced by the potential for reducing the protection gap. With more consumers delaying their retirement, it is possible the abolition will have increasing significance in future years.
Morris: It will have an impact to a certain degree but increases in sales will be limited. The move makes sense because people are living and working longer, whereas previously, potential customers were not necessarily able to take out the cover they desired if they wanted protection past the age of 70.
The abolition of the rule means peopel now have more freedom as to when they take out cover and the length of time they want to be protected for. However, the premiums will be more expensive the further over age 70 the policy continues and so we expect to see only a limited rise in sales.
The ABI was upbeat on new business figures for all life and pension products but were you disappointed in the figures for sales of protection business? Chadborn:
Chadborn:Moderate protection sales should be of no surprise to anyone. The majority of the industry is obsessed with cost, with the misguided opinion that price is the most important factor when advising or selecting a protection product. This short-sightedness, coupled with the ability to buy protection alongside your groceries, has led to the increased commoditisation of protection. If a product is sold or bought based on its cost as opposed to its quality then it will be undervalued or discarded in a similar manner.
Lakey: It has already been stated that without knowing the figures net of lapses and cancellations they become somewhat meaningless. With term premiums falling, divorces increasing and repossessions also heading in the same direction there are many reasons why plans may be cancelled and replaced with more meaningful cover.
One likely reason for the increase is mortgage-related policies riding on the back of the massive increase in mortgage business and resulting hikes in property and mortgage values. Figures do not only lie, they distort. Without a precise breakdown they also become pointless. Nonetheless, it may be a pointer to a sector recovery, which is welcome.
Morris: Yes, the figures were somewhat disappointing. Protection is an important product and the increase in non-advised sellers in the market means that customers are being sold policies that do not match their needs and expectations often enough (such as definitions of types of critical-illness conditions) or just do not pay out regularly (PPI). This can lead to rejected claims and dissatisfied customers, which dents consumer trust and hurts sales.
Do you agree with Swiss Re’s warning that the system of personal accounts, due to be introduced in 2012, will erode the group protection market? Chadborn:
Chadborn:If personal accounts are predicted to have a detrimental effect on the group pension market then it stands to reason that the same could be expected for the group protection market. As proven by the pension term assurance debacle, this Government appears to be ignorant to the value of protection and the important way in which it underpins all aspects of financial planning.
For the pensions minister to describe death benefits as “bells and whistles” shows a disregard for the fact that this benefit could be discarded by employers looking for cost savings.
Lakey: There is a distinct danger that group protection plans could be the victim of cost cutting, particularly if the economy is tipped into recession over the next four or five years. Having said that, group life is a relatively cheap benefit which employers will want to retain.
Many consumers foolishly rely on death-in-service benefits as their main or only form of protection. The onus will be on the professional advisers to ensure that employers fully understand the consequences of removing such cover. Advisers need to explain to employers and employees alike that protection is the bedrock upon which all their other aspirations stand.
Morris: Swiss Re is right to warn about the potential dangers to the group protection market. If employers decide to fund personal accounts by cutting group protection, it could leave many employees worse off and will lead to a worsening in the protection gap.
Around 35-40 per cent of life cover in the UK is provided by group schemes and that cover should not be sacrificed to meet pension contributions.
Is the acquisition of Tomorrow by LV= going to be a good thing for LV=? Chadborn:
Chadborn:Having cut my teeth in the home-service sector, I have seen and admired the way in which LV= has managed to reinvent itself through the evolving landscape of this industry. M&As are to be expected, but this is not an obvious one considering, quite frankly, the bizarre recent rebranding of both organisations. Tomorrow, as GE Life, was a niche player in the retirement market and LV=, as Liverpool Victoria, has created a good reputation as a protection specialist. If the specialist focus is retained, then that bodes well but if the objective is to become mainstream, then that would be disappointing.
Lakey: It will allow LV= access to the retirement and equity release markets via an established player and this is a logical step. It may also rid the market of one or other of the silly names which have recently been adopted and that would be a worthwhile side effect.
LV= is rightly considered a major player in the protection arena and Tomorrow has an attractive annuity offering as well as equity-release and Sipp products. This makes for a positive interaction and should enable LV= to reduce its reliance on protection business.
LV= has been well managed and is widely respected (name change apart) and I fully anticipate the tie-up to provide positive results.
Morris: The acquisition of Tomorrow should be a good development for LV= as Tomorrow has a good reputation for service. It should give LV= products that complement its current protection business and it has said the acquisition will enable them to leverage some of these products for its existing customer base as well as for the IFA market as a whole.
However, we hope it will be careful to remain focused on protection and not to get too distracted by venturing into other areas.