There have been dire warnings in recent years of an increasing gap in protection cover in the UK and the latest Swiss Re report confirms that the gap between what consumers need and what they have is ever widening.
The report sees a yawning gap on life insurance protection and concludes that the amount of cover needed to protect family and dependants in terms of sum assured is £2.2 trillion in 2003, up from £2 trillion in 2002. The income protection gap is calculated at £150bn, up from £130bn.
An earlier report from Swiss Re in May warns that gaps in protection cover could widen further with an expected fall in the number of intermediaries advising on the protection business from January 2005 with the onset of statutory regulation. It also expresses fears that regulatory reform has been a constraint on new product dev- elopment, with providers focusing on getting ready for regulation.
Bright Grey products director Roger Edwards says: “The fall in protection sales and the widening protection gap should actually encourage IFAs to become regulated. They should see this as an opportunity to give good advice, to help plug the gap. If there is anyone sitting on the fence thinking whether they should become regulated, I suggest they take this opportunity without hesitating.”
Another concern of the report is the proportion of consumers who do not understand what cover they have, with 42 per cent saying they have IP cover in force but this figure does not correspond with industry sales which point to a decrease in business.
When asked what conditions they understand to be covered as a part of critical-illness insurance, most respondents thought “critical” to mean anything that stops you from working. The report says: “The biggest attitudinal cause of the protection gap is people believing that they have enough insurance.”
Which? principal researcher Mike Naylor claims part of the problem lies with companies selling incorrect or unnecessary products. He concedes that consumer education is required but thinks solid advice is also needed. Naylor says: “Most of the population relies on their trusted providers – banks and building societies – to give them advice and many of them are not up to the task. For IFAs to make proper recommendations, it requires time, patience, explanations of current provisions and an understanding of the clients' expectations.”
Naylor suggests that a national financial advice network is required so all consumers, and especially low to middle-earners, have access to thorough and inexpensive advice on basic insurance needs.A scheme would require the backing of industry leaders as well as the Government.
But the Swiss Re report warns: “While the FSA has a statutory responsibility to improve consumer education in financial services, it is clear that, in the light of recent bad news stories and poor stockmarket performance, this is going to be a long haul.”
Direct Life & Pensions sales and marketing manager Richard Verdin says: “I am a big believer in advice. Advice is undoubtedly valuable. The industry has made mistakes in the past and as long as the media continues to publish only the bad press, we will continue to lose the confidence of people who need us the most. It is our responsibility as an industry to raise the profile of protection.”
Verdin believes the industry should focus on increasing sales of long-term income protection products and move away from the traditional and more popular mortgage protection payment insurance.
He says: “IP needs to be affordable and not so complicated. Pick 10 IFAs randomly and I doubt that one of them could explain IP in simple terms. There are currently too many parameters around the quotation process.”
Individual IP sales in the UK last year accounted for only four policies per IFA, according to Swiss Re life and health technical manager Ron Wheatcroft.
The report suggests that consumers trust retailers to adopt a selective approach to find the best providers which will deliver a valued product. The conclusion is that a combination of bank or retailer and an established life insurance company could be ideal to raise awareness of cover.
But Chadborn Baker & Kearle IFA Peter Chadborn says: “With this approach, you are looking at losing the impact of advice, diluting its importance. Picking up a leaflet at Tesco on life insurance is maybe not the best way of going about things.”
Lifesearch press relations manager Kevin Carr says: “We endorse the report's judgement that consumers need advice when buying protection and, with spiralling debt, we are concerned that despite all our efforts the gap continues grow. However, we believe it is the advice that is important and not so much whether it is face to face.”
Predictions are that the gap will grow again by 2005 but there may be a glimmer of light. There are a number of newcomers in the market and product relaunches to look forward to in the near future from Bupa, Axa, Royal Liver and Bright Grey.
The awakening interest and additional competition in the market may help to raise awareness in the minds of consumers and intermediaries.
Ultimately, the consensus seems to be that consumer awareness is paramount and needs to be heightened for the gap to close.
Report author Ron Wheatcroft says: “The ABI's warning of the savings gap in 2001 is embedded in the mind of Government. We hope that the same message will get through on protection.”