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In the lapse of the gods

In times of recession, consumers cut their spending on non-essential items and unfortunately protection insurance is sometimes put into this category.

The volume of lapsed policies inevitably rises in any economic downturn but, so far, providers and reinsurers say there has been little impact on lapse rates.

Pacific Life Re head of protection Alex King says this is because there is a time lag between people feeling the credit squeeze and taking action such as cancelling any direct debits which they see as unnecessary so he believes there will be a rise in lapses.

He says: “Lapses do not show up as quickly as people may expect. The increase in lapses we have seen recently is down to normal season- ality at the moment. Our view is that the worst is still to happen.”

King believes one way to reduce lapses is to be flexible when customers miss a premium payment. If a client does not pay their premiums for a couple of months, he says it is key that their adviser is notified as early as possible to see if the policy can be saved.

Normally, consumers have a three-month window during which they can decide to keep their old policy on risk as long as they pay the back premiums. If the window expires and the policy is rewritten, then back premiums are not paid but this means the providers get hit with extra admin and underwriting costs.

To make life easier for clients and providers, King says that Pacific Life Re will consider waiving back premiums if a lapse occurs so clients can continue with their old policies.

King says business is healthy at the moment and Pacific Life Re’s lapse rate is just over 2 per cent, which is about average, although King stresses that lapse rates are very dependent on how mature the book of business is.

The Association of British Insurers recently did some research among working adults and found that 30 per cent of respondents who said they no longer held a protection policy had cancelled it because the product had become too expensive.

Twenty-one per cent said it was a risk they no longer needed to insure against while 20 per cent said they needed the money for something else. Eight per cent said they let the policy lapse and did not bother to renew it.

PruProtect has not seen a noticeable change in lapses, according to director of protection development Kevin Carr, and the business has seen an increase in new sales over the past three to six months.

Carr says: “I would imagine that the type of business most likely to be affected by early lapses is that which is sold on the basis of price alone, where there is little or no regard to product features. I have always said over the years that the one thing any seller can guarantee about protection sales won on price alone is that they will be lost on price alone, as, in the present environment, someone else will always be cheaper.”

Carr says cancelling a protection policy and then reinstating it later down the line could cost thousands of pounds in additional premiums over the term because protection becomes more expensive as people get older.

He says: “Consumers who are feeling the pinch should be encouraged to reduce their cover rather than cancel it outright as it may cost a lot more to replace the cover in the future.”

Lifesearch senior policy adviser Matt Morris says that online early warning systems can help to catch lapses.

Legal & General, Axa and Royal Liver all have systems which instantly notify a client’s adviser if a premium is not paid. The adviser can then contact the client to see if they can come up with a solution, such as reducing the amount of cover, to prevent the policy from being cancelled.

Morris says Lifesearch has not seen a significant rise n lapses and stresses the importance of not selling policies simply on price.

He says: “If the adviser arranges policies that are differentiated not just on price, then the consumer is more likely to realise the real value of the product and is less likely to let the policy lapse.”

CBK Colchester principal Peter Chadborn says he thinks the volume of lapses can be directly related to the quality of advice to the consumer.

He says: “I would be hugely disappointed if the first I knew of a client cancelling their policy was a letter from the provider. I would feel that I am not providing a very good service if this happened. I would want the client to contact me first and then we could talk through the alternatives.

“The reason for trends in lapses reflects the quality of the advice process. We have seen a few more than normal but it is still relatively low.”

Aegon individual protection proposition development manager Stephen Crosbie says that the number of lapses have not got to a stage where the life office feels it is necessary to take any preventive action but he says they are monitoring the situation closely and if this happens in the future, they would take action.

He says advisers are key to ensuring lapse rates stay low and considers that a review of people’s finances is the best action they can take.

“There is a danger that if advisers do not review it with their customers, then customers will make decisions on their own. The lag in the market is starting to hit us a bit across the industry and 2009 is going to be a tough market.”

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