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Industry Sectors: Protection

Simon Hildrey
While the protection industry has gained a more central role over the past 20 years and has grown, only about 50 per cent of people have protection insurance.

Presenting at an actuaries’ conference 18 months ago, David Robinson, chief executive of Bright Grey, asked delegates to put up their hands if they had protection and pet insurance. He says: “More of them had pet insurance than protection. There should be wider coverage as protection should be the foundation of people’s wealth planning.”

Nevertheless, the market has grown. Whereas 20 years ago, the protection industry had annual premiums of £100m, this has now risen to more than £800m, says Robinson.

By the 1980s, protection was over-shadowed by the sale of pensions, savings and investment products. Robinson says many factors have combined to make protection a more important part of insurers’ offering over the past eight years. Perhaps, the most important, says Robinson, was the introduction in 1996 by Scottish Provident of the menu system. “This suited the way IFAs advised their clients and gave clients greater flexibility.” For example, customers could select £50,000 of income protection, £100,000 of critical illness and £75,000 of unemployment protection. The amount of cover for each could then be altered as their circumstances changed.

Another change has been the decline in endowment mortgage. Robinson says, 20 years ago most protection was sold with endowments: “The endowment with-profits market was about £400m a year, with protection amounting to £100m.”

The three main conditions covered by protection were cancer, stroke and heart attack. In the late 1980s, insurers began to add further conditions. Robinson says this trend has now begun to reverse. “Some conditions are no longer regarded as critical by certain insurers and they are now beginning to tighten up the definitions.”

M&A activity has led to a decline in insurers over the past few years but this looks set to change with new entries such as Axa, Royal Liver and Bright Grey, says Kevin Carr, senior technical adviser of LifeSearch.

Technology also played a part in the protection market, says Carr, with the arrival of the internet and telephonebased companies making it easier for IF As and policyholders to buy protection. The arrival of the Exchange enabled IF As to obtain 30 quotes from one source, rather than phoning each provider in turn.”

Another boost for protection came with the bursting of the bull market in spring 2000. “IFAs turned to protection when it became harder to sell savings and investments,” says Carr.

In January 2005 came the introduction of regulation.

IFAs giving advice on protection come under the general insurance regulatory regime. But Carr argues that IFAs should have to provide greater disclosure before the sale of protection products. “If IFAs sell products but do not offer advice, they are not covered by the regulations and clients cannot take any complaints to the Ombudsman. But this only has to be disclosed after the sale.”

The UK critical illness market is younger than MoneyMarketing as it did not exist in 1985. Alison Turner Holmes, protection marketing manager of Skandia, says: “The concept of paying out your life assurance before you died came from South Africa. Marius Barnard, the heart surgeon and brother of Christian Barnard, took the first acceptable set of conditions to the reassurers and hence the birth of the critical illness contract in its earliest form.

“Abbey Life was the first major player to launch the Living Assurance Plan in 1988. It covered seven definitions and premium rates were a bit of a stab in the dark. Critical illness began as a direct salesforce product with Dunbar and others followed quite quickly,” she says.

The critical-illness market has now grown to reach a total sum insured of about £36bn, says Turner Holmes. “New individual critical illness policies have grown from 694,000 in 1998 to 1.06m in 2003.” The number of conditions covered by many insurers has increased to more than 30.

Tim Baigrie – Managing director, LifeSearch
The nice thing about giving advice in 1985 was that few customers challenged how much providers paid you. It never crossed our minds that it was too much and it might cause us to be biased, possibly because, even in hindsight, we were not biased and did not get paid too much.

But perhaps we were the exception. Remember, this was a time when your pocket calculator had the only screen on your desk and regulation meant sending in a form to someone called Nasdim. That was it in a cowboy world where the MI group millionaires looked at those of us not selling whole-of life-plans as savings schemes as if we were simpletons. The old-age battle between those in it for money and those wanting to build an honest business was being won, just as it still is, by the fast-buck merchants.

The only difference was that your client was your sole judge. But in a fast, expanding industry, very few clients were lucky enough to talk to a decent adviser. The Tories were dreaming up Fimbra to end the cowboy age of financial advice, while setting the scene for Labour to take another good idea and ruin it by moving us all into the present world of a bigbrother-regulator.

Until this century, the protection world was very much a last resort. However, it received a big lift when CI crept in from South Africa. IP was called PHI and only accountants bought it and term insurance was second favourite to the new fangled unit-linked whole of life. Pensions and investments was what it was about until the opt-out and transfer chaos ended one and the dot com crash the other. In the noughties, protection had become the staple diet of many IFAs, and long may that focus on basic consumer needs continue.

The arrival of The Exchange represented a lite-changing revolution. Computing became IT and the web. The Exchange became the protection market place, with a focus on price and squeezing out product variation in the quest for comparability. The Exchange was the consumer’s best friend. However, unless advice retains its slender hold on consumer mindset, it will soon be sidelined by the supermarketing of protection.

Roger Edwards – Products director, Bright Grey
wenty years ago, the protection market was very different. Apart from traditional term assurance, the majority was sold bundled with savings products. These were the endowment, which was yet to fall from favour and the complicated unit-linked flexible whole of life plan which allowed customers to alter the balance between protection and savings.

In 1980, the cost oflife insurance doubled as fears of an Aids epidemic saw actuaries factor in huge loadings into premiums.

In 1986, Abbey Life and Allied Dunbar launched critical-illness cover into the UK At first, the product did not capture the imagination of the IFA but new products from Pegasus, Skandia Life and Prolific saw an upward trend in CI business continue until 2004. These products were all written as flexible whole of life plans. The success of CI products was in the standardisation of the six-core illness definitions in a campaign championed by the National Federation of IFAs in the early 1990s.

In 1996, Scottish Provident launched the Self Assurance range – which used a term assurance platform to deliver the first menu protection product, combining life, critical illness and income protection. The product was popular with IFAs as it allowed them to create a tailormade solution for each client. The product was so successful that the menu term product swept the whole of life product aside.

In the late 1990s, concern from the OFT about the complexity of critical illness, income protection and private medical insurance products led to the ABI to standardise terms and definitions increasing consumer confidence and growth.

The development of electronic trading has cut processing costs and speeded up the application process but now after a decade of success the protection market reduced in 2004. Partly due to a downturn in the mortgage market, the introduction of regulation and a rise in the price of critical illness, the industry faces a challenge to restore the protection market to the successful heights it previously enjoyed.

Critical illness needs future-proofing to avoid further increases in price and a simpler more customer-friendly income protection product still needs to be developed.

Nick Kirwan – Protection marketing director, Scotish Widows
The protection market has seen huge changes over the last 20 years. During this time, two new products launched into the UK market. Long-term care (LTC) came and nearly disappeared again under the weight of regulation. In contrast, critical illness cover (CI) has been one of the most successful new products of all time. Entering the market almost 20 years ago, it now offers peace of mind to about 12 million adults and children through about six million in-force policies.

Term life cover has also seen its fair share of change with premiums rising and falling as fears of an Aids epidemic came and receded. While the protection product which has seen the least change has been income protection where sales and market penetration have remained broadly flat.

Regulation has transformed sales of protection. The FSA and its predecessors have played their part but other bodies have also made sure they have had a piece of the action. For example, the FOS overseeing complaints about claims and OFT imposing standard policy conditions for income protection and critical illness cover. Both have provided important consumer protection at a time when there is a lack of consumer trust.

What has not changed in the past 20 years is the consumer need for protection. And yet some 43 per cent have no life cover and 57 per cent no cn leaving an estimated £2.2trillion protection gap. For advisers, it all adds up to a very rosy future for protection sales if we can work together as an industry to restore consumer confidence.

Ron Wheatcroft – Technical manager, Swiss Re
If you asked someone 20 years ago what polarisation was, they might have said it was something to do with the earth’s axis. IFA was an acronym which we would have to get used to, along with all those others that have grown with regulation.

In those days, we had brokers. We thought they might have been a bit biased by the amount they were paid. But in any case, this new-fangled, flexible whole life policy they sold was so good it would meet all our protection needs. Then, about one million new flexible whole life policies were being sold a year.

As for critical illness, that was something South Mricans were buying because their state benefits were not as good as ours. We thought it would never catch on because customers would prefer the IP products we had been selling for years.

Looking back, it is hard to imagine a world where regulation was something a few civil servants looked after and where there were no armies of compliance people.

Some things have not changed. Just like now, we were preparing for a new liberal pensions regime. But we got a fair bit wrong that time. Let’s hope when we see Adair Turner’s recommendations we can move to a solution which has cross-party support and is sustainable long term.

Undoubtedly, financial services have become more professional and costs have been taken out of the industry. But one thing hasn’t changed – the need for protection products. We now know how big the gaps are. Let’s hope the next 20 years will see us make real inroads into them.

Bob Cheesewrite – Group risk marketing manager, Friends Provident
In 1985, who would have guessed that house prices could go down or the stock market fall? Or that the worldwide web, was not a proposal from Japanese fishermen to use huge drift nets to supply enough sushi to sustain their unstoppable economy.

There was no regulator to tell us that the past was no guide to the future. Younger readers will be astonished to learn that we thought that sales of something called ‘permanent health insurance’ were due to take off. As for critical illness, clearly it would never catch on.

Well perhaps we got some of that a bit wrong. No doubt today’s axioms will seem equally flawed but I doubt that anyone will mock the move to a greater focus on protection products and treating customers fairly.

Today we have, ABI IP and CIC initiatives to establish clear standards of terminology. And you can submit your protection business online and have it processed in minutes rather than, weeks or months as in 1985.


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