With Royal Liver and Axa planning to enter the protection market, what does this mean for the industry?
Verdin: That really depends on the products, the processes and the services they each plan to bring to the market.
As for products, no provider looking for volume can really afford to be that different from the rest of the market simply because conformity is dictated by the dynamics around needing products to fit into the various quotation engines. However, this market is primed for a revolution in application and administrative processes and such a revolution is more likely to be started by a newcomer simply because the existing players feel they have too much to lose by being radical or too innovative.
There is always room for another player or two. However, I sincerely hope Royal Liver and Axa do not simply aspire to a “me too” strategy.
Calvert: It means that more IFAs will be reminded of and alerted to the incredible opportunities presented by the protection market. Most are aware of the potential but there is still a long way to go to fully realise that potential, particularly in the blue-collar market where it is perceived to be difficult to obtain cover for higher-risk occupations.
Protection is at the heart of our industry but it sometimes seems as though we have all forgotten this. Currently, there is huge opportunity for income protection sales, particularly while providers are incapable of making up their minds about the future of critical illness.
Jones: More choice. There is a huge protection gap in the UK and we believe this, together with the recent exit of players such as Canada Life and Swiss Life from the personal protection market, make it a good time to be building a new protection proposition.
Forthcoming FSA regulation of protection products will help to endorse the view that intermediaries should consider all their clients' protection needs as an integral part of their financial planning service. Taking a more holistic approach to (and regularly reviewing) clients' needs should help intermediaries build stronger relationships with clients, which should help them to grow – and keep – their personal business.
Will providers have problems recouping indemnity commission from brokers leaving the industry ahead of regulation of protection business? How severe do you think the problem is and how will providers go about addressing the problem?
Verdin: I think the potential for such a problem has been exaggerated. First, insurers have been lending commission on indemnity terms for years and they understand the credit risks and the need for controls better than anyone. Second, I do not anticipate a great exodus from the industry.
It is a myth that those selling protection as unregulated advisers are somehow the great unwashed and will leave the market come regulation. Sure, there are rogues, as there are in any industry, but they are not significant in their number.
Calvert: I do not think anyone really knows how much of a problem this will be, if at all. While regulation may cause some to leave, my own experience suggests that the majority are now getting their act together with a view to very much staying within the industry. Of course, we have seen all this before and, as before, the industry will respond, albeit slowly, and we can all look forward to a very positive future.
Personally, I hope the networks and support groups now come into their own and become very much more proactive in competing against each other to provide even more added value to members and thus attract those who are thinking of leaving the industry.
Jones: Providers should keep in close contact with intermediaries they remunerate in this way in the run up to regulation. They will want to know, for example, who is dropping out, joining a network or deciding to tie. Providers will also want to consider customer contact strategies and establish ownership of those customers left behind by firms leaving the industry.
This has not been an issue for Axa, however, as we have not been a major player in the UK protection market. Our life business has been focusing on investments and pensions and we remunerate most of the intermediaries who sell our medical cover (an annual contract with a 12-month earning period) on non-indemnity terms.
With much criticism of mortgage payment protection insurance/accident, sickness and unemployment policies, would a more flexible use of income protection assigned to mortgage loans be the way forward? Would you actively promote that route?
Verdin: Yes, I would actively promote the development of income protection, focusing on the need of the customer during the mortgage term. The key is for the industry to recognise that ASU policies are not the only option and there are income protection products that, with development, could be more suited to customer needs.
Income protection products can suit relatively short-term needs and the longer-term needs of customers who are, after all, agreeing through a mortgage to a long-term debt. I find it inconceivable that the industry's emphasis on ASU can continue in the way that it has to date.
Lenders, insurers and intermediaries must work together to agree a set of income protection standards for mortgage payment protection that go further than the current MPPI baseline. But income protection providers have much to learn from the ASU providers because, despite all the rhetoric, you have to admire the way the key ASU players saw the opportunity and delivered simple-to-quote-and-sell products that are attractive to most lenders and some intermediaries.
Calvert: Very much so although I believe the majority of good IFAs are already encouraging clients to ensure their mortgage payments can be met through proper income protection. Although many IFA firms do not get involved in mortgage business, it is true to say they still have clients with mortgages and it should be an absolute priority to ensure they all have a means to meet their monthly payments.
Jones: MPPI/ASU products can perform a useful role in meeting customer needs but income protection cover is undoubtedly a more comprehensive way to protect clients' financial needs from the risk of being unable to work due to long-term illness or injury.
One of the key differences between MPPI/ASU and income protection, which is sometimes overlooked, relates to the different underwriting approach that is applied at the new business stage. ASU has relatively little individual underwriting and few, if any, providers would seek medical information or ask applicants to undergo a medical examination. But there are pricing advantages to customers from the more comprehensive assessment of risk that providers take to underwrite income protection. Both products have their place in the market. The biggest challenge to providers is to make income protection easier for intermediaries to introduce and for customers to buy.
Canada Life has pulled out of individual income protection to focus on group protection and Bupa has overhauled its proposition. Does this indicate the market is turning its back on individual income protection?
Verdin: If it is, then some players could not have got their timing more wrong. Income protection sales have been languishing around the same levels, at about 200,000 policies sold each year for the last five years. Therefore, a provider looking only in the rear-view mirror may take the view that other markets offer greater potential.
MPPI/ASU, on the other hand, has seen a 100 per cent increase in sales over the last four years, due partly to the lack of development and focus from income protection providers and the base lining of the ASU product under the Sustainable Home Ownership initiative.
For income protection providers to succeed, they need to shake off some the product's past overdevelopment, which has complicated the product such that it has become cumbersome to quote and sell, and work with the CML and ABI towards mortgage payment protection best practice and away from base lining.
Calvert: Not remotely. We have also seen Zurich Life and Swiss Life disappear from the income protection market and this was for operational/strategic reasons rather than disaffection with income protection. There is no doubt it is a specialist market and will become the domain of a small number of providers but, for those that can make their product/servicing offering distinctive, there is a positive future ahead.
There are two big issues for providers to address. First, they must their products much more simple and appealing. Second, they must provide intermediaries with the skills to maximise the potential from the market. It is just not good enough to keep dishing out appalling health statistics. IFAs tell us they want the practical skills needed to sell the product.
Jones: No. These companies will have their own reasons why they have decided to focus on the group market. We believe there are good opportunities both in the group and individual markets.
Richard Verdin, sales and marketing director, Direct Life & Pension Services Phil Calvert,national sales manager, Pioneer Friendly Society Nye Jones,intermediary development manager, Axa PPP Healthcare