Sales of protection policies are back at peak levels, with the sector growing by more than 20 per cent in the past year, despite adviser complaints over protection’s lack of popularity.
According to the latest figures from Equifax Touchstone, sales of protection policies surpassed £149m between July and September this year — their highest level for over five years and the fourth consecutive quarter of growth.
The market is looking to adviser incentives such as commission payments for ways to sustain this trend.
There are a few potential factors behind the surge, not least a buoyant housing market combined with surging personal debt levels and inc-reased income insecurity — a factor reflected in the strength of mortgage term assurance, sales of which grew by 21 per cent in the second quarter of this year alone.
Critical illness policy sales have also increased sharply, up by 15 per cent to £4.5m between April and June.
Facts & Figures director Simon Webster thinks sharp cuts to welfare payments may also be playing a role. He says: “Many of us believe if the worst happens the state will protect us — but this has changed dramatically.
“A widow with a newborn once got an average payment of around £29,000; now the maximum is just £9,800. And while now if you fall ill or lose your job the state may pay mortgage interest on loans of up to £200,000 after 39 weeks, from April 2018 this will become a repayable loan.”
Another potential explanation for the explosion in protection sales, however, is that insurance is one of the last remaining product types on which financial advisers receive pure commission, with the FCA ruling nearly five years ago during the RDR that this form of remuner-ation was appropriate for protection but not investments.
Earnings data published by the FCA in May showed that overall reported revenue earned from insurance mediation in 2016 was £15.9bn. This represents an increase of 5 per cent on 2015 and 10 per cent since 2013, despite a small decrease in the number of firms earning money from insurance sales (around 10,200 in 2016).
Commission continues to be the main source of insurance intermerdiation revenue, accounting for 83 per cent of earnings last year.
Exactly what advisers get paid for selling protection products remains unclear, with little official data to provide a definitive benchmark. Traditional models have ranged from upfront commission of around 150 to 200 per cent of the first year’s premium, with ongoing commission from 2 or 3 per cent, all the way up to 25 per cent of the monthly premium, plus a further 35 per cent from the provider if the policy is kept for 10 years. Some advisers also choose to work on a non-indemnified basis where commission is paid over the course of the product, while clawback periods are either two or four years.
However, Barrett Financial Solutions managing director Kim Barrett says rates are still not high enough to make them attractive to advisers.
She says: “If you only do commission, you have to sell a lot of it to make any money. We recently set up a life policy for £500,000 — around £15 per month — and the indemnity commission on that was less than £300. By the time you sit down with the client, do a fact-find, do all the client research, do the indemnity report — less than £300. Really?”
Webster agrees, saying the level of work involved makes commission an entirely appropriate form of payment for insurance products, which, unlike financial planning and investment advice, are truly ‘sold’ by the adviser rather than actively bought by the client.
It is also why he, along with a number of other industry insiders, insists that the protection market would “disappear” without commission to incentivise advisers, which would be to the detriment of clients.
Financial incentives, however, have long been a focus of the FCA, with the regulator stating it remains concerned that inducements such as commission “frequently present a significant conflict of interest” for intermediaries and their clients.
Webster says: “Obviously if you’ve got one policy that is £35 a month and one that is £35.02 and the first pays £1,000 commission and the other pays £1,500 commission, you might be tempted to go for the second one. You’d be daft not to.”
However, he adds that advisers genuinely need “a good reason” not to choose the cheapest product, while online quotation technology such as Webline is levelling the market so that few advisers can earn more than others on the same product.
Internet comparison websites also frequently undercut advisers, leading to increased sales through direct-to-consumer hubs such as moneysupermarket.com.
Equifax Touchstone director Chris Park says: “Online is one of the strongest areas of growth in the protection market, with industry leaders like Legal & General really leading on platform offerings.”
He suggests this could be a key factor behind the consistent surge in sales during the past four quarters and he expects sustained growth over the next 12 months for the same reason.
However, while advisers may get a smaller slice of the protection pie in future, many regard any growth in sales as a positive development.
Webster says: “The financial press makes any excuse to print a bad-news story. But this is a good-news story: protection sales are up, the industry is doing its job and the public are better protected as a result. It’s win-win.”