The Financial Ombudsman has concerns over reviewable premiums on critical-illness policies. What needs to be done to allay these concerns and what will be the effect on the market?
McKie: Our plan offers five-yearly reviewable premiums where only the expectations of future morbidity experience can be reviewed. We appreciate the concerns that the FOS have regarding reviewable premium contracts but we feel that our plan is clear and offers good value cover to our customers. Clearly, we will be monitoring the situation to ensure our proposition remains good value.
Newitt: Many reviewable policies are priced on the known claims' expectations of today and so customers are only sharing the risk of unforeseen claims occurring. The review process is key to this. The customer-focused plans have review conditions that require any increases to be linked to groups of customers rather than individuals and demand that the insurer have evidence of change in claims' experience to justify any pricing alternations. In theory, this could lead to a reduction as well as an increase in premiums so provided that policies are clear on the cover being reviewable and the conditions of review are fair then concerns may be allayed.
Cowman: First, as an industry we must make it more straightforward for clients to understand what it is they are buying, so our explanations and communications must be more robust. Second, we believe there is a place for the concept of reviewable premiums so long as it is explained to customers. This is a role for providers, via literature, and brokers/advisers via the sales process. Essentially, as an industry we must be up front in explaining which items and issues will trigger a review and this can be drawn from claims' experience, that of the industry and of each individual provider.
Is it irresponsible for intermediaries to advise on income protection and critical-illness policies to clients who have made no pension provision? In what circumstances would protection insurance be more important than pension provision?
McKie: Clearly, pension provision has, is and will continue to be a hot topic for the UK population, which can only grow in importance given increasing longevity of life. Therefore, making provision for one's retirement is a high-priority financial need. But should it come before or behind protection needs. A simple saying: “Make sure you can live today before you start worrying about how you will live tomorrow” does highlight that protection needs should in my view come before pension provision.
If the unfortunate does happen to a customer, either by early death or being unable to work due to incapacity, then most families will struggle to meet their daily living costs for anything other than a short period of time.
Consequently, they will want to ask their adviser why they did not advise them to insure themselves against such a severe detrimental financial position, especially, when the client discovers the relative cost of life, critical and income protection insurance compared with that of an adequate pension.
The financial effects of no protection could be felt for 40 years or more then it is clear that the downside of not having sufficient protection can be much worse than that of inadequate pension provision. Therefore, IFAs should consider customers' protection needs before they start to consider pension provision as this will act as the safety net for all further advice.
This is especially true if the customer is in one or more of the following groups, that is, is young, has dependants, has a large amount of debt, has a high standard of living, works for an employer who does not provide life cover or other protection, has low assets to fall back on, is self-employed or is a key employee, such as partner/director.
Newitt: This all depends on the individual's circumstance. If the customer is in their 20s with children, it is easy to understand why the customer feels a greater need to protect their ability to provide for their family over the next 20 years, as opposed to thinking about how they will survive in 40-50 years time. If they had to retire early due to ill health, it is unlikely that a pension fund will provide much of annuity for someone who is still expected to survive for a further 40/50 years so protection is more likely to be cost-effective solution.
However, someone in their 50s whose children have left home should be considering their pension provision probably more highly than their protection needs once they have adequate protection in place to cover any debt.
In the ideal situation, the customer will have enough disposable income to meet both their retirement and their protection needs.
Cowman: This is a Catch 22 scenario. Without an income, individuals will not be able to fund a pension so protecting the ability to do so is important. Ideal planning would result in a proportion of income being used to fund a pension and an additional sum being used to covering against the threat of illness or sickness. Ultimately, it is down to the adviser to arrive at an acceptable compromise that meets best advice for the circumstances of that client.
The Government says all employees should have access to a pension scheme or advice on pensions in the workplace. Should protection intermediaries be as expert on advising on pensions as they are on advising on protection and is this the case in practice?
McKie: Currently, not all advisers do give advice on pensions and protection, preferring to refer customers on to protection or pension specialist colleagues and offering bespoke advice on one part of the customer's financial needs which works well in certain cases.
Given the pension burden that is growing for the Government it is clear why they would like everyone to have easy access to pension pro-ision and/or advice. Therefore, it would be intuitively ideal if every adviser could provide advice on pensions and protection needs providing a one-stop shop for customers of the two most important financial needs for us all.
However, customers are not all the same and some prefer to consider and purchase their different financial products with different advisers. Therefore, it is not currently a necessity to be expert in both so there should still be room for the protection expert adviser that currently exists although they may have to forge new relationships with the pension advisers in the workplace to secure sufficient leads if a new breed of adviser is born.
Newitt: The workplace is well positioned to help increase the levels of protection of the working population. Many intermediaries already specialise in giving advice on a group risk basis which includes group life insurance cover, group critical illness, group income protection as well as group pensions in this market as part of an employee benefits package. This is a popular approach for employers who need to balance the financial costs of providing employee benefits.
In those companies which do not offer an employee benefits package then the Government's Informed Choices programme which aims to improve employee understanding of their current and future financial planning needs, is likely to widen the involvement of intermediaries including protection specialists, in the workplace. However, many protection specialists focus on the housing market, which is fine to restrict they advice to this market, provided the customer understands this is the case.
Cowman: The Government has recognised that employers have a key role to play in providing financial information through the workplace for their employees. In future, it is likely to extend to not only to pensions but all manner of financial products.
What will be important is that through the workplace the employee is given access to an adviser with an appropriate level of knowledge to counsel on a broad range of financial needs. It is possible we will see traditional pension adviser up-skilling on protection and vice versa.
If more people are to be working to age 70, how will this affect their protection insurance, especially critical illness and income protection? Will they be able to maintain these insurances without the premium cost becoming prohibitive?
McKie: It is common practice to allow for the predicted retirement age when calculating the best term of cover for a customer. In most cases that is still around the ages of 60 to 65. Therefore, if retirement is delayed there is scope for their protection need to be present for longer than previously. Maintaining the same level of cover through to 70 instead of 65 could be significant especially for critical-illness and income protection.
Further, most income-protection plans at present are tailored around a maximum current expiry age of 65 and so some product development would be required to meet this increased need.
Working longer will increase the duration but there should still be a reduction in cover amounts as the customer ages and reduces their debts and accumulates assets. A flexible protection product should be able to provide cover for longer at an affordable cost to the customer. An increasing age does pose the protection market some challenges but ones that we should be more than capable of meeting to ensure that customers are protected through their working lifetime and potentially beyond.
Newitt: First, we need to understand whether a need for protection insurance will still exist at age 70. The mortgage may be repaid. The family will be independent so the main reasons for buying protection today is fulfilled. New protection needs may emerge as work patterns change. Currently, most products in the market are written for a set term, with most having a maximum age of 65 so adjustment for new sales could be needed.
Increasing the term of the policy and increasing the maximum age will increase the likelihood of a claim unless health patterns continue to improve and hence the premium may have to increase. To avoid this the contract may need to evolve from its current state. Stricter definitions and staggered benefits for example may help to reduce costs. However, the contract must continue to meet the needs and expectations of consumers.
For example, if the average age of CI and IP policyholders increases, illnesses that are more relevant to an older customer base, such as dementia, may need to be added to the list of illnesses covered. However, the experience from our book of business shows that 59 per cent of critical-illness claims were for cancer, with ONS figures showing that 75 per cent of cancer diagnosis are in the over 60 age group – this shows that the most likely reason for a claim is already included.
Cowman: Current protection planning is heavily biased towards mortgage protection plans and there is a new protection gap emerging with people whose cover expires before retirement age (currently estimated at £3 trillion).
Individuals should consider their loss of income at a critical time rather than just covering their mortgage – “your home is at risk if you do not keep up repayments on a mortgage but your life and lifestyle are at risk if you do not keep up an income”.
One way of keeping premiums low is to have reviewable premiums where the cost will only go up if experience changes as this is not age-related.
Rod McKiesenior marketing manager,protection,Scottish Widows, Paul Cowman, head of protection, Prudential
Graham Newitt, managing director intermediary solutions,Legal & General Shelley Robertson, xx, Skandia
Nick Kirwan, head of marketing and product development, Scottish Provident Heather Armstrong, head of marketing, Scottish Equitable Protect