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Rate relations

Our panel of experts give their views on guaranteed rates, the future for online business and the evolution of CI cover.

W hat do you see as the future for guaranteed rates?

Edwards: Recent experience proves that the popularity of guaranteed rates has not been affected by the significant increases in price. Some people are obviously happy to pay a higher premium over the rev-iewable rate for the peace of mind that a guarantee offers.

However, it is important to offer people a choice and guaranteed rates should continue to be offered side by side with reviewable rates. The industry is also reliant on reinsurance for guaranteed rates and as long as this is available, then they definitely have a future. But if there are more price increases on the way, perhaps as a result of medical advances, then we have to watch that the gap between guar-anteed and reviewable does not get so big that guarantees are not seen as good value for money.

Chadborn: It is essential for guaranteed rates to be available across as many products as possible to sustain choice for the consumer and the adv-iser. Where relevant, independent advisers will always concentrate on features and benefits rather than cost alone so having guaranteed rates available is vital. Providers wanting to appeal to advisers adopting this approach will have to endeavour to offer guaranteed rates if they want to be taken seriously and I think more will start re-entering this market.

Kirwan: The availability and cost of guaranteed rates for CI depends largely on the simple laws of supply and demand. We know demand for guaranteed rates has been strong and, in the last couple of years the supply has been limited – hence, we saw prices go up as those continuing to offer them could charge premium rates.

But there are strong signs that the supply side of the equation is easing. When pri-ces go up, the business bec-omes more profitable and therefore more attractive to new entrants. Accordingly, we have seen a number of new entrants to the market – both insurers and reinsurers.

Do you expect to see a mass increase in online business being carried out?

Edwards: IFAs and clients like efficiency and for the application process to be as easy as possible. It is essential that cover goes on risk as soon as possible because for every day’s delay, there is an increased risk that the event they are insuring themselves against could happen before the cover is in place. There will definitely be an increase in online business as it can fulfil these ease and speed requirements.

Chadborn: In short, yes. Online business is undoubtedly going to see an exponential rise, fuelled mainly via dual pricing and commission bias in favour of e-business over paper business. Providers such as Royal Liver will only accept online business and I expect others to follow.

Kirwan: It has already happened in the B2B environment, with around 50 per cent of all intermediary business now transacted online. This trend looks set to increase. However, there are some risks here and the Financial Ombudsman Service is looking very closely at e-business. Cases where the intermediary is keying medical information on behalf of the client have the potential for keying errors and important medical information to be inc-orrect. When this happens, it is essential that the customer sees a copy of the application form to check and, given the Post Office’s recently published results on lost mail, there may need to be a more robust process than simply sending it in the ordinary post and hoping it arrives.

In terms of the evolution of critical-illness policies, what do you think the next generation of CI products should be like?

Edwards: The next generation of critical-illness plans must be future-proofed against medical advancements, that is the main problem we have with the current product. It must cover real life-changing events rather than providing a windfall payment for minor conditions. Above all, it must be understandable to the point that every customer knows what they are covered for and what they are not covered for.

Chadborn: I would like to see a closer correlation between products in relation to the definitions, features and exclusions. Too much attention is given to cost when it comes to recommending CI. A competent adviser should be able to identify providers which offer products with greater features and definitions. However, this is not a straightforward exercise, which is why it is perhaps too easy for recommendations of CI to be cost-driven.

Kirwan: As chairman of the ABI CI working party, I am confident that the review we are undertaking will result in clearer, fairer illness definitions which are more future-proofed against medical advances. This will be an important step in the right direction.

Do you believe that CI rates are going to increase and, if so, why?

Edwards: Medical advances have created upward pressure on price. Claims paid earlier than expected as a result of new diagnostic techniques will continue to provide upward pressure unless the product can be made much more futureproof. Only when the pricing actuaries can be sure the product is robust against this threat will we see a period of price stability.

Chadborn: The advent of depolarisation and the struggle for positions on multi-tie panels will increase competition among providers. Those which have enjoyed a captive audience via bancassurance will now have half-a-dozen other mainstream providers to compete with. Providers which do not see their future as muscling in on multi-tie panels will need to be able to compete on cost as well as have an edge to maintain market share. For these reasons, I believe prov-iders will be doing their utmost to maintain current CI rates, if not drive them slightly lower.

Kirwan: No, quite the opposite. The current economic indicators of supply and dem-and suggest guaranteed premium rates have peaked and may start to fall. There is even some early signs of this in the market. Supply is easing as the market becomes more attractive to new entrants. The demand side of the equation also looks set to change, with a cooling mortgage market reducing demand again, easing the pressure on guaranteed premium rates for CI

What type of strategies need to be implemented to plug the income protection sales gap, as described in last year’s Swiss Re report?

Edwards: Income protection, when you think about it, is probably the most important type of protection for most people but sales lag seriously behind those of critical-illness cover and life cover. Part of the problem is a lack of commitment, not only from product developers and actuaries to create a simpler more attractive product but also from the sales teams who simply have not put the sales effort behind the income-protection product.

Chadborn: Better-quality training to educate the sales environments who are more geared up to secure a sale rather than provide holistic advice. One of the consequences of an employment structure which dictates 10 appointments a week is going to be quick and easy sales such as mortgage protection and accelerated CI, with income protection as an after-thought or “something to think about”. Regulatory changes may help but I remain sceptical.

Kirwan: There is no doubt that income protection should be a core protection product, with sales much higher than at present. However, the key reason why it punches way below its weight is due to the complexity of the proposition. Income protection based on an own-occupation definition and functional assessment tests definition is, in reality, two entirely different products but the two are wrapped together and presented as one, which is very confusing.

Then there are the complexities of the income tests at the claims stage, whether state benefits are offset, how it interacts with employer sick pay and co-insurance clauses for people with two policies. All this before we even consider the complexities of underwriting on an occupational basis.

Is income protection difficult to sell? If so, what can be done to help?

Edwards: Everyone knows why the product does not sell even though most people can see the need for it. It annoys me that the same reasons appear on conference agendas year in year out without any action really being taken. We know the underwriting process is cumbersome, long and often delivers a different premium to that quoted. We know that the product suffers many complex definitions, some of which are subjective and difficult to understand.

We know you do not know what you are going to get until you claim. The industry seriously needs to stop iden-tifying the same old problems and instead do something about fixing them. In fact,there is so much effort going into fixing critical-illness, you could argue that that effort is misdirected.

Chadborn: It is not a difficult sale but it can be harder to position with clients than life cover or mortgage protection. This is primarily due to the additional connected factors to consider such as employer benefits, occupational definitions and claim restrictions, to name but a few. In addition, there are cheap, inferior alternatives on the market such as Asu pol-icies. Again, I think better ongoing training will help but so would greater promotion of income protection by the ind-ustry as a whole. After all, income protection is often the key protection need.

Kirwan: We need to make the proposition much simpler to understand. This is the key to more sales.

Roger Edwards, products director,Bright GreyPeter Chadborn, principal,Chadborn Baker & KearleNick Kirwan, director of protection marketing, Scottish Widows


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