What can be done to improve consumer understanding of the need for protection and who should be leading the drive?
Armstrong: All players in the industry – providers and advisers – need to work together on this. Providers can help by making products and marketing material easier for consumers to understand. The Raising Standards Quality Mark scheme has helped address some issues in this area. Expectation management in terms of claims is also important here to ensure that consumers retain confidence in insurers.
Advisers are ideally placed to educate consumers about the different types of protection products on offer and the need to ensure they are protected against illness and longterm absence from work. This is particularly pertinent given the rising amounts of consumer debt in the UK.
Lack of protection, particularly for mortgage repayments, was highlighted by the FSA in its Financial Risk Outlook 2003. Although the Government has launched initiatives to encourage people to save more for retirement, this has not extended to protection products. At the same time, state benefits are reducing, which means that personal insurance cover, such as income protection, is increasingly advisable for consumers.
Kirwin: I believe it is up to insurers and intermediaries to work together on this. Industry initiatives, for example, the ABI statement of best practice for critical-illness cover, have made products easier to understand and compare.
Scottish Provident itself has worked hard to raise awareness through campaigns such as our Families Inc and High Wire Britain research and we are also always very keen to help promote the real benefits for people through positive case studies in the press.
Robertson: The ABI works hard to provide consumers with generic information about a wide variety of insurance products. While individual providers can make some inroads into increasing consumer awareness, I think it has to be a concerted effort from our whole industry – providers, industry bodies and advisers alike. If we all send the same message, perhaps it will get through.
Do you see CI premiums continuing to increase in the short term or do you think they will level out?
Armstrong: We expect to see a steady increase in prices for guaranteed critical-illness premiums. This is a trend which will continue due to moves from the reinsurers, which has been brought about by medical advances and earlier diagnostic techniques.
As premiums become more costly, we are likely to see more IFAs recommending reviewable rates on critical-illness products. This is where rates are guaranteed for a certain period, for example, five years, then reviewed and guaranteed for a further period. No further underwriting is required.
More providers are offering the option of reviewable rates and this is likely to be an attractive alternative to guaranteed rates in the short term. Longer term, we are likely to see a change in product design for criticalillness policies.
Kirwin: To understand what the future holds in this area, we need to understand why premiums have been going up recently. It really is a simple matter of the dynamics of supply and demand. In the past, there was effectively an unlimited supply of CI cover unmatched by consumer demand. In these conditions, prices tend to fall through competitive pressures which is exactly what was happening.
However, this situation has now radically changed. The supply side has been impacted by a number of factors including a hit on reassurance capital from the effects of World stock-markets and 9/11, increased claims risks from medical science and the withdrawal of one of the major players, Swiss Re, from the market. On the demand side, intermediaries are selling more protection business than ever, supported by a strong housing market and weaker earnings from investments and pensions. So the pendulum is clearly swinging the other way, with the changed balance between supply and demand forcing premiums up. In that climate, it would be brave to bet against further increases. However, we firmly believe that protection remains excellent value for money and would recommend that people considering taking out protection do so now. In short, buy now, buy long.
Robertson: I think that critical-illness cover premiums will continue to trend upwards over the next few years. The initial flurry of activity early this year could well be repeated. That is because some providers chose to increase their rates in stages and others made the jump all at once, so there is probably still some element of catch-up to go.
However, I think this will focus more on guaranteed CI rates rather than reviewable ones.
Do you view the prospect of FSA regulation as a positive development or unnecessary regulatory involvement?
Armstrong: It has to be a positive thing as it could help build consumer confidence in the protection industry. With a massive protection gap continuing to affect UK consumers, anything that helps reduce this gap has to be a good thing. At the same time, we would not want to see this development leading to reduced sales of protection products or stifling product innovation.
Kirwin: It is important to remember that the regulation of general insurance and protection plans is being driven by the EU insurance mediation directive rather than being an initiative from the FSA.
As the FSA is compelled to implement the directive, the question of whether it is unnecessary is pretty academic. However, that does not mean that we cannot use this as an opportunity to raise consumer confidence and awareness. Any initiative that does this is one that we should all welcome.
Robertson: Regulations that help consumers to understand what they are buying is good, whether it is the ability to compare the calorie count in different tins of baked beans or the charges on an investment product. However, regulation should not have to substitute fully for the responsibility that consumers have when buying any product.
Will protection increasingly become one of the core offerings from IFAs?
Armstrong: Absolutely. We have already seen a trend towards this in the last few years and this is likely to continue. Many advisers who were not previously active in this market are looking for alternative income streams in a 1 per cent world, particularly in light of poor investment conditions.
The point that advisers have to understand and convey to their clients is that protection should really form the bedrock of any personal finance portfolio. The most fundamental element of this is the client's income and if that disappears, then the client's ability to pay the mortgage, contribute to a pension or to fund other savings products is likely to disappear at the same time unless their income is properly protected with an income protection and/or critical-illness policy.
Kirwin: This is already happening. Intermediaries are increasingly turning to protection business to diversify earnings away from investments and pensions where stockmarket conditions and the constraints of the 1 per cent cap have conspired against these sectors. Proof of this can be seen in the huge growth that the protection market has seen in the last two years.
Robertson: For many advisers, protection has always been a core product offering. However, more advisers are now turning their attention to protection, for example, as a result of uncertain markets and increasing house prices leading to IHT liabilities. As many people are still underinsured, focusing on protection can only help.
Do you think protection products should be considered higher risk than other forms of general insurance, as the FSA has proposed?
Armstrong: Definitely not. The reasoning behind this is that protection policies are usually more long term than general insurance products, which come up for review each year, but this does not necessarily make them more risky. Advisers and providers must ensure that consumers are not dissuaded from taking out protection policies due to this development.
Kirwin: Not income protection, CI. The long-term nature of these products actually benefits consumers since they are not subject to annually reviewable premiums or terms and conditions, as is the case with many general insurance products. Another factor is that, even if a particular person's health changes for the worse, the insurer cannot increase their premiums individually or cancel the cover – only the customer can do that.
This applies to private medical insurance as well. However, there is a strong case for treating all long-term care products as investment products for the purposes of regulation due to the complexities in advising on LTC. So, except for LTC, having a separate category for these products is not really appropriate. Even if there were to be a separate category, labelling CI, IP and PMI as higher risk may even put consumers off so, at the very least, this label needs to be changed. How about “health products”? I hope the FSA will make these changes after their initial consultation.
Robertson: Many people's understanding of insurance is limited to motor, household and travel insurance. While life cover is also often widely understood, products such as IP and CI cover are often confused.
The FSA proposals include pointing out that clients have a higher risk of not being able to make up any “losses” should they occur as a result of buying the “wrong” insurance. Protection products do have a greater risk as they are long term and the suitability test only occurs when it comes to a claim. That is why it is important to use a plain English style for all material.
Heather Armstrong, head of marketing, Scottish Equitable Protect
Nick Kirwin, head of marketing and product development, Scottish Provident
Shelley Robertson, protection brand manager, Skandia