Mention 2012 and most outside the industry will think Olympics and not RDR or Solvency II. They certainly will not have heard about the Treasury/HM Revenue & Customs review of the taxation of life offices and, in particular, the protection offset within the current “I minus E” regime.
The last of these does not yet have an easy acronym so let’s introduce one now – Por, the Protection Offset Review. It is quite fitting, given that the impact of any change will ensure future customers pay more for their policies.
At this stage in the proceedings, we cannot be sure when any outcome from Por will land and there remains a small but important “if” but most are betting on changes around 2012.
For those active in the protection market, what cumulative effect will all these changes have on 2012’s business? Let me interpret the implications for the market, including providers, advisers and customers.
The London Olympics
Protection sales, like other event-driven sales, always suffer when there is a more interesting event taking place to occupy customers.
Big sporting events disrupt otherwise predictable business flows and if the event is UK-based, the effect on business flows is at its most extreme.
To illustrate this point, on each day that Andy Murray played a game at Wimbledon in 2010, Aviva applications dropped and across the market I estimate that 1,800 fewer applications were submitted each time.
The impact of the Olympics will be to reduce protection sales during the relevant months in 2012. However, we should also expect the pent-up demand to unwind in the months after the Olympics
As we all know, protection sits outside the RDR but the FSA proposes that hard commission disclosure should take place where the sale is associated with an investment sale. There are various ways that “associated” may work and we will just have to wait and see what the final rules say.
Whatever the outcome, the introduction of the RDR will have an impact on our market and we think the net result will eventually be mildly positive. I say eventually because the positive aspects may take a year or so to work their way through and you can be certain they will not balance with any synchronicity.
We, like everyone else, expect there will be fewer advisers after the RDR but we also expect that a higher proportion of those remaining will have a greater interest in advising on protection. We also know that non-IFAs active in the market have growing interests in arranging financial protection for their customers, which will all help to stabilise the market.
Still early in the process but, for protection, Solvency II is mostly a distraction that may slow down some developments. Most of the impact will be felt by reinsurers as insurers review the extent of reinsurance used, which should not work its way through to premiums.
Protection Offset Review
Today, there are providers that benefit from offsetting protection expenses against investment income, called “excess I” companies, and there are others who have in the past been “excess I” and have used their excess up, who together with those who have never had any “I” are known as “excess E” companies.
The Treasury/HMRC are looking at the case for change. Views vary but most believe that change will lead to increased consumer prices for new sales or reduced adviser commission, as suggested by one Government official.
Increasing prices is the most likely outcome, which itself would not be the end of the world for customers. The market impact, however, could be significant as rising prices leave less scope for rebroking, which is estimated to be around 20 per cent to 30 per cent of new sales.
The effect of this on advisers, providers and the wider economy would be significant. The loss of a quarter of market commission would add up to around £350m a year, with most of this concentrated in the IFA market.
Increasing prices are inevitable as all companies will eventually become “excess E”. The issue then is timing. Rather than intervening, it would be better to allow the effect to arise gradually, thus avoiding a still fragile market being battered further.
Let us hope the decisionmakers take account of the full economic impact of any change, as some, if not all, of the tax gains in moving early will be offset by the impact on the tax take elsewhere in the economy.
Finally, it would be remiss not to consider what impact a resurgent housing market in 2012 might have on protection. Some say such a market would boost protection but I am not convinced.
A lot has happened since the last time the market was severely depressed and recovered, with the introduction of statutory regulation for mortgage and protection.
Recently, we have seen protection sales hold up well against substantially lower housing transaction volumes with the switch from mortgage to non-mortgage sales. My view is that any recovery in housing transactions, and one is not certain, will see a commensurate increase in mortgage protection sales with a near corresponding reduction in non-mortgage sales as sellers’ time becomes an issue once more. The overall effect will be mildly positive, with the emphasis on mildly.
The run-up to 2012 will be anything but dull. There will be many ups and downs ahead but for those staying the course the ups will outweigh the downs.