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Time to bridge the gap

Despite concerns about the protection gap, most providers report growth in the market. Pundits are positive when they take into consideration the gap to be filled and the growing need for cover as people borrow more and sources of life cover disappear, for example, when people cash in endowment and whole-of-life policies.

Friends Provident head of marketing communications Peter Hamilton says: “The outlook for the term market is quite finely balanced. It has been buoyed over recent years by rising house prices and falling premium rates. The former has meant a lot of mortgage-related business and the latter has given IFAs the chance to find better terms for customers with existing policies.

“Rates overall are unlikely to fall much further – and may rise – so there will be a limit on how many more policies can be rebroked as existing customers grow older.”

Hamilton sees positive factors influencing the market. While we may not see the same stellar growth in house prices, most commentators are predicting steady advances rather than a crash. He says: “Personal debt is increasing, pension schemes are closing and there is still a vast number of people with insufficient cover. It would be good to see increased focus on personal and business protection on top of mortgage-related business.”

Term life potential

The key thing for providers, advisers and consumers alike is the huge potential in the market for more cover.

Swiss Re&#39s assessment of the protection gap in the market is being reviewed following last year&#39s pinpointing of a gap of £2trn. This has widened by as much as 5-10 per cent, according to Swiss Re technical manager Ron Wheatcroft.

He says: “It looks as if the life insurance protection gap in 2003, based on enforced business in 2002, has increased. We are looking at a market where term insurance sales have grown quite quickly. However, life cover is dropping off quite fast, with the surrender of existing whole-of-life and endowment business, so the two offset each other.”

In the past year, a number of life insurance companies have increased their term insurance rates enough to suggest the “pile it high, sell it cheap/commodity market” approach to term may be about to change. Some companies have suggested their price rises were the result of restructuring and do not indicate a trend but it is likely that increases will be applied over the next year or so. The general consensus is that term assurance is still well priced and rises only warrant comment after a decade of low or decreasing rates.

Norwich Union Healthcare head of protection product development Lawrence Jackson says: “I don&#39t think there is a great pressure for rates to rise. However, in the next 12 months there is slightly more pressure for rates to go up than down. In the long term, we will benefit from increasing financial sophistication with regard to the life companies running the business and also from improved mortality experience. This may bring rates down although not as much as in the past five years.”

Wheatcroft agrees. He says: “Rates have moved up slightly. Perhaps in some instances rates just became ultra-competitive so there has been a bit of a natural correction in the market. But it is difficult to see where rates will go but a competitive market will remain.”

IFA LifeSearch says the cost of life cover has fallen by 40 per cent in the past six years. The company says many who bought life insurance during this period are likely to save money by reviewing their policy. LifeSearch claims the 1.3 million new term policies written in 2000 could be rewritten at an average of less than 22 per cent today. The average premium in 2000 was £301 a year – a 22 per cent cut in price would equate to £66 per policy in 2004 or £90m in total. There could be further savings if the polices already in force were not the best value, in other words, if they were bought from a bank, LifeSearch says.

Rebroking to offer value

Inertia is a problem, however, with many consumers thinking it is too much trouble to change their cover.

This means rebroking may still be an opportunity for intermediaries to offer best value to clients that have cover. Choosing single rather than joint life policies for couples is another tactic recently bought out and dusted down by LifeSearch.

Many couples would be better off with two single polices than one joint policy, says LifeSearch. Two single policies generally cost the same as one joint policy and the benefits in the event of a claim are significant. If both the insured people die, for example, both policies will pay out, leaving more funds for the dependents. If one partner passes away, the surviving spouse is still insured, whatever the state of their health, and they do not have to think about rearranging insurance at what will obviously be a painful time.

LifeSearch figures show how little the cost will differ between a joint or two single policies. The company points out that single policies are easier to write under trust and policy details can vary to suit each life, for example, if one life needs to be insured for longer than the other.

Another cost development causing some hackles to rise is the differential between the price of polices sold directly to the consumer and those available through the intermediary market. More insurers are making deals with supermarkets and other retailers, which white-brand the insurer&#39s term cover. With Liverpool Victoria announcing that Boots is to sell its term product and Tesco selling Norwich Union Healthcare, consumers are being bombarded with financial services as they shop for groceries and pharmaceutical goods.

Selling the right cover

There are two sides to the “should they/shouldn&#39t they be selling term?” coin. One is that the more opportunities individuals have to buy life insurance, the better. The other is how can they be sure they are getting the right cover without taking advice?

There is also the fact that supermarkets and other retailers are generally getting better rates on the term they are selling than IFAs can get for their clients. Insurance companies are quick to reason that this is because supermarkets are waiving much of their commission on the term insurance they are selling and IFAs could do the same if they wished.

Jackson says: “Insurance companies do different things but we give Tesco a separate set of rates. Tesco then takes decisions around its marketing strategy and how competitive it is. Tesco has chosen to take less commission and so offer better terms to customers. What we do is make sure the offering we make to the IFA and to Tesco is fair so that if the IFA chooses to sacrifice commission, he can match the Tesco terms.”

As for advice, the argument goes that people who buy their term insurance at the supermarket know what they want and do not need advice. Shoppers who do not know what life insurance is, or the sort of policy that is right for them, will not be buying it in a store and so are in no danger from the pitfalls of execution selling.

Cases that are easy to underwrite will be covered through the execution-only route, leaving the more complex or impaired cases for the intermediary to deal with.

The fact that intermediaries will end up with the non-standard cases which need more work may be frustrating for the adviser but not for the consumer, who has the IFA trawling the market on their behalf.

This presupposes those supermarket customers, either given a high rating or rejected altogether, seek the advice of an intermediary. Does it also mean the supermarkets and their respective insurers will be cherrypicking the simplest, least risky prospects and those without the consumer distribution outlets will be faced with non-standard cases?

Driving the life market

There are various angles to consider that may offer intermediaries the chance to increase term sales. LifeSearch highlights family income benefit, which provides regular income for the family in the event of the death of the main income provider or the home carer. In a society seemingly obsessed with lump sums, family income benefit is often overlooked.

LifeSearch senior technical adviser Kevin Carr says: “I would prefer if it wasn&#39t called family income benefit at all. The name of the product puts people off because they confuse it with state benefit.

“A couple of life companies offer tick-box options for lump sum or income on their nor-mal life cover application form under the section asking how much cover the individual wants. It is much simpler that way.”

Underwriting is becoming increasingly sophisticated and more product providers are offering online submission options, the latest in the market being Friends Provident with its eSelect service.

While simpler and faster application and quote engines are obviously encouraging, systems that are so sophisticated they can potentially rate on other issues such as location, occupation or postcode present certain concerns in relation to term assurance.

Hamilton says Friends Provident&#39s online service gives intermediaries a chance to compete with the supermarkets in one important regard.

“It would be good to see a greater use of trusts – here&#39s one example of how IFAs can differentiate themselves from supermarkets. The cheap £100,000 cover from Tesco looks less attractive if £40,000 goes in inheritance tax. Our system includes online trusts to simplify the process and encourage greater take-up.”

The impact of regulation

There are varying views as to whether the term market will be affected when the non-regulated sector becomes regulated in January 2005.

For the intermediary selling term, there is unlikely to be an impact specific to their selling of the product.

Hamilton says: “The original proposals to make private medical insurance, critical-illness cover, income protection and long-term care subject to special rules on the grounds they constituted &#39high risk&#39 products have thankfully been dropped.

“There will be, for example, a responsibility on the adviser to tell clients to read the policy summary, particularly the section on exclusions, and to be familiar with the policies but it should not be a major issue.

“The standards are not overly demanding and most advisers selling protection business have already been complying if they have followed the procedures they have in place for investment business.

“For unregulated intermediaries, the decision about whether to become authorised will not necessarily be so straightforward. Those who have not yet made up their minds may find themselves with some serious thinking to do within a relatively short space of time.

“If they are to continue taking in new business, they can either become directly authorised, become a representative of an authorised intermediary firm or network or become an appointed representative for a product provider.”

Jackson does not see market sales being held back by regulation, however, even if the distribution channels themselves are affected. He says: “If anything, it might encourage growth because it increases focus on the market.

“The market may become more concentrated in terms of providers, with the top four or five taking the larger share. That trend may continue. We may also see some consolidation within the sales channels, with the big distributors getting bigger and the smaller ones closing.”

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