Even a casual observer of the way protection is distributed will quickly come to the conclusion that it is a flawed business.
The size of the often-cited protection gap is over £2trn and a quick look at the Association of British Insurers’ sales figures for protection products shows a steady decline over the last 10 years.
A recent study of the UK intermediated disability insurance market by CWC Research has highlighted several problems with the market and concludes that distribution of protection products is ineffective.
Managing director Clive Waller says all the evidence points to a contracting market. “All the numbers say sales are going down. Sales have been relatively resilient during the recession but nonetheless this decade they are down.
Waller says with advisers have focused on investment business or retirement business for baby boomer clients and protection has been squeezed out as a result.
Waller says older advisers with baby boomer clients are not overlooking protection but their clients needs are elsewhere. “The trouble is their clients are now all baby boomers. Baby boomers do not need much in the way of protection, except for inheritance tax planning.”
At the other end of the advisory market, Waller says a lot of the new generation of wealth managers are not really interested in protection and would rather concentrate on other areas of advice that are seen as more prestigious while mortgage brokers still see protection only in terms of a secondary sale after a mortgage.
He says: “If it is a secondary sale, it is never likely to be as professional. They would rather sell the mortgage and if they can sell another mortgage straight away they will not bother with protection as there is more money in mortgages and no clawback, etc.”
Finally, the application process for protection business is quite simply not fit for purpose.
Waller says: “When I was working or a protection company, applications were a page long. They went to two pages when we had to incorporate a direct debit. Now they are 30 pages and they are 30 complex pages, so it is a really ghastly process.”
He says the combined effect of these factors is leading to a gradual and terminal decline of the protection market.
“The protection market is gently dying. That may be an exaggeration but it is going downhill. There will have to be change but the change will have to be quite significant.”
But according to Waller, the catalyst of change that can resuscitate protection distribution is just around the corner in the form of the RDR.
Waller says the changes to adviser remuneration brought about by the RDR will force advisers to move away from focusing purely on investment-related business.
“A lot of firms that have got proper business manager, which tends to be the bigger ones, say there is no way they can survive only on fees on investments.”
Recent figures fro YouGov suggested that the average IFA has assets under advice of around £5m. Waller says even if businesses are able to derive fees from the entire figure, this will not provide enough income and estimates that to survive purely on investment business alone
IFAs will need to be advising on assets worth a minimum of £20m.
Waller says: “The average IFA is not even 25 per cent of the way there, so you are going to need other income streams and logically you would look at the old fashioned idea of financial planning, which would include protection and would include mortgages.”
Recent figures from the Protection Review and the Personal Finance Society suggest this idea is already starting to get established, with 28 per cent of advisers saying they expect to recommend more health and protection business after the RDR.
Waller says another big change, and one that has not occurred to many IFAs yet, is a move into restricted advice.
“We reckon about half of IFAs will go restricted they don’t know it yet because they have not looked at it but once they at it including the type of capital they require, not regulatory capital requirement, the capital they will require to replace the commission they have lost, and once they start looking at the various options such as, if I go for a single platform, is that restricted? If I go for a DFM basis, is that restricted? A lot will go restricted because there is no reason why they shouldn’t.”
This move to restricted advice will lead to new opp-ortunities for product providers, which are able to tailor their application processes to make them more efficient.
Waller says: “Once you accept restricted advice it is possible then protection providers will look for strategic partnerships with distributors that will serve them in a modern way.
“A modern way has got to go straight in a telephone or straight online. This idea of a 30-page application to some adviser who has an interest in the process is lunacy.
“This is then taken back to the office and given to someone who has to type 30 pages into a screen and the screen is not the same as the application. You couldn’t make it up.”
He says either online automated underwriting or tele-underwriting is the only way to progress.
Waller says existing products also need to change to keep up with demand. He says developing products with exclusions for specific conditions would allow many more people to get cover.
He also says technology could also lead to some interesting development such as finding a way to of letting clients design their own products.
Such significant changes to the business cannot take place in isolation.
IFAs can only work with the products currently available to them and product providers find it very hard to change without the backing of reinsurers but Waller says the reinsurers are not oblivious to the need for change.
He says: “We have spoken to the two biggest reinsurers and they both have got an appetite.”
Waller says the chance of reform offered by the RDR is not a guarantee that the market can reform itself sufficiently but says it offers a real chance to do so.
“If you look at the drivers for change, they are information technology, politics, regulation, demographics.
“All these things are happening at the same time, so there is a huge opportunity to do some-thing very different that might just work.”
He concedes there is risk involved for businesses considering change but there is also a lot of reward for businesses that are able to adapt to change.
“It could be the first mover gets scalped or it could be the first mover gets the market.”
He points out that failing to do anything at all is not really an option.
“If we behave in the same way after the RDR as we have done before the RDR we are nuts because it is a totally different marketplace.”