The UK term assurance market has enjoyed a continued period of growth over the last year. Billed as one of the simplest and most effective types of insurance, term assurance is also one of the cheapest and has found sales driven forwards by 2002’s boom in housing and consequently mortgage sales.
Although there is no doubt that term sales are currently strong, the actual figures are all anecdotal as the most recent market overview was published in October 2002 by GE Frankona Re, and referred to sales in2001. Nevertheless, these figures were impressive, showing total sales up by 28% on 2000. The total number of policies at the beginning of 2002 was 7,078,201 ‘ or one in four of the working population. Level term assurance policies accounted for around 50% of sales, with the leading five providers generating 61% of sales.
Louise Roche, marketing analyst at GE Frankona Re and author of the October report, says: ‘The booming housing market has undoubtedly contributed most of these sales and as the housing market has continued to flourish we expect to see good sales for 2002 too.’
The one concern for the term sector is that new growth in the housing market has slowed down this year. This may have more of an impact on sales of term assurance than the figures in the housing market would indicate as the number of remortgages as a percentage of the whole is increasing, partly masking the drop in new borrowers, at least for a while. Rosalind Pearson, personal finance research and planning manager at Swiss Life, says: ‘A slowdown in the housing market has been predicted for a while and this year has seen the start of this. There could potentially be a knock-on impact on sales of mortgage-related term assurance.’
However, according to Nick Kirwan, head of product development at Scottish Provident, this would not necessarily mean sales of mortgage-related term assurance would slow. He says: ‘When income multiples on mortgages get stretched there is a tendency to leave out cover, which I think is a mistake, but what happens is that when people remortgage they are perhaps a bit more established and that is maybe another opportunity for advisers to sell protection. Often when people remortgage they are increasing the size of the loan, which gives further opportunities for top ups.’
Technical pricing issues, such as allowances for future mortality and the impact of new diseases have probably hit a plateau as most of these factors have been taken into account in the recent rate cuts. A major factor in term rates falling over the years has been the removal of loadings remaining from the HIV scare.
Ronnie Martin, protection director at Legal & General, says: ‘There will be continuing issues over guaranteed rates for term critical illness policies in the new year but, as far as life term is concerned, mortality experience has been improving and we have seen that coming through in prices, as well as adjustments after the AIDS loading of the early 1990s. In future I see no scope for price reductions on that scale being repeated.’
However, external factors such as competitive pressure and the desire to build market share may mean that there is room for manoeuvre. In addition, e-trading is designed to reduce the cost of processing the various forms of term assurance and this may be reflected in rates as time goes by. Pearson says: ‘Clearly with term being such a commoditised product it is ideal for e-trading and more providers are moving in this direction.’
Martin agrees: ‘The move towards electronic submission of business is quite a strong influence on business practice and is an element effecting price, as it is cost effective. If there are any savings to be passed on in future it will be in this area and in customer service costs,’ he says
Advisers grew their share of both level and decreasing term new business, according to last October’s report, accounting for 40% and 44% respectively. This seems to have been largely at the expense of bancassurers whose market share dropped by 6% for both products, accounting for 23% of level and 28% of decreasing term sales.
Kirwan believes that this will not necessarily turn out to be the case in 2002 and 2003. He says: ‘The non-IFA market includes bancassurance, which remains very strong, with banks and building societies in a position to write quite a lot of mortgage related term assurance. However, I think advisers are becoming more and more switched on to protection products now, partly due to the demise of some of the other markets, such as investments. Advisers need to sell things to clients that will reward them for time spent.’
Pearson agrees: ‘IFAs have been increasing their share generally in protection. Some of this can be put down to the demise of a number of direct sales forces and many of these becoming IFAs themselves. Other factors may include the increasing interest of advisers in protection as a possible income stream in the light of changes to pensions and the downturn in investments with low equity markets.’
One area in which term assurance has the potential to increase sales is in family income benefit (FIB). FIB is a cost-effective way of buying protection for the family at a time when there may be pressures on household budget.
Laura Shanks, product development manager at Scottish Equitable Protect, says: ‘FIB is not sold very much with a mortgage because people perceive the lump sum benefit as more attractive. It is also interesting that of the FIB policies that are claimed on, the majority, if not all, commute to a lump sum at point of claim. Most policies on the market allow the option at claims stage and most customers go for it.’
In many ways this is an oversight. With current interest rates so low, a lump sum invested is not going to produce a healthy income, certainly when compared to 10 years ago. Because the capital at risk on FIB decreases over the term it is also a relatively cheap option for the amount of income provided.
FIB does offer opportunities for IFAs. ‘I think one of the main points of FIB is that it is a good sales tool for intermediaries to use in certain circumstances. If the client finds the premium for £100,000 lump sum benefit too high for example, then the same amount over a certain period in instalments, for example would be invariably cheaper. The client also still gets an option to take a lump sum in the event of a claim,’ says Shanks.
The individual term life insurance market tends to be a fairly static one in terms of market entrants and exits, and there have been only two major movements over the past year. Bright Grey, an offshoot of Scottish Life, has entered the market and Swiss Life (UK) has closed its doors to individual business.
Swiss Life (UK)’s departure is not a sign of any greater market malaise. Swiss life’s parent company, the Swiss Life Group, based in Zurich, decided that the UK arm was not going in the overall direction it wanted the group to go in, as it concentrated on capital intensive protection products. It has put the company up for sale, unsuccessfully so far, and decided to reduce capital requirements by refusing individual business. Swiss Life (UK) still accepts group life business.
As for the other players in the market, it is common knowledge that the poor returns from equity markets have caused problems for insurers, but the Financial Services Authority has stated that firms in the market have adequate funds, and can stand further falls in the markets without a major crisis occurring.
Paul Casey, media relations specialist at GE Frankona Re, comments: ‘The life companies have been through some tough times and there have been some tightened regulations around capital, that has put a bit of pressure on them. However I do not see a danger of many life companies disappearing from the market, we are not facing any mass exodus.’
All in all the term assurance market is diverse enough to survive anything but major market upheaval. Rates for life and critical illness went up a little recently. Actuaries have also been discounting future improvements in mortality. If the outlook turns out to be not quite as rosy as expected then rates could be further trimmed but few expect any significant upward pressure on rates.
Casey sums it up when he says: ‘Term assurance is becoming increasingly competitive, at the end of the day it is a commodity product. While there is a possibility of a slowdown in sales if the housing market slows and, as far as the product goes, there are no new markets opening, term assurance is already a great protection for a multitude of scenarios, it is a basic product that is cheaper now than for many years. I foresee no major changes in the coming year.’