You are here: Home - Better Business - Business Skills -

Protection 2012/13: The changes that will affect your business

by: Richard Verdin
  • 23/01/2012
  • 0
Protection 2012/13: The changes that will affect your business
Protection business in 2012 and 2013 is set to be affected by some fundamental changes to the market. Aviva's director of protection, Richard Verdin, explains why brokers must act now to assess the implications for their business.

While the Olympics and Euro 2012 will act to suppress sales, the pressures building into 2013 could well act to increase sales opportunities during 2012, albeit at the expense of business that would otherwise have been written next year.

It is worth thinking about the very real implications for advisers’ marketing, sales, resourcing and cashflow planning. If these have not already been factored into your business plans, then maybe you should think again.

The removal of the I-E tax regime, the introduction of genderless pricing, and planning for the implications of the Retail Distribution Review (RDR) must all be baked into people’s plans.

Here is one view of the impacts and implications for advisers:

THE EFFECTS OF RDR AND I-E   

If there is one thing that all the surveys and commentary agree on, it is that the need for additional qualifications and concerns about the move from commissions to fees will act as catalysts for some advisers to leave the industry. 

The thing surveys and commentators disagree on is the number of advisers who will leave the industry. More recent views have matured to suggest there will be more than just one wave, as some businesses inevitably fold despite best efforts in an RDR world.

While it is unlikely that those leaving the industry will be those who successfully and regularly advise on protection, there will be a market adjustment as a result of the lost sales that those leaving the industry would otherwise have made.

The balancing item to the market volume – and there is no suggestion this will happen seamlessly – is that an increasing number of remaining advisers will offer holistic advice incorporating protection, as customers look to reduce advice fees through the commission their insurance purchases generate.

The implication of this for advisers is that, if you are not one of the advisers looking to include protection advice, then you may well find customers turning to an adviser who will, simply because it is more efficient for them to do so.

The other impact of RDR is the move by some to restricted advice. We are already seeing the development of restricted protection panels with commensurate and sometimes non-commensurate demands for increased commissions as well as marketing and technology support.

All of which reduces insurers’ margins which may or may not be made up with promised efficiencies of volume. However, there is only one cake and in many cases, if nothing else changes, customer premiums are bound to be affected.

As far as I-E is concerned, setting up new protection policies by insurers carries a cost (administration, underwriting and commission) with the income derived from doing so recovered over time from the regular premiums.

Some with investment income in their life fund still benefit from the I-E regime, which in effect reduces the rate of tax applicable to protection business as the expenses (E) are offset against investment income (I). The tax relief/credit (often called the protection offset) is currently passed on to the customer through lower pricing.

The effect of the changes planned at the end of the year is to remove this benefit which, in turn, will increase customer prices. The change impacts new customers only, existing policies will be unaffected by the change.

This will have the effect of increasing annual premium income per case for those customers who buy on the basis of cover. However, we know many customers buy their protection to a budget, so we won’t see the full increase in premium work its way through to a market increase in value.

The major impact, and the one advisers must plan for, will be on transaction levels. Many estimate that around 25% of life only cases are re-broked, with the vast majority of those on the basis that a switch represents better value for the customer.

If that is not true, because prices have risen, then many rebroking opportunities will be lost to advisers. Now you can argue over whether that is a more or less healthy state to be in, but the fact is that transaction opportunities and therefore market volume and advisers’ income will be hit.

The final impact of the removal of I-E will be to make standalone critical illness cover (CI) more viable as a product than it is today.

Today, accelerated CI (Life and CI first event) is available at a lower cost than standalone CI because it is classed a life insurance under I-E.

Post-I-E, it will be more expensive and therefore less popular, although the arguments around the problem with survival periods for heart attack victims and others will continue.

Genderless Pricing   

As a result of action taken through the European courts by Test Achats, from the end of the year it will be illegal to price products differentially based purely on an individual’s gender.

The only certain outcome is that joint policies with different genders will remain the same on price with the likely outcome that life and CI policies will rise in price for females, and the price of income protection prices will rise for males.

No one knows what affect the competitive environment will have after that.
The point is that this is yet another inflationary pressure on protection pricing reinforcing implications already highlighted above.

It seems that it will not take very long for entrepreneurial advisers to work out those thinking of buying a policy early in 2013 might (depending on the cover they are looking for and their gender) be well advised to buy during 2012.

It goes without saying that it is never good advice to buy something just because in the future it will be more expensive. Many such sales have a way of unwinding themselves through the complaints process when the “economies” prove unjustifiable.

The result of all the above is it is reasonable to assume that, following  a summer holiday rich in sporting events, we may see a rise in new business to be offset by a subsequent lull in 2013.

All of which – as was said at the start – has implications for resourcing, planning marketing activity and ultimately cash flow and profits.The gender directive will also affect product/­proposition development.

Consider this, in a post-gender directive world, where a male customer buying CI cover discloses a family history of breast cancer, the genderless response to his price may mean providers applying a rating.

What is quite likely, therefore, is that providers could offer exclusions in replace of ratings so that the men and women will be able to pick and choose.

This may develop further with products having cover benefits offered to all at the same price, but targeted at specific genders.

Again, a great planning tip for advisers is that whilst the law is the law and prices will have to be genderless, that isn’t the basis on which insurers and reinsurers will value cases. Insurers will value a better than market mix of female lives for life and CI and males for income protection. If your business has such a mix, you may well benefit.

For the reasons detailed above, we can see greater volatility in the short term than we are used to, but the protection market and those who trade within it are resilient.

Having come from an adviser and broker background, as well as having witnessed the astonishing switch from mortgage to family cover sales immediately following the mortgage market meltdown, I know that while appearing stagnant the protection market is in fact sturdy and far more sustainable than many imagine.

The past 15 years have proven that the absolute price is not the constraining factor of this market as a whole; at the top level this market is price inelastic. Price is a competitive issue only within the market. The landscape is changing, but it is rich with opportunities.

Six out of ten UK families are still without financial protection and while we can’t manage something rounded to the nearest hundred billion pounds, it is our ­responsibility to help each individual and each family address their gaps.

Then, as our grandmothers would say: “If you look after the pennies, then the pounds will look after themselves.”  

Richard Verdin is protection director at Aviva

There are 0 Comment(s)

You may also be interested in