Despite a greater reliance on remortgages to boost overall figures, the mortgage market has remained healthy over the last 12 months. As a direct consequence, so has the market for the general insurance products which the majority of advisers sell alongside the mortgage.
However, not all protection products have remained stable over the last year and some insurers feel that several are due for change.
The critical illness (CI) sector has seen the biggest changes. Diagnostic developments and a prediction of an explosion in claims has led to underwriters reassessing risks. The market is still feeling the effect of reinsurer Swiss Re’s decision to stop reinsuring guaranteed rates for CI, and several providers have ended guarantees, while others have raised premiums on new policies to cover the extra perceived risk. Providers are still attempting to find a comfortable price for guarantees while staying competitive.
According to Swiss Re, 572,234 mortgage related CI policies were sold in 2002 – a rise of 13.8% on the previous year, and sales have continued to rise. The Association of British Insurers’ (ABI) latest figures show 326,000 policies sold, for all reasons, as of the second quarter this year. This compares with 296,000 at the same time the previous year.
Ronnie Martin, protection director at Legal & General (L&G), does not think sales have been damaged by the increase in guaranteed premiums but the insurer has announced it is undertaking research into the second generation of CI products. He says: “Premiums are higher than a few months ago but we are looking at the market now because it is still successful. CI sales are still increasing, we have had a good run, but the time is right to enter the debate on what the future might look like.”
He points out that CI remains cheap in all its forms: “If you look back prices are just getting to the levels they were three or four years ago. We previously had prices falling as a function of competition, as were life insurance premiums. However, if prices keep increasing there will come a point where the affordability becomes a problem. Part of our research is to try and get customer feedback to find exactly where that point might be,” he says.
However, there is an element within the insurance industry which seems to be looking after its own vested interests. Nick Kirwan, head of product development at Scottish Provident, says: “One of the things about the current CI is that customers have voted for it with their cheque books and bought in droves. My estimate is that there is around £412bn of sum assured at risk, covering about 11 million adults and children. This is a problem. If there were only four policies out there nobody would worry but with numbers like these at risk who would want to be 10% wrong?”
He adds: “Another problem is that the industry has found a product that people actually like. If we come up with, say, CI ‘mark 2’, it is going to be very difficult to hold that against the present version. We almost need the present product to fail first.”
The insurance industry is looking at the possibility of combining CI with another product or even incorporating it as part of a wider protection bundle. L&G’s research will ask how customers feel about CI policies that reflect severity of disease, for example milder forms of cancer and whether it would be popular to assess impact on lifestyle.
L&G is not alone. Kirwan says: “We are looking at variations and hybrids, as is everyone else, but that does not mean that we are going to launch them or that we think the market is ready for them. At the moment we are strong advocates for the current product. Those who believe that there has to be a change have a vested interest in telling us that the current product is not sustainable. I do not see a big sea change in the market in the next 12 months.”
Mortgage and income protection
There has also been movement in the mortgage payment protection insurance (MPPI) market. The Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) have abandoned their target of a 55% take up of MPPI cover by 2004, as part of a sustainable homeownership initiative. By the end of June 2002 there were only an estimated 2,518,000 MPPI policies in force, representing almost 23% of the total number of mortgages outstanding.
The aim now is to keep average possessions below 30,000, – lower than they would have been in comparable economic circumstances in the past. A statement issued by the CML says: “Bearing down on the number of possessions over the long term is a more comprehensive objective than insurance take-up alone in making homeownership truly sustainable.”
Nevertheless, there are those in the market who are unhappy with MPPI as a product. Kevin Carr, senior technical adviser at IFA Lifesearch, says: “Brokers tend not to sell as much MPPI as high street lenders as it is generally an inferior product. MPPI is pushed very heavily by the high street lenders, very few of which offer the income protection (IP) alternative, when it could be far more suitable and potentially less expensive.”
The unemployment element of MPPI has caused underwriters concern when covering people whose jobs are not guaranteed in the long term. The travel and holiday industry, especially airline staff and those on the manufacturing side of these businesses are particularly volatile. There have been a lot of redundancies in these areas over the last few years and it has had an impact on the market as a result.
Similarly, insurers do not want to discourage people from taking out cover, even though making the proposition attractive while maintaining affordability is a continuing struggle.
Carr would like to see MPPI removed as a standalone product and replaced by IP. He says: “Traditionally IP would not cover unemployment but most IP providers will now allow that to be added on. So what you are choosing between the two products is cover for a year or cover to retirement. The average IP policy at claim has been paying out for over five years. Over half of all IP claims are for back injuries or stress and depression and they can keep people off work for some time.”
He added: ” I would like to see one product called income protection which would allow you choose a payment period from one year to five years and then on to retirement. The public would know what it means as it would be the product that ‘protects’ their ‘income’. I also think that the Government should be putting tax relief on this as it does with life cover – pension term assurance. There would be a huge benefit to the state if people were to protect their income.”
Sales of IP have been variable. In 2002 the sector grew by almost 20%, with policy sales amounting to 245,063, according to Swiss Re, compared to the 204,379 policies sold in 2001. Prior to this, sales figures for IP showed the product was failing to achieve its full potential with growth at a fraction of CI or life.
The spurt in growth can be attributed to mortgage-related sales in the term assurance market rather than outright standalone sales. However, heavy reliance on the mortgage market does pose a problem – if sales of mortgages begin to fall, so inevitably, will sales of IP.
Figures from the ABI already show that by the second quarter this year, IP sales had fallen from 96,000 in the same period last year to 77,000. And there is a possibility that by the end of 2003, the total number of IP policies sold will have dropped below last year’s figure.
Carr comments: “IP is not an easy sale – 63% of IFAs have bought IP but they are not managing to sell to the public. The estimate at the moment is that one in ten are protected under some form of income protection. People will insure cars and houses, pets, holidays and weddings, but they do not insure the one thing that pays for it all.”
The only truly stable product in the mortgage intermediary’s armoury is term life assurance and any pricing pressure is upwards.
Kirwan sums up: “We do not expect to see many changes in the life cover market frankly, but if anything premiums are likely to go up slightly. Actuaries are already discounting future improvements in life expectancy -if we live longer, premiums have taken that into account; if we do not live longer then premiums would rise. There is still a need for life companies to set capital aside and the cost and availability of that capital is an issue, with the state of the markets at the moment, this is another upwards pressure.”
Insurers have begun investigating ‘the second generation’ of critical illness policies.
Sales of income protection policies are volatile and may actually be falling.
63% of IFAs have bought income protection insurance compared to only 10% of the general public.