In addition, research by MoneySupermarket.com this month, revealed that one in ten people in the UK live off their overdrafts and their current accounts are never in the black.
Government cuts are starting to bite and an interest rate rise is looking likely in the short term. Even a slight increase in interest rates will be enough to tip some people over the edge.
While affordability of protection insurance is going to be an issue, especially for those using credit cards to pay essential bills, intermediaries have a duty to broach the subject of insurance to their clients.
In my view, accident, sickness and unemployment (ASU) protection is vital cover for consumers in this uncertain economic environment. It allows the policyholder to either cover their mortgage or rental payments, or a percentage of their income.
However, this cover has come under fire from both regulators and the media because of the way the product has historically been sold to customers and the perception of the product has suffered.
As a result, some intermediaries have been disinclined to sell the products to their customers. This is a dangerous prospect at a time when many people need this type of protection most.
Yet, a new breed of ASU product is coming to market that promises to address the concerns and criticisms that have been levelled at the product.
The key difference between the new breed and the traditional ASU products is the way in which they are underwritten. Traditionally, these policies were underwritten at the point of claim which meant there was a degree of uncertainty as to whether a policy would pay out on a claim. The new breed of products are underwritten at the point of sale.
Last year, Aviva announced that it was planning to launch a ‘game-changing’ short-term income protection product in 2011 – the game changer being that it would be underwritten at point of sale which would increase successful claim rates.
Assurant Intermediary launched its own short-term income protection and mortgage payment protection products, both underwritten at the point of sale, in January and Aviva came to market with a similar offering in March. This race to market indicates that this change to the ASU product is a significant one.
However, how important is this move towards underwriting payment protection insurance at the point of sale? What does it really mean?
Fundamentally, it aligns ASU with the way every other personal lines insurance is underwritten.
Some providers have half-heartedly looked at adopting a more robust underwriting approach at the point of sale, but declining an applicant who happens to work in a particular occupation or for a particular employer is unfair and simply favours the insurer as they try to mitigate as much risk as possible.
This practice is known as “declinature based underwriting” where the insurer decides what it doesn’t want to insure, rather than what it will. In our view, underwriting at the point of sale for ASU is underwriting for risk. It should start from the position of providing cover and then adjust the premium to reflect the risk.
This means that no risk is declined. The policy is priced according to the risk profile of each individual when they buy the policy, rating the policyholder individually across a number of criteria. This produces a unique premium based on the risk that policyholder represents to the insurer: the bigger the risk, the bigger the premium and the lower the risk, the lower the premium. This moves ASU away from the one-size-fits-all premium commonly adopted by the industry.
As a policy is effectively built around the policyholder at the point of sale then, barring the consumer unintentionally providing inaccurate information, there is no reason why any valid claim should be turned down.
Contrast this with the historic situation whereby claims have been underwritten and assessed at the point of claim, which has lead to a fair amount of criticism due to the uncertainty it creates.
This is something that has fundamentally got to change if confidence is to be restored in the product.
Kevin Paterson is sales and marketing director at Assurant Intermediary
