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Protection: Always bet on High Net Worth

by: Richard Walsh
  • 15/10/2012
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So, we are in political party conference season. This always coincides with reports from think tanks seeking to explore difficult issues we face. Every now and then a report comes along which is likely to have an important influence on economic policy making and political positioning by the main parties.

In September, the Resolution Foundation (RF) published a report, Who Gains from Growth – Living Standards in 2020. This report sets out exceptionally well the strategic economic landscape which will determine what some aspects of UK society will look like in the next ten years or so.

Although it focuses on the incomes of low to middle earners – precisely the same group to which the simple products initiative is designed to address – it also addresses high income ones. In essence the report sets out two groups of scenarios.

The first group of scenarios assumes no major interventions in social policy, ie. we leave the market to get on with it. The result is there will be more jobs at the top and bottom ends of the jobs market – high pay/high skill and low pay/low skill. The fastest-growing sector will be in the top three occupational classes of managers, professionals and top technicians.

At the bottom end, growth is expected in low-skilled service roles, with more than 700,000 new jobs being created in retail, caring and leisure. Traditional jobs in the middle, for example in skilled manufacturing and administration, will fall.

In this world, working households below middle income in 2020 will be worse off than those in the same position a decade earlier. A household at the bottom of the low to middle income group in 2008 to 2009 had an income of £10,600 a year. By 2020 to 2021, this falls to £9,000 – a real term fall of 15%. Even households at the top of the low to middle income group would see income drop from £23,000 to £22,200, a real term fall of 3%.

Finally, the share of household income from the state for these households is expected to fall substantially. In 2008 to 2009, around 20% of gross household income in this group came from the state. In 2020 to 2021 this is projected to fall to 16.4%.

For protection insurance the effect will be that, even though low to middle income groups will have more need for life and income protection insurance than ever, purchasing it will present a major affordability gap. On the other hand there will be a growth in higher net worth clients – giving a bigger market for IFAs in this sector.

The second set of scenarios assumes state interventions. RF look at three possibilities – boosting low wages (current Labour Party and Boris policy), improving skills and raising female employment.

Taken in isolation, however, these three interventions lead to only modest improvements for those in the bottom half of the income distribution. Only when all three are combined do we arrive at a situation where many people in the bottom half become substantially better off. Of course, even here the top earners continue their rise in income levels.

If the combined set of state intervention scenarios comes to pass we could see the affordability gap for protection insurance for low to middle earners becoming less of an issue. Combined with falling state provision, this would create an ideal growth market for simple products.

Whichever sets of scenarios come to pass, the future of protection sales by IFAs to higher income groups looks promising.
Richard Walsh is a director and fellow of SAMI Consulting,


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