Income protection at the crossroads

Alarming figures from Swiss Re show sales of term plans have plummeted 26% in the past two years despite continual cuts in product prices. Critical illness plans have dropped 15% in the same period, so is income protection in danger of becoming extinct? These figures are a wake-up call. They represent a substantial expansion in the protection gap to 170bn in 2005 compared with 130bn in 2002.

Concern should not be limited to the industry. In a climate of increasing consumer demands and record debt, theory has it that as debt rises, so should income cover. But we are seeing the reverse with taxpayers and next of kin having to foot the bill for debt. This is worrying as people are borrowing so much that total debt outstripped the country’s GDP at the beginning of this year. We must face up to this crisis before income protection products lumber towards extinction.

In a recent poll consumers were asked if they had income protection. Some 42% claimed they did but a more realistic figure would be one-third. According to most IFAs, customers think critical illness cover is too complicated or expensive or that providers will find an excuse to avoid paying claims. When asked, most people say they can’t afford cover or they already have it.

Among customers who have critical illness or in-come protection cover and make claims, one in four are rejected from the off. This affects customer confidence. Many customers believe they have adequate policies in place until they face unemployment or sickness and then it’s too late.

Rather than a policy to meet their needs at a difficult time they receive a refund of premiums. They don’t get the safety blanket they were expecting because they did not understand the terms of what they bought and did not seek advice. Experiences like this are making a huge dent in the market.

If a customer was looking for protection products a decade ago they would have encountered a direct sales team – probably a single organisation offering comprehensive advice on one or two products. Customers had less choice but they were able to make more informed decisions as those selling could typically reel off 20 or more useful, product-related facts.

Repeating the exercise now, they are in all probability directed to a call centre or have to deal with an intermediary who knows little about the multitude of products on offer. Rather than being taken through the benefits of each they are shown the price which is what customers now base decisions on. In the short term they may feel they are getting value for money but if they buy anything at all, it’s not necessarily what’s best for them in the longer term.

Time and time again we’re told that customers are dissatisfied at having to deal with overseas administrators who have little or no local knowledge relating to their purchase. They prefer advice to be more personal and UK-based.

The demise of direct sales forces and shift towards mass selling via call centres means providers are losing touch with their customers who are being sold products that don’t meet their needs. Consequently we are seeing a huge drop in sales volumes.

And how many customers know what it is that they are buying? The only things they are aware of are price and how much money they have saved by switching to an alternative provider.

Also, the commoditisation of protection products, speeding up the process and reducing costs has resulted in many providers underwriting at the point of claim rather than at point-of-sale. While this means people will be ‘on risk’ much sooner, any peace of mind that offers will be left in shreds if at the point of claim consumers find they have bought an unsuitable product.

Customers’ lifestyles are also changing and we are seeing one section of society in particular getting ever wealthier. Needless to say, sellers are targeting this group and failing to invest in those less wealthy as they don’t see them as viable. This is short-sighted given the record levels of debt across all social groups.

If products and markets are to avoid extinction they must evolve. There is a need for innovation to make buying easier and selling simpler and more profitable for all parties.

A recent survey by The Protection Review revealed that the top five priorities of providers are customers, profit, efficient processes, well structured products and underwriting. It’s heartening that customers come first but the industry must now put this into practice.

There is an urgent need to rebuild consumer trust, which means shifting the focus away from price and towards the best products for customers. This means investing time and money, but without customers all products are useless and we run the risk of seeing the whole machine grind to a halt.

Providers and brokers must also develop a better understanding of how to sell products. If sellers are transparent they have nothing to fear in terms of retribution from unhappy customers.

This involves placing more focus on products so that those selling have more knowledge about what they are offering. Providers could also help by providing clearer definitions of their products.

Get friendly with an estate agent

The most significant effect of Home Information Packs so far has been to force estate agents to take a hard look at their sales processes. This may involve some agents calling it a day and some doing the opposite – expanding through mergers.

The housing market remains a lucrative place for brokers. The mandatory introduction of HIPs in their original format was always going to be difficult. With the dropping of the Home Condition Report you have to ask – what’s the point? But the government wants to maintain its commitment to the Kyoto agreement so energy certificates will be necessary.

Consequently we may see the introduction of a ‘soft’ HIP although this could still have an effect on the housing market. And bear in mind any downturn will hit the chancellor in the pocket. The government has got itself into a spot because there are still not enough home inspectors so don’t be surprised if there is a further announcement in the next few weeks.

At Home of Choice we see the recent development as another opportunity for brokers and estate agents to build alliances and address the competition posed by larger agents and the corporate sector.

One-stop shopping is here and the corporate market is gearing up for market share so now it’s even more important for local businesses to get together. We have a stay of execution to develop these local broker and agent relationships. Let’s not waste it.

Richard Coulson, chief executive, Home of Choice