Whilst the term ‘credit crunch’ may be in danger of being over-used, there’s no doubt that the number of new house purchase transactions has fallen dramatically over the past few months. Mortgage rates have risen, especially so for new buyers, thus causing some degree of stagnation in the market. Potential first-time buyers are hesitant – can they afford, with interest rates as they are, to buy now? Could interest rates rise? Could house prices fall further and bring them into instant negative equity?
Is it better to rent in the short term and allow the market to recover? The market is certainly, to some degree in limbo.
Even before this, protection sales - especially alongside mortgages - have continued to fall below expected levels. Far too many mortgage customers appear prepared to run the risk that they can survive the implications of a serious illness, inability to work – or even death.
Protection uncovered
There are several reasons for this. Many customers, already prepared to stretch themselves in terms of budget are prepared to ignore, at their peril, the chances of anything happening to them. Statistics suggest that only around 50 per cent of adults have any form of life cover, with even fewer including critical illness cover. In more recent times, lenders were prepared to lend on higher multiples of salary, resulting in even less affordability for the necessary cover. This is a huge concern.
It is also evident that in the past, many mortgage advisers concentrated solely on the mortgage sale, choosing for whatever reason, to ignore the opportunity, or need, to consider the customer's protection needs. As an industry, we need to make the proposition more attractive to these advisers and to their customers, making it simpler and more worth the effort. There’s much evidence that providers are doing just that.
Lastly, we have the issue of claims that are turned down. Life companies aim to pay valid claims quickly. Ask any claims manager and they will tell you that's what they're there for. They will only turn down claims that they truly cannot justify, to other policyholders or shareholders and they only do that where there has been blatant non-disclosure. Like others in the market, our position has always been to pay proportionate benefits where the picture is blurred - we will pay something where there is good justification.
Sadly, we only hear of the disputed claims, not always the reasons behind them. The industry needs to, and is doing more to publicise the good work it does in paying many, many valid claims and reducing a huge amount of hardship that would otherwise be endured. Many thousands of policyholders have very good reason to be glad they took advice from their financial adviser, with payouts that make a real difference.
Is innovation the answer?
The industry seems divided on this issue. Some say it’s key to the future of our market, that it’s the only way to reduce the protection gap. Andy Couchman, director for financial services consultancy at Bankhouse Communications and co-author of the ‘Protection Review,’ suggests the only way to get out of the gap is through innovation. Alan Lakey, partner at Highclere Financial Services and respected correspondent on financial issues applauds the appointment of two notable IFAs to prominent posts with major providers and sees positive implications for our industry. Others, including the ABI’s Nick Kirwan disagree, suggesting that, whilst innovation is very welcome, it is more about distribution and customer awareness.
Innovation is to be welcomed, and helps to raise the level of debate around protection and certainly increases interest. For example, Fortis’ recent entry, coupled with the involvement of such a major protection IFA as Lifesearch, has prompted a number of providers to publicly state that they will follow suit, and you can bet that all the others are watching developments closely.
Zurich itself launched an innovative integrated income protection benefit last summer which reduces the costs against standalone income protection because of its link with critical illness, acknowledging the obvious overlap and the need to offer cover for those on a tighter budget.
The difficulties arise firstly from a product comparison point of view. Comparison sites, by their nature, look at identical products or benefits – if you offer something different, you clearly won’t be able to compare it in the market, and it’s therefore more difficult to justify to a client, no matter how good the adviser.
The more customer-focussed innovations, such as Zurich’s and that of Fortis address of all a customer’s essential protection needs – death, serious illness and disability – all in one plan with one lot of underwriting and at a reduced cost. And cost – or rather price – is at the heart of much of our problems at the moment.
Many advisers, indeed mortgage brokers who have the greatest access to clients with protection needs, simply look at the cheapest price as the main selection criteria. There seems to be little (or less) focus on underwriting quality, involvement or speed, nor of added value, claims payment history or post-sales servicing or customer support. These factors become increasingly important as we move away from pure term cover – and if we’re honest, adding critical illness cover to a plan, whilst adding so much value, does not increase the premium dramatically. Is it a case of the path of least resistance?
Innovation is undoubtedly stifled by a combination of poor education on the part of the provider but also a reluctance on the part of the adviser to stay away from what he or she knows best, is most comfortable with, and will not ultimately result in a potential law suit. I can give no better example from a few years back of UNUM’s Elixiar 123 – a good idea at the time, but one that wasn’t embraced because, although it attempted to pay appropriately for less serious illnesses, customers might be upset when they didn’t get the payout they might otherwise have expected.
Nick Kirwan is more right than wrong on this issue. Yes, innovation is to be welcomed and it shows both a commitment to our market in terms of resource and spend, and it supports the call from many sections of our industry. But at the end of the day, in an adviser world, it is the adviser who will make that all important recommendation – and has to live by it.
And as mortgage sales dwindle…?
Mortgages were until recently quite plentiful, such that many brokers didn’t need to consider protection at all – it may have been seen as an obstruction, something that got in the way of the next mortgage sale. For the time being, those days have gone, and may be so for the next 18 months if our experts are to be believed. There is much evidence that mortgage brokers are looking to retrain, to upskill, to allow them to sell a higher proportion of protection alongside the current fewer mortgages that are completing. This is good news for them in that income can be maintained, good news for customers who will have their protection needs met, and good news for providers who have seen protection sales fall over the past year or two.
Making life easy
There are many myths amongst the uninitiated that protection is complicated, time-consuming, involves customers in a whole range of intrusive underwriting factors and is not worth the effort. Perhaps so for the most unhealthy of lives – but even for them, seeking out some form of cover when all seems lost, is a worthy exercise.
The majority of mortgage customers are younger, healthier and seeking lower levels of cover. Whilst most if not all providers continue to accept paper applications, the advent of online application (and quote) systems have brought new business processing into the modern world. Accessing a life office’s online system, with the customer present or having obtained the customer’s details offline, can result in an underwriting decision and being ‘on risk’ for clean cases within around 15 minutes.
Some systems, like Zurich’s, will provide an underwriting decision for many cases – standard or otherwise, before you actually submit the case to the company, allowing an ‘adjust benefits’ facility. You will be able to submit the questions as they are answered by the client, or choose an interactive route whereby additional questions are ‘dropped down’ allowing the adviser to ask these further questions of the client, thus enhancing the chance of a point-of-sale decision.
Modern systems provide full pipeline information in terms of the status of business submitted, providing the adviser with all he needs to know about the progress and status of his cases. Although practice varies, some providers will actively pursue outstanding requirements, chasing doctor’s reports, medical examinations and other requirements such as direct debit instructions, money laundering requirements, trusts etc.
Tailoring the solution
In the midst of a credit crunch as we find ourselves, there’s no doubt that cost will be a real issue for some clients. Insurers can provide an array of information and statistics which will confirm the number of people claiming state benefits, the types and frequency of critical illnesses such as cancers and heart attacks, and the probability of death For example:
In the last 12 months.
• Some 150,000 people will have had a stroke, 10,000 of whom will be under retirement age.
• More than 100,000 will have had a heart attack
• More than 250,000 people will have been diagnosed with cancer
The switched-on adviser will start off by outlining the risks of death, serious illness or inability to work – much more common that most customers would imagine. Where including full cover for, say, a mortgage against all these probabilities might, on occasion, be outside of the client’s immediate budget, the adviser might consider scaling back the benefits.
Zurich’s integrated income protection benefit alongside accelerated critical illness benefit is designed to cover the associated mortgage costs and affords savings against standalone income protection cover. Where cover needs to be scaled down further, it is always recommended that full life cover is in place to cover the mortgage capital but where full critical illness cover cannot be afforded, providers can offer a lower level of critical illness cover to that of life cover, ensuring that in the event of the client becoming critically ill, at least some level of benefit is payable.
What the future holds
Looking forward, we’re likely to see an increasing integration of CI and IP. The potential gaps and overlaps have been well documented. The last 12 months have seen turmoil in the mortgage market. CI sales have been closely aligned with mortgages over the years, for good reason. The ability to pay off a mortgage having suffered a critical illness allows the claimant to focus on a full recovery without having to worry about where the next mortgage payment is coming from. The mortgage market is changing, but there is a real chance that advisers will re-look at family protection, arguably overlooked by many when generous procuration fees and a plentiful supply of mortgages made this easy to do.
