While a decelerating housing market could threaten a slowdown in term assurance sales the market is currently strong, finds Paul Robertson Term assurance policy.
The UK term assurance market has enjoyed a continued period of buoyancy over the last year. Billed as one of the simplest and most effective types of insurance, term assurance is also one of the cheapest and has found sales driven forwards by 2002's boom in housing and consequently mortgage sales.
Although there is no doubt that term sales are strong, actual figures are hard to come by as the most recent market overview was released in October 2002 by Ge Frankona Re, and referred to 2001's figures which were impressive, showing total sales up by 28% on 2000. The total number of policies at the beginning of 2002 was 7,078,201, or one in four of the working population. Level term assurance policies account for around 50% of sales, with the leading five providers generating 61% of sales.
Louise Roche, marketing analyst at GE Frankona Re and author of the October report, says: 'The booming housing market has undoubtedly contributed most of these sales and as the housing market has continued to flourish we expect to see good sales for 2002 too.'
If there is a black spot on the horizon it is the housing market has been widely tipped to slow somewhat in the coming year. The mortgage market will not slow as much as the number of remortgages as a percentage of the whole is increasing.
Rosalind Pearson, personal finance research and planning manager at Swiss Life, says: 'A slowdown in the housing market has been predicted for a while and this year may see the start of this. There could potentially be a knock-on impact to sales of mortgage-related term.'
However, according to Nick Kirwan, head of product development at Scottish Provident, this would not mean sales of mortgage-related term assurance would slow.
He says: 'When income multiples on mortgages are stretched there is a tendency to leave out cover, which I think is a mistake, but what happens is that when people remortgage they are perhaps a bit more established and that is maybe another opportunity for advisers to sell protection. Often when people remortgage they are increasing the size of the loan, which gives further opportunities for top ups.'
One year term life insurance
Technical pricing issues, such as allowances for future mortality and the impact of new diseases have probably hit a plateau as most of these factors have been taken in to account in the recent rate cuts. A major factor in term rates falling over the years has been the removal of loadings remaining from the HIV scare.
Ronnie Martin, protection director at Legal & General, says: 'There will be continuing issues over guaranteed rates for term critical illness policies in the new year, but as far as life term is concerned, mortality experience has been improving and we have seen that coming through in prices, as well as adjustments after the AIDS loading of the early 1990s. In future I see no scope for price reductions on that scale being repeated.'
However, external factors such as competitive pressure and the desire to build market share may mean that there is room for manoeuvre. In addition, electronic trading is designed to reduce the expenses of processing the various forms of term assurance and this may be reflected in rates as time goes by.
Pearson says: 'Clearly with term being such a commoditised product it is ideal for e-trading and more providers are moving in this direction.'
Martin agrees: 'The move towards electronic submission of business is quite a strong influence on business practice and is an element effecting price, as it is cost effective. If there are any savings to be passed on in future it will be in this area and in customer service costs,' he says.
Advisers grew their share of both level and decreasing term new business, according to October's report, accounting for 40% and 44% respectively. This seems to have been largely at the expense of bancassurers whose market share dropped by 6% for both products, accounting for 23% of level and 28% of decreasing term sales.
Kirwan believes this will not necessarily turn out to be the case in 2002. He says: 'The non-IFA market includes bancassurance, which remains strong, with banks and building societies in a position to write quite a lot of mortgage-related term assurance. However, I think advisers are becoming more switched onto protection products now, partly due to the demise of some of the other markets, such as investments. Advisers need to sell things to clients that will reward them for time spent.'
Pearson agrees: 'IFAs have been increasing their share generally in protection. Some of this can be put down to the demise of a number of direct sales forces and many of these becoming IFAs themselves. Other factors may include the increasing interest of IFAs in protection as a possible income stream in the light of changes to pensions and the downturn in investments with low equity markets.'
Two areas in which term assurance has a potential to increase sales is in family income benefit (FIB) and business protection. FIB is a cost-effective way of buying protection for the family at a time when there might be pressures on household budget.
Laura Shanks, product development manager at Scottish Equitable Protect, says: 'Family income benefit is not sold much because people perceive the lump sum benefit as more attractive. It is also interesting that of the family income benefit policies that come to claims point, the majority, if not all, commute to a lump sum. Most policies on the market allow the option at claims stage and most go for it.'
In many ways this is a shame. With current interest rates so low, a lump sum invested is not going to produce a healthy income, certainly when compared to 10 years ago. Because the capital at risk on FIB decreases over the term it is also a relatively cheap option for the amount of income provided.
FIB does offer opportunities for IFAs. 'One of the main points of family income benefit is that it is a good sales tool for intermediaries to use in certain circumstances. If the client finds the premium for £100,000 lump sum benefit too high for example, then the same amount over a certain period in installments, for example would be invariably cheaper. The client also still gets an option to take a lump sum in the event of a claim,' says Shanks.
Business protection cover
There are also signs of increased activity in business protection, keyperson and shareholder protection. Typically a policy used will be a term product and brokers are particularly well placed, as this is an area that requires advice and recommendations. Business protection is a niche area, but one with potential for advisers looking for areas to develop their business. In addition, usually the cases are large with consequent high premiums. There are many issues to understand, such as tax and trusts, but providers are able to provide support.
United life insurance
Business protection cover is an area largely unaffected by price changes and will remain buoyant. Kirwan says: 'The reason is that price rises pressure for term products is related to premium guarantees. These are term dependent, with the biggest increases on 25-year term products. However, key employee cover is all written as five-year policies so remains insulated.'
He adds: 'One element we are seeing in family income benefits and business combined is a growth in the pensions under-pining market. As people switch from final salary to money purchase pension schemes they loose the early retirement due to ill health benefit. Therefore people are taking out income protection or critical illness term assurance, so they would not be forced to cancel their pension and take benefits early. This insures the value of the pension.'
All in all the term assurance market is diverse enough to survive anything but major market upheaval. Life rates went up a little bit recently, as well as critical illness. Actuaries have also been discounting future improvements in mortality. If the outlook turns out to be not quite as rosy as expected then rates could be further trimmed but few expect any significant upward pressure on rates.
Paul Casey, media relations specialist at GE Frankona Re, sums up: 'Term assurance is becoming increasingly competitive, at the end of the day it is a commodity product. While there is a possibility of a slowdown in sales if the housing market slows and, as far as the product goes, there are no new markets opening, term assurance is already a great protection for a multitude of scenarios, it is a basic product that is cheaper now than for many years. I foresee no major changes in the coming year.'