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Critical Illness and Income Protection - UK - May 2012

“There are a number of key challenges currently facing the protection industry. Providers will have to carefully position their products and brands in order to maximise the opportunities that lie ahead, such as the RDR, and to mitigate the potential pitfalls, such as those associated with Solvency II.”

– Sarah Hitchcock, Senior Analyst – Financial Services

Some questions answered in this report include:

  • What factors have led to the recent recovery in critical illness sales?
  • What proportion of UK adults have income protection?
  • What are the key elements of the welfare reforms and what impact will they have on the protection industry?
  • What are the short-term prospects for protection providers?

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Table of contents

  1. Introduction

      • Abbreviations
      • Executive Summary

          • The market
            • Critical illness – making a solid recovery
              • Figure 1: Forecast of total new individual critical illness premiums, at current prices – fan chart, 2006-16
            • Segment performance
              • Group sector performance
                • Income protection – margins under pressure from cheaper rival products
                  • Figure 2: Forecast of new individual income protection premiums, at current prices – fan chart, 2006-16
                • Fall in average premium
                  • Group sector performance
                    • Market factors
                      • Uncertain economic and investment backdrop
                        • Regulatory pressures
                          • Recent claims experience
                            • Social and demographic trends
                              • Significant protection gap
                                • Company, brands and innovation
                                  • A concentrated market
                                    • Product innovation
                                      • Advertising activity
                                        • Distribution trends
                                          • The consumer
                                            • Product penetration
                                              • Figure 3: Ownership of life protection and health insurance products, March 2012
                                            • Main reasons for eschewing cover
                                              • Figure 4: Top eight reasons for not having critical illness or income protection insurance, March 2012
                                            • General attitudes towards protection insurance
                                              • Figure 5: Agreement with statements about protection insurance, March 2012
                                            • Sources of emergency funding
                                              • Figure 6: Sources of financial support if unable to work for prolonged period, March 2012
                                            • What we think
                                            • Issues in the Market

                                                • What factors have led to the recent recovery in critical illness sales?
                                                  • What proportion of UK adults have income protection?
                                                    • What are the key elements of the welfare reforms and what impact will they have on the protection industry?
                                                      • What are the short-term prospects for protection providers?
                                                      • Future Opportunities

                                                          • People need to be proactive and take pride in their own self-preservation
                                                            • Persuade the young to take a long-term view of their financial security
                                                            • Internal Market Environment

                                                              • Key points
                                                                • Recent regulatory, legislative and industry developments
                                                                  • Claims costs rise as rejection rates fall
                                                                    • Figure 7: Critical illness claims paid and proportion of successful claims – selected providers, 2006-11
                                                                  • Fall in proportion of declined claims due to non-disclosure
                                                                    • Figure 8: Proportion of critical illness claims declined due to non-disclosure – selected providers, 2006 and 2011
                                                                  • Much less claims data available on income protection
                                                                    • Cancer is the top reason for a critical illness claim
                                                                      • Income protection gap
                                                                        • Figure 9: Income protection gap (measured by annual benefit), 2005-10
                                                                    • Broader Market Environment

                                                                      • Key points
                                                                        • Tough economic backdrop has mixed implications for the protection market
                                                                          • Three years on from the financial crisis and there’s no real improvement in people’s financial position
                                                                            • Figure 10: Personal financial situation, 2009-12
                                                                          • Depressed housing market forces protection providers to seek revenues elsewhere
                                                                            • Figure 11: Number of UK residential property transactions with a value of £40,000 or more – seasonally adjusted, Q1 2006-Q3 2011
                                                                          • Loans for house purchase are still half of what they were just prior to the crisis
                                                                            • Figure 12: Number of new loans for house purchase and remortgage loans, 2007-11
                                                                          • Despite stable house prices, first-time buyers remain in abeyance
                                                                            • Figure 13: Number of loans for house purchase, by type of borrower, 2007-11
                                                                          • Falling house prices translate into lower sums assured on CI policies
                                                                            • Figure 14: Average sum insured for new individual critical illness policies versus median first-time buyer advance, 2001-10
                                                                          • People are living longer, but not necessarily in good health
                                                                            • Disability – key demographics
                                                                            • Competitive Context

                                                                              • Key points
                                                                                • There are 1.5 million income protection policies in force
                                                                                  • Figure 15: Number of individual protection policies in force, by type, 2010
                                                                                • Some 46% of mortgage term and 35% of protection term assurance policies were sold with CI riders in 2011
                                                                                  • Figure 16: Critical illness rider benefits as a proportion of new individual term assurance business, 2007-11
                                                                                • Gross premium income from ASU policies totalled £466 million in 2011
                                                                                  • Figure 17: Regular-premium income from in-force individual income protection policies versus premium income from short-term personal accident/sickness policies, 2007-10
                                                                              • Market SWOT Analysis

                                                                                  • Figure 18: Critical illness insurance market – strengths, weaknesses, opportunities and threats, 2012
                                                                                  • Figure 19: Income protection market – strengths, weaknesses, opportunities and threats, 2012
                                                                              • Who’s Innovating?

                                                                                • Key points
                                                                                  • Insurers make underwriting changes to speed up the application process…
                                                                                    • …and broaden cover
                                                                                      • Aviva makes income protection more affordable and inclusive
                                                                                        • Legal & General replaces MPPI with short-term income protection
                                                                                          • Hybrid health and critical illness product unveiled by Universal Provident
                                                                                          • Market Size and Forecast – Critical Illness

                                                                                            • Key points
                                                                                              • Business in force
                                                                                                • Critical illness sales have grown strongly over the past two years
                                                                                                  • Figure 20: New individual critical illness sales and average annual premium, 2007-11
                                                                                                • Most policies are sold as an add-on to life insurance
                                                                                                  • Figure 21: New individual critical illness sales – rider benefit versus standalone policies, 2008-11
                                                                                                • Protection term assurance is the fastest-growing and largest sub-sector
                                                                                                  • Figure 22: Segmentation of critical rider benefit sales, by policy type, 2008-11
                                                                                                • Group critical illness – a small market in comparison
                                                                                                  • Figure 23: Volume and value of new group critical illness sales, 2008-11
                                                                                                • Forecast: continued premium growth
                                                                                                  • Figure 24: Forecast of total new individual critical illness premiums, at current prices – fan chart, 2006-16
                                                                                                  • Figure 25: Forecast of new individual critical illness premiums, at current and constant prices, 2006-16
                                                                                                • Forecast methodology
                                                                                                  • Fan chart explanation
                                                                                                  • Market Size and Forecast – Income Protection

                                                                                                    • Key points
                                                                                                      • Business in force
                                                                                                        • Sales of income protection grew by two fifths in 2011, as providers introduced cheaper solutions
                                                                                                          • Figure 26: New individual income protection sales and average premium, 2007-11
                                                                                                        • Group income protection sector is much larger in value than the individual sector
                                                                                                          • Figure 27: Volume and value of new group income protection sales, 2008-11
                                                                                                        • Forecast: some uplift in premiums from 2014
                                                                                                          • Figure 28: Forecast of new individual income protection premiums, at current prices – fan chart, 2006-16
                                                                                                          • Figure 29: Forecast of new individual income protection premiums, at current and constant prices, 2006-16
                                                                                                        • Forecast methodology
                                                                                                          • Fan chart explanation
                                                                                                          • Market Share

                                                                                                            • Key points
                                                                                                              • Lloyds Banking Group is the largest provider of critical illness cover…
                                                                                                                • Figure 30: Market shares of the top five providers of new individual critical illness cover, based on volume sales, 2010
                                                                                                              • …while HSBC just managed to hold on to its lead in the individual income protection market in 2010
                                                                                                                • Figure 31: Market shares of the top five providers of new individual income protection, based on volume sales, 2010
                                                                                                            • Companies and Products

                                                                                                                • Aviva
                                                                                                                  • Legal & General
                                                                                                                    • Royal London Group (Scottish Provident and Bright Grey)
                                                                                                                      • Scottish Widows
                                                                                                                        • Friends Life
                                                                                                                          • LV=
                                                                                                                          • Brand Communication and Promotion

                                                                                                                            • Key points
                                                                                                                              • Limited above-the-line adspend on critical illness and income protection products
                                                                                                                                • Figure 32: Total advertising expenditure on protection products, by product category, 2008-12
                                                                                                                              • Just three providers account for 96% of critical illness cover adspend
                                                                                                                                • Figure 33: Top three advertisers of critical illness products, 2010-12
                                                                                                                              • Unum uses TV to get across the message that income protection is a useful ‘back-up’
                                                                                                                                • Figure 34: Top three advertisers of income protection products, 2010-12
                                                                                                                              • Alternative advertising avenues
                                                                                                                              • Channels to Market

                                                                                                                                • Key points
                                                                                                                                  • The vast majority of protection business is sold with advice
                                                                                                                                    • Bancassurance channel drives recent growth in critical illness rider business…
                                                                                                                                      • Figure 35: Distribution of new individual critical illness rider benefit premiums, by channel, 2008-11
                                                                                                                                    • …but has a very small presence in the standalone sector
                                                                                                                                      • Figure 36: Distribution of new individual standalone CI premiums, by channel, 2008-11
                                                                                                                                    • IFAs lose ground in the income protection market
                                                                                                                                      • Figure 37: Distribution of new individual income protection regular premiums, by channel, 2008-11
                                                                                                                                  • Ownership of Protection Insurance

                                                                                                                                    • Key points
                                                                                                                                      • Survey background
                                                                                                                                        • Presence of a mortgage and children ups the attraction of having proper protection
                                                                                                                                          • Figure 38: Ownership of life protection and health insurance products, by presence of children, tenure and marital status, March 2012
                                                                                                                                        • Take-up of critical illness cover is highest among the 35-44s
                                                                                                                                          • Figure 39: Ownership of life protection and health insurance products, by age, March 2012
                                                                                                                                        • Product crossover
                                                                                                                                          • Figure 40: Ownership of life protection and health insurance products – cross-analysis, March 2012
                                                                                                                                        • Merely one in 20 adults have complete protection
                                                                                                                                          • Figure 41: Ownership of life protection and health insurance products, March 2012
                                                                                                                                      • Take-up Barriers

                                                                                                                                        • Key points
                                                                                                                                          • Cost is the top barrier to take-up
                                                                                                                                              • Figure 42: Reasons for not having critical illness or income protection insurance, by gender, March 2012
                                                                                                                                            • Parents and mortgage holders are most concerned about the expense of taking out cover
                                                                                                                                              • Figure 43: Reasons for not having critical illness or income protection insurance, by presence of children in household and tenure, March 2012
                                                                                                                                            • Target the middle-aged with low-cost solutions
                                                                                                                                              • Figure 44: Reasons for not having critical illness or income protection insurance, by age, March 2012
                                                                                                                                          • Attitudes Towards Protection Insurance

                                                                                                                                            • Key points
                                                                                                                                              • Most people understand that the state will no longer provide a comprehensive financial safety net
                                                                                                                                                  • Figure 45: Agreement with statements about protection insurance, March 2012
                                                                                                                                                • Parents and mortgage holders are most likely to say that having insurance gives them ‘peace of mind’
                                                                                                                                                  • Figure 46: Agreement with statements about protection insurance, by parents and mortgage holders, March 2012
                                                                                                                                                • Attitudes vary depending on level of protection held
                                                                                                                                                  • Figure 47: Agreement with statements about protection insurance, by level of protection, March 2012
                                                                                                                                              • Sources of Emergency Finance

                                                                                                                                                • Key points
                                                                                                                                                  • Most people would draw on their savings if they were unable to work for a long spell
                                                                                                                                                      • Figure 48: Sources of financial support if unable to work for prolonged period, by gender, presence of children and mortgage holders, March 2012
                                                                                                                                                  • Appendix – Definitions and Industry Regulation

                                                                                                                                                    • Long-term insurance protection policies
                                                                                                                                                      • Short-term insurance protection policies
                                                                                                                                                        • Income protection versus ASU cover
                                                                                                                                                          • Figure 49: Summary of the main differences between income protection and ASU cover
                                                                                                                                                        • Other related products
                                                                                                                                                          • Recent regulatory milestones
                                                                                                                                                            • Key industry initiatives
                                                                                                                                                              • An introduction to ESA
                                                                                                                                                              • Appendix – Ownership of Protection Insurance by Demographics

                                                                                                                                                                  • Figure 50: Ownership of protection insurance, by demographics, March 2012
                                                                                                                                                              • Appendix – Population Segmentation by Level of Protection and Demographics

                                                                                                                                                                  • Figure 51: Population segmented by level of protection, March 2012

                                                                                                                                                              Companies Covered

                                                                                                                                                              • AIG Group (American International Group Inc)
                                                                                                                                                              • Aviva Plc
                                                                                                                                                              • AXA UK plc
                                                                                                                                                              • Barclays Bank plc
                                                                                                                                                              • Bright Grey
                                                                                                                                                              • BUPA
                                                                                                                                                              • Chartis UK
                                                                                                                                                              • Exeter Friendly Society
                                                                                                                                                              • Friends Provident plc
                                                                                                                                                              • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                              • HSBC Private Bank (UK) Limited
                                                                                                                                                              • Legal & General Group PLC
                                                                                                                                                              • Lloyds Banking Group
                                                                                                                                                              • Lloyds TSB Insurance
                                                                                                                                                              • LV=
                                                                                                                                                              • Mansfield Building Society
                                                                                                                                                              • Nationwide Building Society
                                                                                                                                                              • Pearl Group Limited
                                                                                                                                                              • Royal Bank of Scotland Group plc
                                                                                                                                                              • Royal London Group
                                                                                                                                                              • Sainsbury's Bank
                                                                                                                                                              • Scottish Provident
                                                                                                                                                              • Scottish Widows Bank plc
                                                                                                                                                              • Skipton Group (The)
                                                                                                                                                              • Standard Life Assurance Company
                                                                                                                                                              • Swiss Re
                                                                                                                                                              • Virgin Money

                                                                                                                                                              Critical Illness and Income Protection - UK - May 2012

                                                                                                                                                              US $2,672.70 (Excl.Tax)