The Insurance Report: A gap in perception reveals that the life assurance protection gap has risen to GBP 2 200 billion in terms of sum assured.
Swiss Re first calculated and published the UK life assurance
protection gap in November 2002, when it stood at around
GBP 2 000 billion. warns that, in the short term, there are no
signs that the trend towards a widening gap will be reversed.
This is despite an increasingly confident attitude amongst many
consumers towards buying insurance products.
The gap has been driven wider because of inflation, an increase
in the working population and an overall net reduction in in-force
individual cover since the gap was last calculated. This decrease is due to a greater sum-assured amount of business lapsing, expiring or paying claims than the amount of new business coming onto insurers’ books.
Swiss Re warns that the gap may increase further when new UK
rules covering advice given for protection sales come into force
in January 2005. It is generally accepted that the number of
people advising on or arranging insurance will fall once products
such as term assurance come under the Financial Services
Authority’s incoming regulatory framework. This, the study says,
will have a harsh impact on those with low to middle incomes,
with whom it is least economic for financial advisers to deal.
Swiss Re study: life cover shortfall amongst UK consumers increases to GBP 2 200 billion; corporate life and income protection gaps also demonstrate need for action.
Affordable face-to-face financial advice is key
The report suggests that the key to resolving the disparity
between in-force cover and consumers’ protection needs lies in
the delivery of financial advice. Consumers display a general
reluctance to pay for advice, and intermediaries are generally
unwilling to handle business for the type of fee that most
consumers appear willing to pay [see chart below]. This is at
odds with a preference amongst the population at large to be
guided on their financial purchases on a face-to-face basis.
More than 1 000 consumers took part in Swiss Re’s benchmark
survey, around three quarters of whom expressed a preference
for advice in person.
Swiss Re asked: How much would you be prepared to pay for advice? (in GBP)
Further solutions
Swiss Re believes that a further contributor to resolving the life
assurance protection gap lies in marketing and distribution via
the workplace. The report recognises, however, that the
difficulties of differentiating individual products from group
products provided via employers can be a barrier to successfully
penetrating this area. A further boost to sales may lie in a
simplification of the ‘fact-find’ process to encourage consumers
to engage more readily with the industry. In addition, the
consumer survey revealed a high degree of support (57%) for
compulsory life insurance for people who can afford it. The
scope for improved financial education for the young is also
explored in the report.
Corporate life protection gap
The Insurance Report builds on Swiss Re’s protection gap
analysis by examining, for the first time, the UK shortfall of
corporate life protection cover. So-called ‘key man’ cover differs
from regular group life cover in that it is designed to protect
companies from the financial consequences of losing a person
who is critical to the success of their operation, rather than the
employee’s dependents.
Swiss Re’s research amongst businesses with up to 100
employees in the United Kingdom found that more than 60%
employ people whose continued presence is critical to their
business. However, only around 5% of companies are believed
to have key man cover in place. Swiss Re estimates that there is
a corporate life protection gap of GBP 300 billion, measured by
sum assured.
Call for capital
In combination, the gaps in individual life protection cover and
corporate life cover add up to GBP 2 500 billion. The report
considers the issues faced by life insurers in seeking to address the UK’s collective need for additional cover. To close these gaps, the industry would require an injection of capital of some GBP 7.5 billion in order to meet initial solvency requirements.
The availability of sufficient shareholder capital could, Swiss Re
warns, be an obstacle to bridging the life protection gaps.
Income protection gap.
Previous research by Swiss Re – published in March 2003 –
estimated that the gap between UK in-force income protection
(IP) cover and the amount technically required to protect income
in the case of prolonged disability was GBP 130 billion in annual
benefit.
The Insurance Report shows that the income protection gap has
now risen to at least GBP 150 billion. This is due to an increased
number of full-time employed people and growth in earnings
overall, coupled with modest new business sales of individual IP, the majority of which covers a mortgage commitment rather
than providing full protection of income.
Stakeholder challenges
In publishing the Insurance Report, Swiss Re seeks to persuade stakeholders in the UK’s direct life insurance market of the challenges involved in ensuring that UK consumers are
adequately protected.
“The challenge facing government, regulators and the industry
will be to deliver a proposition which balances consumer
interests with costs. The industry itself will need to display more
openness in its dealings than ever before,” says Mark Johnson,
Head of Marketing for Swiss Re Life & Health Limited.
