Protection is likely to become an increasingly important part of a broker’s full service proposition, according to many in the industry.
This is being driven by a number of factors, including changing consumer attitudes, increased regulation and the need to derive revenue from a variety of streams.
However, brokers still face hurdles when trying to greatly increase sales of protection and general insurance (GI) policies. With property prices continuing to rise the most immediate challenge remains cost, with some borrowers preferring to use surplus income to secure a higher home loan. But the complexity of this market is also proving an obstacle for some brokers.
It takes a certain amount of skill to engage clients on these issues
Association of Mortgage Intermediaries (Ami) chief executive Robert Sinclair says there has not been a significant increase in sales of protection products in the wake of the Covid pandemic. Figures from the Association of British Insurers show that the market is broadly static, he observes.
However, SPF Private Clients head of protection Chelsea Warren says the mortgage broker share of this protection market is growing. Changing customer attitudes have helped to expand the sector.
“Customers are more educated these days when it comes to protection. It is more widely understood, and people are open-minded and less scarred by the payment protection insurance scandals,” says Warren.
This chimes with recent research conducted by Ami, which found consumers were more receptive to conversations regarding protection than they were in pre-Covid days.
If you don’t talk to clients about protection, someone else will
Sinclair says: “There is a clear indication of a shift in attitudes, particularly among the under-40 age group,”
He thinks the experience of living through a pandemic may be a factor, with issues of mortality and morbidity coming to the fore. This may have shifted the ‘It will never happen to me’ perspective to a recognition that ‘It just might.’
Close association
These days, most broker firms offer a range of protection policies alongside their mortgage advice. Some brokers recommend products directly; others have a dedicated in-house team or refer customers to protection specialists.
L&C Mortgages associate director David Hollingworth says: “Mortgage and protection products have long been closely associated with each other. There could hardly be a bigger reason for getting a protection policy than taking out a mortgage to buy a family home.”
Increasing numbers of Paradigm firms are bringing in protection specialists
Core protection products include life insurance, critical illness (CI) and income protection (IP), alongside variants of term assurance such as family benefit, which pays a regular income rather than a lump sum. Some brokers offer GI policies (building and contents), or business protection, key person insurance and even private medical cover.
Hollingworth says, although Covid may have made borrowers more aware of health risks, no one gets up in the morning and thinks about buying a protection product.
“It remains an important part of the broker’s job to start this conversation and ensure customers are thinking about how their financial situation would change if they fell ill or died,” he says.
Brokers agree that framing such a conversation isn’t always easy.
If you are looking at impaired-life issues, there are a lot of fringe providers in this space
Sinclair says: “It takes a certain amount of skill to engage clients on these issues. Borrowers may not want to think about death or illness when they are excited about buying a home.”
He adds there is also a danger of clients perceiving this as the broker upselling other products.
‘Clear disconnect’
Coreco managing director Andrew Montlake says: “Recent Ami research shows there is still a clear disconnect between brokers who believe they adequately discuss protection issues with their clients and the understanding of the clients themselves.”
Montlake says the structure of these conversations, including clear signposting to a protection product, may need more work in future, whether these products are sold in house or customers are referred to a specialist.
It’s important an adviser has an idea of what will affect a client’s premiums and ability to get cover
This may become even more important from April 2023 when the FCA’s new duty-of-care regulations come into force. These are likely to stipulate that advisers should “avoid foreseeable harm” when selling a range of financial products.
Paradigm head of protection Mike Allison says: “While this phrase is open to interpretation, it may increase the focus on whether brokers ensured mortgage customers had adequate protection in place.”
Sinclair agrees that is a likely consequence of the proposed new rules.
“Losing the family home because one breadwinner dies may be seen as a ‘foreseeable harm’. There will perhaps need to be better-evidenced conversations about protection; evidence that customers understand the issues involved.”
Business perspective
As well as being the right thing to do, it makes sense from a business perspective to recommend these products, according to Connect for Intermediaries head of training Jim Selley.
Not all clients will be in perfect health or lead a safe and healthy lifestyle. This will impact on the cost of cover
“If you don’t talk to clients about protection, someone else will, and they may well be a mortgage adviser who could take that client off you.”
He adds: “I don’t think we can ignore that advisers earn revenue from advising on protection as well. Mortgage procuration fees alone make for a relatively low-margin business.
“When protection is so obviously linked to a mortgage discussion, it makes no sense for an adviser to walk past the opportunity to fundamentally do the right thing, and to earn from it at the same time.”
The fees earned will vary, depending on product, size of policy and provider. Your Mortgage Decisions director Dominik Lipnicki says protection policies pay commission on either an indemnity (up front with a clawback period) or a non-indemnity (drip) basis.
Even the seemingly most straightforward cover, like life insurance, now has variations that mean the cheapest is not always best
“Clearly, by ensuring best advice is given, commission can be thousands of pounds per case,” says Lipnicki.
In the directly authorised sector, says Allison, the commission on an average life insurance policy is around £1,100, albeit this depends on several factors, including the size of the policy.
“Most sales via mortgage firms are based on an indemnity commission, which is paid to the broker at the time of completion or direct-debit collection, and then ‘earned’ over either two or four years,” says Allison.
Commission is similar for IP and CI, he adds, although there are exceptions. In contrast, the commission earned on an average annual GI product is around £130.
There is still a clear disconnect between brokers who believe they adequately discuss protection issues with their clients and the understanding of the clients themselves
“As long as the broker reviews the policy regularly to ensure it is appropriate for the customer, this gets paid annually for as long as the policy stays in force.”
Tricky process
Warren observes that, technically, brokers don’t need any qualifications to advise on protection.
“You can work via a network or be whole of market and apply directly to the insurers. At SPF, we use a mixture of both. For example, if we were able to negotiate rates that were better than the network’s, we would do so.”
But she adds that, although the general concept of protection is relatively straightforward, sourcing the most appropriate policy for a customer can be a tricky process.
“This is a very complex area of advice and should be treated as its own process, with its own fact-finding and advice presentation. If you do not have the right infrastructure in place to ensure correct advice is given — for example, compliance auditing, specialist advisers, clear suitability letters — you could leave yourself open to risk of complaint if anything was unclear.
When protection is so obviously linked to a mortgage discussion, it makes no sense for an adviser to walk past
“Also, depending on whether you are working on an indemnity or non-indemnity commission, you can be at risk of a clawback, which can affect your cashflow position if you are a smaller business. Some intermediaries prefer not to take on the risk and refer business out.”
Sinclair agrees that the complexity of both the market and the product has dissuaded some brokers from becoming too involved in this area. He points out it can create problems for whole-of-market brokers if they decide to opt for a panel for insurance and protection products.
Selley says most mortgage advisers will be able to explain the benefits of the main products to their clients, and how they work.
“However, as providers look to compete more on quality of cover rather than price — which is a good thing, in my view — there are differences between each provider’s offering,” he adds.
I don’t think we can ignore that advisers earn revenue from advising on protection as well
“Take CI: you may have a panel of around 12 insurers but several of these may offer four ‘levels’ of cover, along with other bolt-on services, such as fracture cover. That’s before we get to Vitality’s related but slightly different ‘serious illness’ cover.
“Similarly, each provider has its own additional benefits such as GP services, fitness and nutrition options, or mental health support. These can vary between policies.
“Even the seemingly most straightforward cover, like life insurance, now has variations that mean the cheapest is not always best.”
Time and knowledge
It can take a considerable amount of time, as well as knowledge, to source the most suitable product. Notably, anecdotal reports from the industry suggest that sales of protection have fallen slightly in the past few months as brokers have been increasingly busy with rate rises and product changes.
Selley says a sourcing system such as iPipeline’s comparison report can help, and CIExpert gives impressive detail on these products. But a good basic knowledge of what is covered and what the definitions mean for a large number of illnesses is essential.
There will perhaps need to be better-evidenced conversations about protection; evidence that customers understand the issues involved
Advisers also need to understand the principles of underwriting, adds Selley.
“Not all clients will be in perfect health or lead a safe and healthy lifestyle. This will impact on the cost of cover — and realistically these are clients who are likely to need the protection the most.
“It’s important an adviser has an idea of what will affect a client’s premiums and ability to get cover.”
Ami says across the protection market there are eight or nine large insurers, with a long tail of smaller providers. Major players are Aegon, Aviva, Canada Life, Legal & General (L&G), LV=, Royal London, The Exeter Friendly Society, Vitality and Zurich.
Paradigm says some of the biggest GI providers include Assurant, L&G, LV=, Paymentshield, Source and Uinsure.
Sinclair says: “If you are looking at impaired-life issues, there are a lot of fringe providers in this space.”
Borrowers may not want to think about death or illness when they are excited about buying a home
Brokers could be comparing 20 to 25 providers, depending on the product, with some clients wanting quotes for life insurance, life insurance with CI, and CI only, to compare costs and benefits. This is where networks and panels can be useful, particularly as most networks provide training in this area.
In-house specialists
Given this complexity, it is perhaps unsurprising that more brokers are building specialist in-house teams. Ami says it’s a trend across the market, with specialist protection advisers working alongside mortgage brokers.
Allison says: “We are seeing increasing numbers of Paradigm firms bringing in protection specialists, allowing mortgage brokers to focus their energies on mortgages alone.”
Customers are more educated these days when it comes to protection
The approach seems to be paying dividends as the network is seeing increased sales from these firms.
“This is clearly having a positive effect on consumer outcomes. We are supporting those firms in helping these specialists increase their knowledge in the protection arena,” says Allison.
Sinclair points out the cost-of-living crisis makes protection policies more important than ever. Consumers are likely to have less money in savings, heightening the need for an insurance-based safety net.
Many people may find their finances stretched when taking out a mortgage, but compromising on protection could prove to be a short-lived saving.
This article featured in the July edition of MS.
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