The protection sector is bracing itself for a year in which customers will be less inclined to take out cover when arranging their mortgage as cost of living and inflationary pressures persist.
But as the property market cools, opportunities abound for advisers to grow the market by educating all customers – particularly those renting – on the importance of taking out protection cover – not least in light of the looming final rollout of the Financial Conduct Authority’s (FCA) Consumer Duty.
And with the shocks to public health and the economy over the last three years, advisers are noting that customers now recognise they need protecting and the recurring sentiment of “it won’t happen to me” is disappearing.
Mortgage market sees more stability
The mortgage market endured a bumpy ride last year – not helped by inflationary pressures hitting budgets and a disasterous mini-Budget from Liz Truss and Kwasi Kwarteng which triggered rocketing interest rates and caused providers to withdraw products.
However, the good news is the market has seen more stability and has begun to respond well, Aviva protection distribution director Daren Boys tells Health & Protection.
“Interest rates on fixed mortgages have not increased following the recent rise in the base rate, while some have even come down,” Boys continues.
“We’ll see if this sentiment flows through to potential customers placing their properties on the market as we head into the spring.”
But Peter Hamilton, head of market engagement at Zurich, points out that average house prices had fallen for four months in a row to December, and most forecasts for 2023 were for further price falls of 5-10%.
“We may see some forced sales as higher interest rates bite, while the purchase market could slow as buyers seek further drops in prices before committing,” Hamilton adds.
“There will certainly be plenty of re-mortgage activity.”
Strong IP sales
Despite this uncertainty Mortgage Advice Bureau proposition director – protection Andy Walton, explains that Q4 2022 had actually proven to be a “bumper” period for protection sales in Q4.
In further positive news, Walton notes that MAB also saw an increase in customers commitment to spend on protection with premiums up by 7% on last year.
“Income protection sales continue to perform very strongly and 43% of all protection cases now have an element of income protection,” Walton continues.
“The other piece of good news is that the percentage of customers cancelling is extremely low and there has been no sign at all of any upward trend in this regard.”
Spare capacity in monthly budgets is hard to find
But there is no getting away from the fact that the cost of living crisis is still hitting consumers’ budgets, as Edward Jones, protection advice director at L&C Mortgages, warns.
“Substantially higher mortgage payments coupled with other rising costs, including food and energy, means that spare capacity in monthly budgeting will be hard to find,” he says.
“That inevitably will see some homeowners looking at where they could cut costs, which could heighten the risk of them reducing or cancelling protection.”
But this only underlines the importance of advisers having conversations with customers about the importance of protection cover, says Alan Lakey, director at Highclere Financial Services.
“It is important at the outset of any mortgage conversation to explain to the prospective clients that protecting a debt is part of the mortgage process and to ensure that they are aware of the overall costs to see how it fits within their budget,” he says.
“Leaving such a conversation until later will result in a far lower take up.”
‘It might happen to me’
According to Miles Robinson, founder and director of Home Group Financial, it is imperative that advisers have ‘what if?’ conversations with these customers.
“Customers are certainly more wary of budgeting and concerned of making payments with rising mortgage rates and energy bills,” he says.
“Therefore, when talking about the risks and the what if conversations, customers are much more intune and wanting peace of mind. I’ve noticed a move away from the ‘it won’t happen to me’ strapline.”
Legal & General commercial director of retail protection James Shattock agrees, adding: “People often underestimate the value of long-term protection, thinking ‘it’ will never happen to them.
“However, if the unthinkable does happen, protection can be a financial lifeline for people to help cover mortgage payments, loss of income or essential living costs.”
And holding these sorts of conversations about protection will also help advisers keep on the right side of the Consumer Duty set to come into force later this year.
Gregor Sked, protection development and technical manager at Royal London, warns that the duty will mean providers and adviser firms of all sizes will be under more pressure to measure whether they’re delivering good outcomes for clients.
He notes a “fundamental” shift of focus for many financial advisers from treating customers fairly to treating customers well and demonstrating that they are doing so.
“This creates a great opportunity to either ensure advisers are having these protection conversations with clients directly or they’re referring clients to a protection specialist; 2023 will really bring the phrase ‘write it, refer it, don’t ignore it’, to life,” he adds.
Overlooked opportunity of renters
One group “too often overlooked” in holding protection conversations are renters.
Cirencester Friendly predicts that landlords are going to be under pressure to increase rents as their own mortgage rates increase.
“That’s even more reason why tenants need a safety net if illness or injury strikes. As income protection is linked to earnings, not the mortgage or rent payments, it’s a product that meets their needs,” it argues.
“We’re encouraging mortgage advisers who work with landlords to make sure they are asking them to refer tenants for advice about protection.
“We need to move away from thinking it’s only mortgage clients who need this cover, it’s a product suitable for everyone and we need to do more to get this message through.”
Naomi Greatorex, managing director at Heath Protection, agrees – adding that whether customers are renting or taking a mortgage, they need some kind of protection.
“For renters, there is now a variety of income protection products, both full term to retirement and short-periods that offer 1-2 year pay-outs, making it much more affordable for renters to take some form of protection,” she highlights.
But Alan Richardson, head of expert advice at LifeSearch, points out that while there has been some good progress on solutions, renters are still less likely to have protection cover compared to homeowners.
“One of the reasons for this missed opportunity is the lack of a trigger to talk about protecting their lifestyle and managing debt when becoming a tenant,” he says.
“We must do more to move the protection conversation to consumers whether they are dealing with landlords or buying a home.”
Not all doom and gloom
Despite the general downturn in the economy there is optimism for the market, particularly for later in the year – although it appears reasonable to temper expectations.
“With inflation and base rates expected to fall in the second half of the year and house price growth slowing, we may well see a resurgence in the market as we progress through 2023,” says Jamie Page, head of protection distribution at The Exeter.
“The positive for the protection industry and advisers, is that we have successfully navigated similar challenges before.
“What’s more, we can be confident that the quality and flexibility of the products available within the market make it easier than ever for advisers to tailor cover to meet individual needs, budgets and personal circumstances. This makes protection conversations relevant to everyone, not only mortgage clients.”
Alan Knowles, co-managing director at Cura Financial Services, adds he also remains positive about 2023 for protection.
“It looks like overall sales for 2022 will be down on the previous year so hopefully we can curb this so it doesn’t become a trend. But I wouldn’t expect huge increases, given the economic outlook,” he concludes.