Sales of IP are increasing but is this performance or market forces?

Date posted: 18/11/2016

Our CEO, Eoin Lyons examines the growth of income protection sales this year.

The latest sales figures for Income Protection on the surface are encouraging. New business in 2016 in this category will likely be an increase of 6% on last year.

Before this is taken as a true measure of sales performance it is important to put market context around this growth.

The size of the UK workforce continues to increase year on year and if you look at the simple ratio of new policies sold per worker you can see a different complexion on performance.

Since 2013 the sales per worker trend has been improving which is good news but we are still way off the mid-2000s.

In 2016 there will be just over 4 new business IP placed per 1000 workers which is a modest increase on last year but still nowhere near the 5 policies sold per 1000 workers in 2006.

Similarly, the increase in the number of mortgages arranged in 2016 based on previous years will be almost at a similar level to the increase in IP sales.

On the other hand in 2006 there was more than double the number of mortgages sold than there will be 2016.

So perhaps de-coupling the sale of IP from the mortgage may not be a bad thing considering the market has halved in 10 years.

IP does not resonate with the mass market

Excellent stories like "7 families" as well as increased emphasis on education and training have surely made a difference, such as "the Wake Up to IP" events run by LV=. Product innovations and sales of group IP as an employment benefit will also move things forward.

Doing the same things will deliver the same result, however. We can expect marginal sale increases as the economy is doing well and visa-versa.

There will be no step change or mass appeal for the product despite an obvious need. This leaves 90% of the population effectively self-insuring, relying on savings or on the welfare state. The product is not engaging people.

Other industries have had a similar problem. In the 1950s less than 5% of the occupants of a car would regularly wear a seatbelt.

This was despite acceptance that it would make them safer in an accident. Our evolutionary optimism programmes us to tell us "it won't happen to me".

Protecting ourselves is often not engaging as shown in other industries

An engineer at Volvo took designs from aircraft he had worked on during the war and developed the first 3 point retractable seatbelt for cars.

Volvo was installing them as standard in all their vehicles by 1963 and they chose to give away the patent - for free - to their competitors. Despite the design being more comfortable and safer, adherence only marginally increased.

By the 1970s in this part of the world we were being educated by Government ("clunk-click").

In 1983 seatbelts became compulsory in law. In other words there was a financial incentive to wear them. Adherence went above 85% in just one generation.

Better product design and education didn't make much difference. Ultimately the alignment of all stakeholders including government, education, innovation, and financial incentives made a step change. Not wearing a seatbelt is now socially unacceptable.

Take the humble bicycle helmet - protection for our heads. When I rode my first bicycle in the late 1970s you couldn't buy a helmet and parents didn't consider them necessary.

Professional cyclists didn't wear them - let alone the man in the street. New designs were developed but the real change in the last generation has happened in a similar way to the wearing of seatbelts.

In some countries helmets have become compulsory and in others, such as the UK and Ireland, there is a tax incentive to buy them as an accessory included with the purchase of a bicycle.

The increased focus on health and exercise and the Sky cycling revolution, wearing a helmet now compulsory in the professional ranks coupled with the incentives have made a step change. From a standing start it is estimated that 20% of bicycle journeys in the UK are protected by a helmet.

In both these case studies most people fully understood the benefit of protecting themselves from the consequences of an accident. Despite understanding this most didn't change behaviour - a phenomenon known as optimism bias or the "it will never happen to me" effect.

A step change will only come with alignment of all stakeholders

So what can our industry learn from this and how can we apply this to IP? The lessons here are not necessarily about making something compulsory.

It is about a business model change brought about by a combination of factors. These factors include better product design, education, an alignment of stakeholders, and some element of incentive or disincentive.

In my view as long as IP is a sold product not much will change. The trick will be to identify the moment of truth for individuals where they themselves have identified, understood and accepted the need and are willing to pay. The market will need to provide an easy solution to fulfil the need there and then.

This easy solution will almost certainly be digitally enabled. An executive in our industry recently suggested that robo-advice will not replace the relationship. I agree with that point as it is simply put. What will replace the relationship for the mass-market will be trusted information and an easy solution at the moment of truth.

Dis-intermediation of a market is not necessarily a bad thing for an intermediary

Take the travel industry for example. We used to pick up brochures in the travel agent and select our holiday perhaps with the benefit of some advice from the agent.

The advent of the internet moved those brochures online but didn't make much difference initially - it just saved paper and perhaps cost.

Once websites like Tripadviser and became a trusted source of information, the travel agency was dis-intermediated from the transaction. The advent of user generated content (UGC), enabled by the internet, plus trusted booking and payment solutions, made the difference.

Despite this the number of people working in travel agencies has only reduced by 10%, from 50,000 to about 45,000 in the past generation. The services they offer have become more specialised and in fact more profitable as they provide niche advice and complex travel packages.

The mass market has moved away from agents yet there are almost as many serving the market and the ones that remain have moved up the value chain of the industry. So with the challenge comes the opportunity for those who adapt and specialise.

Paul Volcker, former chairman of the Federal Reserve, reckons we have to go back more than 30 years to find the last truly great innovation in financial services - the ATM.

In 2014 Ross McEwan (CEO of RBS) observed that their "busiest branch was the 7:01am train from Reading to Paddington".

Over 167,000 of his customers use their mobile banking app between 7am and 8am on their commute to work every day.

Putting banking on the internet was not the step change for that industry, it just developed the game changer that was the ATM, which took banking transactions outside the branch and outside business hours.

The need is increasing. How might it be met in future?

So what are the possible disruptive opportunities for our industry and more specifically IP?

Well firstly the market opportunity is increasing. The number of workers in the UK economy continues to increase and sick pay is falling behind the rest of Europe. Government is increasingly looking to the individual to protect themselves when unable to work or in retirement. There is more implicit demand for IP.

Perhaps the buoyancy of group sales is showing us the way. People naturally think about sick pay - that is what IP is - when they are starting a new job.

A modest deduction from a payslip, money you never had, seems much less painful than a direct debit. This would be especially true if it were tax deductible or auto-enrolled or both. This reflects a traditional sale in many ways but imagine it enabled by a seamless digital administration experience.

New insights into peoples' needs and wants are becoming available from an individual's behaviour on the internet.

This is not only how people transact their business but also based on their social interaction. Imagine somebody looking up recruitment websites at the same time they are comparing the sick pay benefits of possible employers and talking to their friends on Facebook about starting a new job.

The capability already exists to identify them and create relevant digital offers for them but I believe our industry is only dipping its toe into the water here.

The winners will be digital

IP is a great product meeting a real and increasing need. I'm convinced somebody will work out how to match the need in the mass market with a relevant offer when a customer values it most. This will be business model innovation using digital tools.

I'm sure traditional and specialist financial advice will endure with the appropriate customer. The "winners" will be those in our industry who are digitally enabled and willing to play where their customers are already playing.

Eoin Lyons is Chief Executive Officer of Outsourced Professional Administration Ltd