R05 Financial Protection Study Book 2024-25 PDF

Financial protection R05 2024-25 STUDY TEXT  Financial protection R05: 2024–25 Study text RevisionMate Provided as part of an enrolment, RevisionMate offers online services t...

Financial protection R05 2024-25 STUDY TEXT  Financial protection R05: 2024–25 Study text RevisionMate Provided as part of an enrolment, RevisionMate offers online services to support your studies and improve your chances of exam success. Access to RevisionMate is only available until 31 August 2025. This includes: Printable PDF and ebook of the study text. Student discussion forum – share common queries and learn with your peers. Examination guide – practise your exam technique. To explore the benefits for yourself, you can access RevisionMate via your MyCII page, using your login details: ciigroup.org/login Updates and amendments to this study text This edition is based on the 2024–25 tax year and examination syllabus which will be examined from 1 September 2024 until 31 August 2025. Any changes to the exam or syllabus, and any updates to the content of this study text, will be posted online so that you have access to the latest information. You will be notified via email when an update has been published. To view updates: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided Under ‘Unit updates’, examination changes and the testing position are shown under ‘Qualifications update’; study text updates are shown under ‘Learning solutions update’. Please ensure your email address is current to receive notifications. 2 R05/July 2024 Financial protection © The Chartered Insurance Institute 2024 All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part including photocopying or recording, for any purpose without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. No part of this publication may be copied or reproduced in a generative AI tool. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given to anyone else. Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The publication has been produced solely for the purpose of examination and should not be taken as definitive of the legal position. Specific advice should always be obtained before undertaking any investments. Print edition ISBN: 978 1 83727 065 1 Electronic edition ISBN: 978 1 83727 066 8 This edition published in 2024 The authors We gratefully acknowledge the contributions of the following to the production of this study text: Fortica Andy Couchman Ron Wheatcroft The CII would like to thank the authors and reviewers of other CII study texts in respect of any material drawn upon in the production of this study text, in particular study text CF3. While every effort has been made to trace the owners of copyright material, we regret that this may not have been possible in every instance and welcome any information that would enable us to do so. Unless otherwise stated, the authors have drawn material attributed to other sources from lectures, conferences, or private communications. Updater for this edition Jon Dunckley, BSc (Hons), ACII, CFP, FPFS. Reviewer for this edition Ron Wheatcroft, FCII, Chartered Insurer. Typesetting, page make-up and editorial services CII Learning Solutions. Printed and collated in Great Britain. This paper has been manufactured using raw materials harvested from certified sources or controlled wood sources.  3 Using this study text Welcome to the R05: Financial protection study text which is designed to support the R05 syllabus, a copy of which is included in the next section. Please note that in order to create a logical and effective study path, the contents of this study text do not necessarily mirror the order of the syllabus, which forms the basis of the assessment. To assist you in your learning we have followed the syllabus with a table that indicates where each syllabus learning outcome is covered in the study text. These are also listed on the first page of each chapter. Each chapter also has stated learning objectives to help you further assess your progress in understanding the topics covered. Contained within the study text are a number of features which we hope will enhance your study: Activities: reinforce learning through Key points: act as a memory jogger at practical exercises. the end of each chapter. Be aware: draws attention to important Key terms: introduce the key concepts points or areas that may need further and specialist terms covered in each clarification or consideration. chapter. Case studies: short scenarios that will Refer to: Refer to: sections/chapters that provide test your understanding of what you valuable information on or background to have read in a real life context. the topic, from either within this or other CII study texts. The sections from other study texts are available for you to view and download on RevisionMate. Consider this: stimulating thought Reinforce: encourages you to revisit a around points made in the text for which point previously learned in the course to there is no absolute right or wrong embed understanding. answer. Examples: provide practical illustrations Sources/quotations: cast further light of points made in the text. on the subject from industry sources. In-text questions: to test your recall of On the Web: introduce you to topics. other information sources that help to supplement the text. At the end of every chapter there is also a set of self-test questions that you should use to check your knowledge and understanding of what you have just studied. Compare your answers with those given at the back of the book. By referring back to the learning outcomes after you have completed your study of each chapter and attempting the end of chapter self-test questions, you will be able to assess your progress and identify any areas that you may need to revisit. Not all features appear in every study text. Note Website references correct at the time of publication.  5 Examination syllabus Financial protection Purpose At the end of this unit, candidates should be able to demonstrate an understanding of and ability to analyse: the purpose and scope of financial protection products and how they interact with State benefits; the main features and functions of the different types of contracts and how they are arranged in order to meet the individual client’s protection needs; the main protection needs of businesses. Summary of learning outcomes Number of questions in the examination* 1. Understand the consumer and retail market factors and trends relevant to financial 3 protection. 2. Understand the areas of need for protection planning and the main sources of 3 financial protection. 3. Understand the role and limitations of State benefits and state/local authority funded 3 solutions for financial protection. 4. Understand the range, structure and application of life assurance and pension based 8 policies to meet financial protection needs. 5. Understand the taxation treatment of life assurance and pension based protection 6 policies. 6. Understand the range, structure and application of income protection insurance and 6 options to meet financial protection needs. 7. Understand the range, structure and application of critical illness insurance to meet 6 financial protection needs. 8. Understand the range, structure and application of long-term care insurance to meet 3 financial protection needs. 9. Understand the main features of other insurance based protection policies. 6 10. Evaluate the needs and priorities for financial protection and the relevant factors in 6 selecting appropriate solutions. * The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within the range plus or minus 2 of the number indicated. Published June 2024 ©2024 The Chartered Insurance Institute. All rights reserved. R05 6 R05/July 2024 Financial protection Important notes Method of assessment: 50 multiple choice questions (MCQs). 1 hour is allowed for this examination. This syllabus will be examined from 1 September 2024 to 31 August 2025. Candidates will be examined on the basis of English law and practice in the tax year 2024/2025 unless otherwise stated. It should be assumed that all individuals are domiciled and resident in the UK unless otherwise stated. This PDF document has been designed to be accessible with screen reader technology. If for accessibility reasons you require this document in an alternative format, please contact us on [email protected] to discuss your needs. Candidates should refer to the CII website for the latest information on changes to law and practice and when they will be examined: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided 4. Select qualification update on the right hand side of the page Published June 2024 2 of 4 ©2024 The Chartered Insurance Institute. All rights reserved.  7 1. Understand the consumer and retail 7.2 Explain the underwriting and claims issues and market factors and trends relevant to processes associated with critical illness insurance. financial protection. 8. Understand the range, structure and 1.1 Explain the role of insurance in mitigating personal application of long-term care insurance to financial risk. meet financial protection needs. 1.2 Describe consumer attitudes and behaviours to 8.1 Describe the regulation which applies to long-term protection needs planning. care insurance. 1.3 Describe trends relevant to financial protection. 8.2 Describe the main types of long-term care insurance 2. Understand the areas of need for policies and their features. protection planning and the main sources 8.3 Describe the long-term care planning process. of financial protection. 9. Understand the main features of other 2.1 Describe the need for protection planning for insurance based protection policies. individuals and businesses. 9.1 Describe the main features of other insurance based 2.2 Explain the relationship between insurance and protection policies. assets and liabilities. 2.3 Describe the sources of financial protection. 10. Evaluate the needs and priorities for financial protection and the relevant 3. Understand the role and limitations of factors in selecting appropriate solutions. State benefits and state/local authority 10.1 Identify the priorities, risks and choices for funded solutions for financial protection. individuals or business clients. 3.1 Examine the role and limitations of State benefits 10.2 Assess and quantify an individual’s or business’s and State/local authority funded solutions for future capital and income needs in real terms. financial protection. 10.3 Determine the suitability of product types and 4. Understand the range, structure and options. application of life assurance and 10.4 Explain planning considerations and approaches pension based policies to meet financial for appropriate, inclusive advice and positive customer outcomes including regard for protected protection needs. characteristics. 4.1 Describe the types of life assurance policies, as well 10.5 Explain the importance of regular reviews. as pension based policies, their benefits, limitations, tax treatment and how they meet financial protection needs. 4.2 Describe the underwriting and claims issues and processes associated with life assurance and pension based policies. 5. Understand the taxation treatment of life assurance and pension based protection policies. 5.1 Describe the taxation treatment of life assurance and pension based protection policies. 6. Understand the range, structure and application of income protection insurance and options to meet financial protection needs. 6.1 Describe the types of income protection policies, their benefits, limitations, tax treatment and how they meet financial protection needs. 6.2 Explain the underwriting and claims issues and processes associated with income protection insurance. 7. Understand the range, structure and application of critical illness insurance to meet financial protection needs. 7.1 Describe the types of critical illness policies, their benefits, limitations, tax treatment and how they meet financial protection needs. Published June 2024 3 of 4 ©2024 The Chartered Insurance Institute. All rights reserved. 8 R05/July 2024 Financial protection Reading list International dictionary of banking and finance. John Clark. Hoboken, New Jersey: The following list provides details of further Routledge, 2013.* reading which may assist you with your studies. Harriman’s financial dictionary: over 2,600 essential financial terms. Edited by Simon Note: The examination will test the Briscoe and Jane Fuller. Petersfield: syllabus alone. Harriman House, 2013.* The reading list is provided for guidance only and is not in itself the subject of the examination. Examination guide The resources listed here will help you If you have a current study text enrolment, keep up-to-date with developments and the current examination guide is included provide a wider coverage of syllabus topics. and is accessible via Revisionmate (ciigroup.org/login). Details of how to access CII study texts Revisionmate are on the first page of your Financial protection. London: CII. Study text study text. It is recommended that you only R05. study from the most recent version of the Journals and magazines examination guide. Cover. London: Incisive Financial. Monthly. Available for free online at Exam technique/study skills www.covermagazine.co.uk. There are many modestly priced guides Protection review (previous e-Protection available in bookshops. You should choose review). Great Rissington: Bank House one which suits your requirements. Communications. Quarterly. Available at protectionreview.co.uk Personal finance professional. London: CII. Four issues a year. Available online at www.pfp.thepfs.org (CII/PFS members only). Life insurance international. London: Timetric. Monthly. Retirement strategy. Supplement to Money marketing. London: Centaur Communications. Monthly. Also available at www.moneymarketing.co.uk. Pensions age. London: Perspective. Monthly. Available at www.pensionsage.com. Pensions Expert. London: FT Finance. Weekly. Available at www.pensions- expert.com. Pensions insight. Newsquest Specialist Media. Monthly. Available at www.pensions- insight.co.uk. Professional pensions. London: Incisive Media. Weekly. Available at www.professionalpensions.com. Reference materials Concise encyclopedia of insurance terms. Laurence S. Silver, et al. New York: Routledge, 2010.* Dictionary of insurance. C Bennett. 2nd ed. London: Pearson Education, 2004. * Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only). Published June 2024 4 of 4 ©2024 The Chartered Insurance Institute. All rights reserved.  9 R05 syllabus quick-reference guide Syllabus learning outcome Study text chapter and section 1. Understand the consumer and retail market factors and trends relevant to financial protection. 1.1 Explain the role of insurance in mitigating personal financial risk. 1A, 1G 1.2 Describe consumer attitudes and behaviours to protection needs 1B, 1C planning. 1.3 Describe trends relevant to financial protection. 1D, 1E, 1F 2. Understand the areas of need for protection planning and the main sources of financial protection. 2.1 Describe the need for protection planning for individuals and 2A, 2B businesses. 2.2 Explain the relationship between insurance and assets and 2C, 2D liabilities. 2.3 Describe the sources of financial protection. 2E 3. Understand the role and limitations of State benefits and state/local authority funded solutions for financial protection. 3.1 Examine the role and limitations of State benefits and State/local 3A, 3B, 3C, 3D, 3E, 3F, 3G, authority funded solutions for financial protection. 3H, 3I, 3J 4. Understand the range, structure and application of life assurance and pension based policies to meet financial protection needs. 4.1 Describe the types of life assurance policies, as well as pension 4A, 4B, 4C, 4E based policies, their benefits, limitations, tax treatment and how they meet financial protection needs. 4.2 Describe the underwriting and claims issues and processes 4D, 4F, 4G associated with life assurance and pension based policies. 5. Understand the taxation treatment of life assurance and pension based protection policies. 5.1 Describe the taxation treatment of life assurance and pension 5A, 5B, 5C, 5D, 5E based protection policies. 6. Understand the range, structure and application of income protection insurance and options to meet financial protection needs. 6.1 Describe the types of income protection policies, their benefits, 6A, 6B, 6C, 6F, 6G, 7I limitations, tax treatment and how they meet financial protection needs. 6.2 Explain the underwriting and claims issues and processes 6D, 6E, 6H associated with income protection insurance. 7. Understand the range, structure and application of critical illness insurance to meet financial protection needs. 7.1 Describe the types of critical illness policies, their benefits, 7A, 7B, 7C, 7D, 7G, 7H, 7I, limitations, tax treatment and how they meet financial protection 7J needs. 7.2 Explain the underwriting and claims issues and processes 7E, 7F associated with critical illness insurance. 8. Understand the range, structure and application of long-term care insurance to meet financial protection needs. 8.1 Describe the regulation which applies to long-term care 8A, 8B insurance. 8.2 Describe the main types of long-term care insurance policies and 8C, 8D their features. 10 R05/July 2024 Financial protection Syllabus learning outcome Study text chapter and section 8.3 Describe the long-term care planning process. 8E, 8F, 8G 9. Understand the main features of other insurance based protection policies. 9.1 Describe the main features of other insurance based protection 9A, 9B, 9C, 9D, 9E, 9F, 9G policies. 10. Evaluate the needs and priorities for financial protection and the relevant factors in selecting appropriate solutions. 10.1 Identify the priorities, risks and choices for individuals or 10A, 10B, 11A, 11B, 11C, business clients. 11D 10.2 Assess and quantify an individual’s or business’s future capital 10C, 10D, 10E and income needs in real terms. 10.3 Determine the suitability of product types and options. 10F 10.4 Explain planning considerations and approaches for appropriate, 10G inclusive advice and positive customer outcomes including regard for protected characteristics. 10.5 Explain the importance of regular reviews. 10G  11 Exam guidance and accessibility Before you begin the study text, we would encourage you to read about how to approach the exam. Study skills While the text will give you a foundation of facts and viewpoints, your understanding of the issues raised will be richer through adopting a range of study skills. They will also make studying more interesting! We will focus here on the need for active learning in order for you to get the most out of this core text. Active learning is experiential, mindful and engaging Underline or highlight key words and phrases as you read – many of the key words have been highlighted in the text for you, so you can easily spot the sections where key terms arise; boxed text indicates extra or important information that you might want to be aware of. Make notes in the text, attach notes to the pages that you want to go back to – chapter numbers are clearly marked on the margins. Make connections to other CII units – throughout the text you may find ‘refer to’ boxes that tell you the chapters in other books that provide background to, or further information on, the area dealt with in that section of the study text. Take notice of headings and subheadings. Use the clues in the text to engage in some further reading (refer to the syllabus reading list) to increase your knowledge of a particular area and add to your notes – be proactive! Relate what you’re learning to your own work and organisation. Be critical – question what you’re reading and your understanding of it. Five steps to better reading Scan: look at the text quickly – notice the headings (they correlate with the syllabus learning outcomes), pictures, images and key words to get an overall impression. Question: read any questions related to the section you are reading to get a feel for the subjects tackled. Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for the topics and the style the book is written in. Remember: test your memory by jotting down some notes without looking at the text. Review: read the text again, this time in more depth by taking brief notes and paraphrasing. On the Web Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy. Note: website reference correct at the time of publication. 12 R05/July 2024 Financial protection Exam guidance Answering multiple-choice questions When preparing for the examination, candidates should ensure that they are aware of what typically constitutes each type of product listed in the syllabus and ascertain whether the products with which they come into contact during the normal course of their work deviate from the norm, since questions in the examination test generic product knowledge. Some questions are simply questions of fact, whereas others may be more progressive in nature, requiring reasoning to determine the correct option or, perhaps, being answerable by a process of elimination. Whatever the question, read it carefully to identify what it is really asking. Do not assume that you 'know' what it is asking, even if the question is on a topic about which you feel very confident; answer the question exactly as it is asked. Also, look out for the occasional negative question (Which of the following is not …?). Try to answer all of the questions. While there is no substitute for a good grasp of the subject matter, and you cannot expect to pass the examination purely on guesswork, you do not lose marks for giving a wrong answer! You can find more information on the specific unit in the exam guide (available on the unit page on the CII website and on RevisionMate). Important note on tax rates and allowances Tax tables giving rates of tax, tax bands, reliefs, etc. will be provided, where necessary, when you take the exam. This information will be restricted to figures and amounts only; you will still be expected to know the principles of the tax system, and how to apply these using any figures supplied. You will also need to understand the workings of the main forms of taxation and the types of exemptions, reliefs and allowances available. On the Web You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/ qualifications/assessment-information/before-the-exam/. Note: website reference correct at the time of publication. Accessibility The CII has produced a policy and guidance document on accessibility and reasonable/ special adjustments. The purpose of this is to ensure that you have fair access to CII qualifications and assessments. On the Web The ‘Qualifications accessibility and special circumstances policy and guidance’ document can be found here: www.cii.co.uk/media/bxsjd2e2/cii-qualifications-accessibility- and-special-circumstances-policy-and-guidance.pdf. Note: website reference correct at the time of publication.  13 Introduction Financial protection is best summed up with the old adage: plan for the best and prepare for the worst. However grand our wider financial aims and goals, everything can quickly come crashing down if disaster strikes. Good financial protection underpins every other aspect of financial planning by ensuring that, in the event of death or illness, we protect the goals and people that matter to us most. In this text, we explore the main forms of financial protection applicable to consumers as well as some of the factors in business insurance. In doing so, we address key considerations for any financial planner: policy types; establishing the appropriate sum assured; underwriting; claims; the use of trusts; and the taxation of benefits. We also provide context by considering relevant market factors and looking at State benefits – the availability of which is often cited as a reason why consumers fail to take out adequate protection.  15 Contents 1: Market factors and trends in financial protection planning A The role of insurance in mitigating personal financial risk 1/2 B Consumer attitudes and behaviour in relation to protection needs 1/3 planning C Attitudes to protection insurance 1/6 D The main drivers of sales of life assurance products 1/8 E Health and longevity trends 1/10 F Recent trends in life product design and pricing 1/11 G The value of advice on protection 1/13 2: Financial protection needs A Main types of financial protection cover 2/2 B Areas of need for protection 2/3 C Divorce and relationship breakdown 2/7 D Relationship between insurance and assets and liabilities 2/7 E Sources of financial protection 2/8 3: State benefits A Scope of social security and State benefits 3/2 B The changing face of benefit provision 3/3 C Bereavement benefits 3/4 D Income-related benefits 3/5 E Disability-related benefits 3/8 F Child Benefit and tax credits 3/10 G Help with housing costs 3/12 H Universal Credit and the benefit cap 3/13 I State pensions 3/15 J Considerations and impact on financial planning 3/18 4: Life assurance A Policy types 4/2 B Calculation of premiums 4/9 C Trusts and life assurance 4/12 D Underwriting 4/15 E Terminal illness benefit 4/22 F Assignments 4/22 G Claims 4/27 16 R05/July 2024 Financial protection 5: The taxation of life assurance and pension-based protection policies A Qualifying, non-qualifying and offshore policies 5/2 B Taxation of life funds, onshore and offshore 5/7 C Chargeable gains and life assurance policies 5/7 D Taxation of offshore policies 5/12 E Inheritance tax planning and life assurance 5/13 6: Income protection insurance A Policy types and uses 6/2 B Product features and options 6/5 C Benefit terms and limitations 6/8 D Premiums and underwriting 6/9 E Claims 6/12 F Group policies 6/14 G Taxation 6/15 H Adviser considerations 6/15 7: Critical illness insurance A The evolution of critical illness insurance 7/2 B Policy types and uses 7/3 C Policy options and variations 7/4 D Conditions covered and excluded 7/6 E Premiums and underwriting 7/8 F Claims 7/9 G Group policies 7/9 H Taxation 7/10 I Adviser considerations 7/10 J Market developments 7/11 8: Long-term care insurance A What is long-term care? 8/2 B State benefits for long-term care 8/3 C The main types of long-term care 8/8 D The long-term care insurance market 8/10 E How an individual can meet their own care costs 8/15 F Choosing the right care package 8/18 G The future of long-term care 8/21  17 9: Other insurance based policies A Personal accident and sickness insurance 9/2 B Private medical insurance 9/4 C Mortgage payment protection insurance 9/11 D Accident, sickness and unemployment insurance 9/13 E Health cash plans and dental plans 9/14 F Payment protection insurance 9/15 G Adviser considerations 9/16 10: Personal protection A Factors shaping clients’ needs 10/2 B Attitude to risk 10/7 C Identifying and quantifying financial protection needs 10/8 D Protection against redundancy 10/18 E Affordability 10/19 F Product selection and suitability 10/19 G Identifying and reviewing solutions 10/23 11: Business protection A Key person insurance 11/2 B Share protection insurance 11/12 C Partnership protection 11/18 D Business finance and loans 11/20 Self-test answers i Cases xiii Legislation xv Index xvii  Chapter 1 Market factors and trends 1 in financial protection planning Contents Syllabus learning outcomes Introduction A The role of insurance in mitigating personal financial risk 1.1 B Consumer attitudes and behaviour in relation to protection needs 1.2 planning C Attitudes to protection insurance 1.2 D The main drivers of sales of life assurance products 1.3 E Health and longevity trends 1.3 F Recent trends in life product design and pricing 1.3 G The value of advice on protection 1.1 Key points Question answers Self-test questions Learning objectives After studying this chapter, you should be able to: outline public attitudes to taking out protection cover; describe in context the change in access to protection products and the consequent change in products offered; appreciate how the changes in family life have created different demand for protection products and a different appreciation of risk; list the major factors that have an impact on the purchase of insurance protection; explain the UK ‘protection gap’, what it represents and the direction in which it is moving; outline the basic pricing issues in the protection market and their interaction with underwriting; and determine the importance of advice in selecting protection products. Chapter 1 1/2 R05/July 2024 Financial protection Introduction Financial protection insurance is often described as the ‘bread and butter’ of insurance cover, yet the fast pace of change in the market means it faces major pressures and strategic challenges. This chapter looks at the public perception of protection cover, and how the industry has adapted its products and practices to cater for a rapidly altering social environment. Key terms This chapter features explanations of the following ideas: Affordability Consumerism Economic factors Preferred life policy Protection gap Welfare state A The role of insurance in mitigating personal financial risk An important part of the financial planning process is to identify different types of risk and to plan accordingly. Some risks are best managed while others are best insured. The risk that a casual passer-by will walk into a person’s home and steal the cash sitting on the hall table is best managed by keeping the front door locked and putting large sums of money out of sight. But the more remote risk that a determined burglar might break in and steal valuables is best left to insurance. The most common way to categorise different types of risk is according to their severity of impact as well as their likelihood of occurrence. Some events are very likely to occur but may not be so important in terms of the impact on a person’s life. Most people need minor dentistry from time to time, but any cost is likely to be relatively low. Some events, such as the house burning down, can be disastrous but happen very rarely. Insuring against minor and frequent risks may be expensive and pointless, but it generally makes sense to insure the high impact but low frequency type of risk, where an insurer is prepared to provide cover through an insurance policy. The main events that have a high potential impact on individuals and their families are death and disability, which should be the top priorities for insurance-based solutions. The range of possibilities can be represented in the simple matrix shown in Figure 1.1. Figure 1.1: Frequency and impact matrix Low frequency High frequency Plus Plus High impact High impact Level of Impact Low frequency High frequency Plus Plus Low impact Low impact Frequency of occurrence Chapter 1 Market factors and trends in financial protection planning 1/3 Chapter 1 In domestic terms, an event that would fall into the bottom left-hand box (low frequency plus low impact) would be an infrequent minor injury, such as a cut finger, that could be more or less ignored or be dealt with by having access to a first aid kit. The high frequency plus high impact event in the top right-hand corner might include periods of unemployment, especially in certain jobs. Insurance for this may be expensive or may not be available so this sort of risk is best ‘managed’. For example, an individual would be advised to accumulate a buffer of savings and to work hard at their employment to avoid unnecessary periods of joblessness. On that basis, it might be possible to recategorise the risk as low frequency plus high impact, requiring lower levels of financial reserves. Likewise, the chances of an individual reaching retirement age and, therefore, stopping work and losing earned income are usually very high. The most effective way to provide for this eventuality is to save enough money to generate an adequate income for after retirement. The top left-hand box represents the area in which insurance has the most effective role to play. Premature death (generally any death during working age) or serious illnesses are relatively rare occurrences in the UK, but when they do happen, the financial consequences can be very severe. Most people find it impractical to build up sufficient resources to provide an adequate financial buffer against this potentially expensive eventuality. Pooling the risk through insurance is therefore the most effective way of financing the payment of benefits to the relatively few people who are affected by these kinds of risk. In terms of quantifying the risk of early death, the most recent government statistics show that, in the UK, new-born boys have an average life expectancy of 78.6 years and new-born girls of 82.6 years (source: National Life Tables United Kingdom 2020–2022, Office for National Statistics, 11 January 2024). These figures are averages and there will be regional variations, but the majority of new-borns will survive to retirement. However, insurance can help the families of those who do not. Also, because most will survive, the actual cost of cover can be lower than many people might expect. On the Web Source: www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2020to2022 Most people instinctively understand this analysis of risk and the role of insurance. Where they decide not to insure themselves – despite the potential consequences – or they take out too little insurance, it is often because they have failed to grasp the implications. Similarly, they may have confused the role of savings and insurance, or miscalculated the impact or probability of death or serious illness. Financial protection is the term commonly used to describe the range of insurance contracts that provide financial sums in the event of long-term illness, disability or death. The British protection insurance industry is the fourth largest in the world in terms of sums insured in force, behind the USA, China and Japan. B Consumer attitudes and behaviour in relation to protection needs planning B1 Life stages financial planning Ideas about life assurance needs in the decades immediately after the Second World War would now seem very simplistic. There was a general assumption that life unfolded in a smooth, linear fashion and that the key life events of marriage, setting up home, having children and retiring were quite predictable. People today generally experience many more important life events compared to their parents or grandparents. This reflects the greater complexity of most lives as a result of more choice, greater affluence and changed social attitudes. Chapter 1 1/4 R05/July 2024 Financial protection Table 1.1: Increase in number of life events Post-war Today Live at home Live at home Get married Leave home for university Have children Return home after university Retire Leave home again to live in a flat with friends Move into flat on own Start long-term relationship Co-habit with long-term partner Have children Get married Separate and move into flat on own Move in with new partner Child from previous marriage moves in Partially retire All children finally move out Fully retire Source: Trajectory and the British Household Panel Study B2 Changing social patterns The major widening of lifestyle options as evidenced by the British Household Panel Study underlines the basic changes that have taken place in British society since the 1950s. Lives have become less predictable and age is no longer such a reliable trigger for taking particular actions. Changes in attitudes to marriage, divorce, childrearing, career building, sexual equality and the explosion in home-based technology have created a very different and less predictable dynamic. Changes in protection products and the way they are purchased have reflected these developments in society generally. B3 Historical attitudes to life assurance protection Classic life assurance training in the 1950s would describe a young man’s progression through life (because men were much more commonly seen as ‘breadwinners’ and many women did not work). He would leave school at 16 or 18 and be far more likely to start work immediately than to go to university. He would build a career, very often with the same employer, meet a potential partner in his early 20s and marry around the age of 24. This would give rise to the need for a mortgage (which would need to be protected), and other needs would develop as children were born and grew up. If he had children when he was between 26 and 28, he would have needed substantial amounts of life cover over a period of roughly 20 years to ensure that his family was protected until they ceased to be dependent on him. A growing family would necessitate a larger house, which would be bought with an increased mortgage. Pension planning was not often needed because most employees became members of large final salary schemes. Many people stayed in these jobs at least partly because of the difficulties of transferring pension entitlement. Some employers also arranged life assurance cover for all of their workers, typically two or four times their earnings. Products such as family income benefit and permanent health insurance (now income protection) were used to cover the risk to the family of the main income earner’s death or disability. The linear progression generally continued until the man’s retirement. Although he might buy endowment and whole life plans to fund a daughter’s wedding or to provide a nest egg on death, the development of many people's family finances was relatively straightforward. There was also a traditional way to buy insurance products, which served a large proportion of the middle, lower middle and working-class populations in the UK – the industrial Chapter 1 Market factors and trends in financial protection planning 1/5 Chapter 1 insurance, also known as home service, sales force. This offered easy access to insurance, but its high cost base often meant poor value for money. Consider this… What are the key financial commitments that protection policies need to cover? B4 Sales and distribution – consumer access and affinity There is a maxim commonly cited in the insurance industry that ‘life assurance is sold not bought.’ History strongly suggests that interest in buying life assurance (other than to protect a mortgage) has diminished over the last 60 years, perhaps as a result of the widespread change in distribution methods. The industrial sales force (salespeople that came out to your home to collect premiums each week or month) was a very effective way of maintaining contact with people in their homes and spotting needs and opportunities for further purchases. In the 1950s, it was common for insurance agents to call on large numbers of houses in an area every week or fortnight. Turnover of agents was low (many were self-employed and maintained their own ‘book’ of customers). While this proved very effective in generating sales and breeding a strong affinity between insurers and British families, it came at a high price. Companies gradually began to realise that sending sales agents door-to-door was an expensive way to collect what often amounted to relatively small premiums. They started to review whether larger and more profitable sales might be made through a distribution system that needed less client contact. If customers could be persuaded to remit their regular premiums from their banks rather than in cash or by cheque, it would greatly reduce the cost of collecting premiums. After changes to the provision of investment advice within the financial services industry made by the Retail Distribution Review (RDR), attention has returned to the ‘sale’ of protection. Many commentators have argued that an average person is much less likely to have access to financial advice as the bancassurance market shrinks and other companies move towards a high net worth fee or equivalent model. Protection is one of the few areas where commission may still be charged. This had led some commentators to speculate that many advisers would try to take advantage of this by moving towards protection advice. This does not seem to have been backed up by experience as there has been little change in reported new business sales figures for the main protection products. An alternative to getting advice is to buy direct from the provider, or through one of the new online, non-advised channels. This non-advised section of the market has been steadily increasing but showed a reversal in 2022 when the percentage of new level term non-advised sales fell from 50.3% to 42.0%. This fall was attributed to the cost-of-living crisis where more consumers were choosing to spend their money elsewhere. Level term assurance policies are the simplest type of cover and the propensity to purchase without advice falls as the product proposition becomes more complex. Total sales Non-advised Percentage Level term 751,187 316,849 42.2 Level term with critical 279,683 50,633 18.1 illness Decreasing term 348,405 72,545 20.8 Decreasing term with 168,342 12,668 7.5 critical illness Source: Term & Health Watch 2023, Swiss Re While online portals like BeagleStreet.com offer a range of tools to help consumers select the right level of cover, buying without advice places responsibilities on the consumer. For example, few consumers know of the differences between various types of cover, risking Chapter 1 1/6 R05/July 2024 Financial protection either buying the wrong product or not setting it up in the best way. Some direct-to-consumer providers offer a service where customers can ask for advice, which is often arranged through a separate specialist adviser. C Attitudes to protection insurance Changes in society have meant that attitudes to insurance have changed too. Some of the background drivers include: The UK’s highly developed welfare state, which may lead some people to believe that ‘the State will always look after you’. Significantly changed family models. For example, with the growth of more informal and flexible units and more single people. The growth of consumerism which has subjected many industries to intense scrutiny. Insurance has both benefited and suffered from this scrutiny. Technological developments which have had a major impact on the purchase, delivery and process of insurance. Significantly changed attitudes to personal risk. An increased range of options for other ways of spending income. Consider this… Is the welfare state in any sense a competitor to the insurance industry? Interesting research into consumer attitudes has been undertaken over recent years. Although some of these studies are now a few years old, they tell a fascinating story about the attitudes of our time. In June 2019, Royal London published its consumer attitude survey, the State of the Protection Nation. Only 15% of those surveyed felt that everyone in employment should consider income protection and worryingly one-third felt sceptical about buying any kind of protection product. In 2022, the FCA’s Financial Lives survey found that 53% of UK adults said that they had no life assurance or other financial protection. Of those who said they had cover, life assurance was the most common, with 29% of adults having some form of it, compared to only 13% saying they had critical illness insurance and 6% saying they had income protection insurance. On the Web Source: www.fca.org.uk/publication/financial-lives/fls-2022-general-insurance- protection.pdf According to research conducted by Scottish Widows in 2017, 42% of uninsured self- employed workers insist that they don’t need critical illness insurance or don’t see it as a priority. This is despite 76% of business owners having no employees and nobody to cover for them should they fall ill and be unable to work themselves. In 2018, Scottish Widows reported that only 30% of self-employed workers have a life assurance policy, compared with 39% of full-time employees. Only 6% of self-employed workers have critical illness cover compared with 13% of full-time employees. Many people fail to appreciate the nature of their cover. Although Swiss Re has found that people have become a bit more realistic about the cover they hold, one consistent finding in protection insurance research is that people overestimate the cover they have in force. In another survey in 2011 (Protection Review/ICM/Hannover Life Re Survey 2011), people were asked whether they believed that they had sufficient life, private medical insurance, critical illness and income protection policies. Chapter 1 Market factors and trends in financial protection planning 1/7 Chapter 1 The following proportions believed that they had enough cover of each type: Life assurance: 90%. Private medical insurance: 90%. Critical illness insurance: 90%. Income protection insurance: 88%. Out of those surveyed, 42% had none of the above types of cover. There is some evidence that attitudes have changed as a result of the pandemic. Research by Drewberry in 2021 found that one-in-six people were more likely to consider life insurance following the pandemic, with similar people looking at life and health insurance. This renewed enthusiasm was, however, tempered by the fact that respondents expressed concern over insurers paying out. Some 44% of respondents believed that insurers had paid out less than 50% of COVID-19 related claims. Another issue is that many people do not understand different types of protection insurance and what they do. Research for the Syndicate, carried out by ICM Research in September 2012, found that when presented with a list of four options, only 20% of people could pick the correct definition of term insurance (the simplest form of protection insurance). In 2016 the research was repeated and this time at least 70% of people identified the correct definition. This rose to at least 80% for ‘critical illness’ and ‘life assurance’ with the latter being the most likely of all the products in the survey to be correctly matched with its definition. The definitions offered to the sample were simplified when the research was repeated, which would account for some of the increase in recognition. The results undoubtedly show the importance of clear and simple definitions for consumers. Consider this… Why might people overestimate the type and amount of cover they have purchased? The Royal London State of the Protection Nation survey asked consumers without cover why they hadn’t taken cover. The findings were interesting: around 50% of respondents said that they had no life cover either because it was too expensive or because they didn’t trust the life assurance provider to pay out on a claim. In 2018, a study by GenRe considered the reasons why younger, so called ‘millennials’ (aged 18–40) hadn’t bought life assurance. Its findings revealed that cost was not a major factor for this group. Don’t need it 25% No dependants 23% No mortgage 13% Sufficient cover from work 12% Would rather spend money elsewhere 8% Would rather invest money elsewhere 8% Don’t know how to buy it 7% Too expensive 5% Source: GenRe 2018 Trust Mutual trust is essential to any financial transaction. For its 2014 report, the Syndicate probed consumers regarding their use of financial advisers. The views of those who said that they would not be willing to use a financial adviser pointed to a lack of trust. In particular, consumers highlighted concerns regarding whether the service was genuinely unbiased and whether it represented good value for money in terms of commission or fees. To explore this further, in 2016 the Syndicate asked where consumers would go to research protection insurance. The split of responses, including whether the method had already been used or would be considered in the future, is shown in table 1.2. Chapter 1 1/8 R05/July 2024 Financial protection Table 1.2: Methods of researching protection insurance - survey responses Over the Online via a Online via a Online via a Face-to-face Face-to-face telephone laptop/PC tablet smart phone with an at my bank or adviser, building broker, bank society or building society I have already 17% 37% 18% 14% 24% 20% used this method to research protection insurance I have not but would 19% 32% 31% 27% 32% 34% consider researching protection insurance this way I have not 64% 30% 51% 59% 44% 45% researched and would not consider researching protection insurance this way This is further supported by the Pacific Life Re research, which has charted the changing attitudes of consumers toward distribution channels. In response to the question, ‘If you were to buy life assurance, how would you prefer to buy it?’, the percentage of those selecting ‘the internet’ stood at 45% of all respondents in 2016 with a further 12% favouring the telephone (source: PacificLife.com 2017). The research published by Swiss Re in June 2021 suggests that these preferences are now being reflected in market statistics. If the financial services industry is to penetrate the protection needs of consumers successfully, it seems that there is work to be done to build trust. Doing so might well involve the greater use of technology to deliver services and benefits in the same way that technology has revolutionised other purchases. Evidence of this is already being seen in the ‘gamification’ of health and fitness through apps linked to financial protection. D The main drivers of sales of life assurance products A number of factors drive the demand for mortality protection. On an individual basis, these include the age and life stage of the individual as well as their income. The aggregate demand for life assurance is driven by: affordability; movements in the housing market; income per head and various other economic factors; and whether they have any dependants. There appears to be a natural correlation between the age of the main income earner and the amount of protection sought. Income levels tend to increase with age and family responsibilities are likely to grow, so the level of financial commitments is likely to be higher. This pattern is also seen in other countries, notably the USA, where long-term statistical information is available. The extension of working lives as people generally live longer may alter the scale of this effect, but the basic principle is unlikely to be affected. Consider this… What can insurers do to stimulate demand for protection products? Income is a key determinant in the amount of cover taken and is normally highest in the age range of 45–54. There are considerable differences in the timing of retirement dates and approaches. Many people in senior executive jobs are retiring in their mid-50s and beginning Chapter 1 Market factors and trends in financial protection planning 1/9 Chapter 1 second careers or moving into semi-retirement. This natural movement is counterbalanced by the ‘lumpy lifestyle’ phenomenon where second families are formed later in people’s lives, extending their financial responsibilities. A further factor which will impact working lives is the trend to providing pensions through a defined contribution scheme rather than a defined benefit one. D1 The protection gap and the demand for financial protection The work carried out to measure the degree to which insurance needs are being addressed by the protection industry has resulted in the calculation of the protection gap. Swiss Re has calculated a life assurance protection gap, which equates to ‘the shortfall in the amount of cover necessary to maintain the current living standards of dependants.’ Its formula for calculating the protection gap is broadly: Resources needed – cover in place through individual policies and through employer- sponsored group life cover = protection gap It is based on multiples of gross income. The relatively crude figure produced represents the amount of life cover which should be in place, based on national average salaries. Deducted from this figure is any cover actually in force to find a level of ‘protection shortfall’. According to Swiss Re, the UK life protection gap calculated on this basis is currently estimated to be £2.4trn. The protection gap for income protection, based on banded earnings (so as to exclude the lowest earners who might be best served by State benefits) is estimated to be £200bn a year (Swiss Re 2015). The size of these gaps underlines the reality of the difference between an ideal measure of cover and a pragmatic assessment by customers – both individual and corporate – who have limited budgets, as well as different personal values and aspirations. It may also reflect the fact that many have not been made aware of their protection needs by an experienced adviser. The economic vulnerability of many people in the UK is the challenge that faces the industry and should be a cause for concern. For example, a high percentage of mortgage loans are now not backed by life assurance cover and there is a growing number of people who choose to rent rather than buy a property and who have no insurance in place to protect their payments should they fall long-term sick. So far, this issue has not become a political priority to the Government. Consider this… Why might the size of the life assurance protection gap be a concern for the Government? D2 Influences in demand for protection A number of factors can influence consumers’ demand for protection. D2A Affordability The affordability of insurance has an influence on the demand for cover. A report by Guidewire found that 10% of respondents would consider cancelling health insurance and a similar percentage would consider cancelling income protection in light of the increased cost of living (Guidewire 2022). If the cost of mortality cover falls (as it has done in recent years), the amount of cover purchased increases significantly. Swiss Re said in May 2016 (source: Swiss Re, Term & Health Watch 2016) that prices of term assurance, with and without critical illness cover, reduced by around 2% per annum over the ten year period from 2006 to 2015. Between April 2019 and April 2020, there was a 0.3% reduction in the prices of the most competitive by prices firms offering term assurance policies (source: iPipeline data included in Swiss Re Term & Health Watch 2020). Price competition for life cover continued into 2022, meaning the average of the cheapest five products, excluding low start plans, for a basket of cases was 2% lower in December 2022 compared with January 2022 (source: iPipeline data included in Swiss Re Term & Health Watch 2023). Chapter 1 1/10 R05/July 2024 Financial protection D2B The housing market The number of residential property transactions and movements in house prices can substantially affect sales of mortality protection in the UK, as life and critical illness packages are commonly sold to protect the financial commitments of homeowners. As a result, the growth in the number of people who rent rather than buy property will impact potential sales of life and critical illness cover. D2C Economic factors Income per capita of population is a very important factor affecting the demand for life assurance, as the higher the income, the greater the amount of protection required and the greater affordability of protection. Another key driver of demand is the rate of inflation in any economy. A World Bank Study in 2003 found that a percentage point increase in inflation reduced life assurance in force by 1.4%, a negative correlation which has been supported by further empirical studies. One possible explanation is that people understand that their insurance cover will become out of date and will, therefore, be more reluctant to take the trouble to take out insurance. They might also consider that costs are likely to escalate so much in the future that the amount of cover needed is too much to contemplate buying. In general, inflation tends to undermine people’s confidence in long-term financial arrangements. A simpler explanation is that people simply feel poorer and do not regard life assurance as being as important as other expenses when money is short. This was highlighted by the changes to purchases of term assurances without advice highlighted earlier. However, the same study suggested that other variables such as life expectancy, educational attainment, dependency ratios and welfare expenditure did not consistently affect the purchase of mortality cover in a variety of global markets. With the UK experiencing rates of inflation in 2022–24 that represent 20 year highs, it will be interesting to see the longer-term impact that this has on in-force protection. E Health and longevity trends The protection market has been affected by trends in improving general health and increasing longevity. E1 Health and morbidity Morbidity is defined as the relative incidence of a particular disease (while mortality concerns death). The improvement in hygiene, better health education (especially the very significant decrease in the number of smokers), more medical intervention and long-term illness management, and a greater emphasis on physical fitness have all contributed to improving mortality. This growth has been exponential in the last 60 years and has forced a rethink in insurance pricing. Considerable exposure has been given to the changing situation facing insurers and their customers. For many years, the chief concern of people looking at their insurance needs was that they might die prematurely, with the consequent shock to their family finances and commitments, especially their mortgage and loans. Although early deaths will always occur, the rapidly improving trends in mortality mean that the biggest concern facing most people is not dying too early but living too long. The strain on pension provision around the world has become enormous and has led to the demise of many final salary pension schemes. This has been exacerbated by the necessity of working beyond what we now accept as normal retirement dates in the future to provide for a longer lifespan. This change in the balance of human affairs will continue to cause upheaval in the workplace and will have very significant consequences for the protection industry. The link between mortality and morbidity is still far from clear. There is significant evidence that being in work has very positive health consequences and that being occupationally inactive can be bad for health. This has informed the political policies of the UK Government with respect to the provision of disability and incapacity benefits. What we have yet to discover is whether the strain of working five or ten years beyond traditional retirement dates will accelerate or defer the ageing process and whether new causes of morbidity will arise in an older workforce. Chapter 1 Market factors and trends in financial protection planning 1/11 Chapter 1 Consider this… Does the insurance industry have an opportunity to forge public/private partnerships with the Government? What issues might complicate this? E2 The effect of an ageing population Rising longevity will also have important consequences in our approach to time frames. Most life assurance policies are timed to finish at the same time as mortgages are paid off and relatively close to retirement. The extension of people’s working lives will push out the time horizons on retirement and may also tend to extend mortgage terms some years beyond their current expiry. Longer-term underwriting will cause challenges as insurers have to assess the ‘normal’ health profiles for older lives and prepare to write significantly longer risk-related plans. F Recent trends in life product design and pricing In recent years, the nature of employment has changed for many people. Fewer people now have long-term contracts and many more are self-employed, while others work on short-term renewable contracts or have more than one job. Most people can expect to change jobs, or even careers, before they retire. This can mean that the financial consequences of, say, a long-term disability or illness can be greater than when people worked for an employer with a very paternal approach to managing employees. In addition, many more women work now compared to the 1950s. Even though women still tend to lag behind in terms of average incomes and in the numbers holding the most senior positions, that is now changing too – supported both by more equality legislation and by evolving societal attitudes. Similarly, many more people with disabilities and long-term illnesses can now expect to work – even if that means adaptations to their work environment or pattern of working. All these factors can affect the need for protection insurance, especially as the Government alternative may offer only a very basic safety net that would leave many people significantly worse off if hit by illness or disability. Insurers now pay more attention to the nature of someone’s work when assessing their risk, along with their current and past health history. In most cases, health remains the main factor affecting risk, and one of the major changes in protection product design has arisen through the segmentation of vital health determinants – the key issues that affect mortality. Since 21 December 2012, all insurers are no longer able to charge different premium rates to males and females. Most policies available in the UK fall into the main categories outlined in this study text. However, insurers are innovative and constantly developing new solutions that either challenge existing practices or develop new or evolved solutions to meet existing or new needs. You should therefore follow developments as they arise. F1 Smoker/non-smoker products This trend began about 30 years ago in the USA with the development of ‘smoker/non- smoker’ products. The rationale behind this approach was that the health of smokers was statistically proven to be worse than non-smokers. On that basis, non-smokers should be able to buy products with substantially lower premiums. It was also consistent with public health policies and part of a general move to discouraging smoking in many Western societies. When a move of this scale takes place, it changes competitive conditions and forces revised pricing decisions on other competitors in a marketplace. As smoker/non-smoker policies started to be sold widely, it created serious anti-selection against companies who retained their aggregate pricing stance. When smokers were charged more than non-smokers by a number of companies, they naturally sought the cheaper rates that were offered by aggregate pricing offices. These offices would find that they were insuring a disproportionate Chapter 1 1/12 R05/July 2024 Financial protection number of smokers (who would exhibit worse mortality) and fewer non-smokers (who would have better mortality). As a result, virtually every company had to reprice on a smoker/non- smoker basis to avoid anti-selection and a major imbalance in their portfolio of life policies. F2 Preferred life policies A corollary of the smoker/non-smoker move was the advent of the preferred life policy. This also had its genesis in the USA, but essentially followed the principle employed by motor and household insurers of ‘cherry-picking’ risks. The preferred approach effectively reverses the underwriting process by establishing high fitness protocols and giving substantial premium discounts to applicants who can meet them, as statistics show that people with those lifestyle habits will, on average, have much lower mortality. Conversely, people who fall outside the specified category tend to pay higher premiums. Market pricing becomes highly complex if companies compete on a number of different preferred bases. The disclosure of lifestyle habits is theoretically able to streamline the underwriting process, but competitive pressures to offer new preferred discounts have led to rather bizarre and dubious categories of preferred life (e.g., ‘preferred substandard’). The UK market rapidly moved to a smoker/non-smoker approach, and though it has not explicitly embraced preferred underwriting it has started to move toward offering discounts to those who can demonstrate behaviours associated with a healthy life (such as regular gym use). As the use of technology to measure personal fitness and health becomes commonplace, insurers are likely to consider using the information to assess and price risks. This, in itself, could lead to models which are similar in approach to preferred life underwriting. Providers are likely to adopt a cautious approach given the risk that the data, such as the number of steps walked each day could be corrupted. Question 1.1 What market distortions can occur if preferred life policies are developed? F3 Effects on underwriting practices The great improvement in mortality has tempted some actuaries to factor in anticipated mortality improvements to produce extremely competitive premium rates. Often these rates have been supported by reinsurers with a very aggressive approach to mortality. They are applied to all new proposals, but companies are keenly aware that they need to underwrite their new products stringently because the premium bases generally provide them with little or no margin for error. The broad effect of this is that companies rate more lives and create different groups in their portfolio of insured lives. Lives that are ‘super-select’ pay wafer-thin premiums, while lives with moderate amounts of health concerns (e.g., overweight or chronic pain) pay higher premiums and ultimately may not benefit from the rate reductions that are theoretically available. It is also possible that a higher number of cases may be declined as underwriting standards become stricter. In January 2020, the British Insurance Brokers Association (BIBA) launched a signposting agreement (known as the Caxton House Statement) to support people with disabilities and pre-existing medical conditions. It covers life assurance, critical illness or income protection. The service, known as Find Insurance, operates across personal insurance, business protection and group risk policies. Under the agreement, participants pledge to improve access to protection by signposting consumers they cannot serve to specialist advisers and providers who can help them. Where a firm does not have an arrangement in place, BIBA will endeavour to put it in touch with another firm which may be able to help. F4 Expenses Insurance company expenses have also reduced considerably because of competitive pressures. The increasing impact of information technology has reduced administrative time and expense. The impact in the underwriting field has been especially marked where expert systems can achieve a high percentage of proposals accepted on a ‘straight-through Chapter 1 Market factors and trends in financial protection planning 1/13 Chapter 1 processing’ method where underwriting times (and evidence obtained) are substantially curtailed. (This percentage can often be upwards of 50% of proposals.) F5 Commoditisation In the UK, market price pressures have been increased by the existence of online portals that show comparative premium rates. If an applicant is considering term insurance, this is close to a commodity purchase and, clearly, price will be the determining feature. Insurance companies therefore try very hard to be on the first or second page of price-comparison sites because it is very unlikely that applicants would look much further for a basic commodity product. Pricing is far more complex in critical illness insurance and income protection, where the value of advice is very significant because product types and conditions vary and definitions may be quite different. As a result of the COVID-19 pandemic, for instance, a number of companies temporarily withdrew products, typically those income protection policies where benefit was payable after a short deferred period. Pricing will need to take account of the implications of ‘long COVID’ which could result in longer recovery periods and, consequently, claim payment periods until the claimant is able to return to work. Advisers may also have experience of the underwriting (and claims) approach of particular insurers and may know the quality of their administration and the professionalism of their service. These determinants help ensure that price is not the only criterion when selecting ‘living benefit’ policies. G The value of advice on protection Most protection providers offer their products both through financial advisers and directly to consumers. Sales of protection products are more likely to be achieved where there is face-to-face interaction with an adviser. The adviser can carry out a proper needs analysis and arrange the appropriate features and levels of cover and, where relevant, set up the appropriate trust to ensure the policy proceeds are paid promptly to the right person. The more complex the range of cover an individual applies for, however, the longer the completion process is likely to be. As a result, underwriting problems and delays may frustrate the potential purchaser, and the eventual costs may turn out be much higher than originally projected. At the same time, it has become much easier to buy protection without advice. This has led to a more standardised and simplified process which tends to increase the likelihood of quick completion. There are several problems with this approach: The difficulty of enthusing potential customers about the need for protection without heavy upfront marketing costs. The compliance and underwriting issues that even a simple process may generate can make a simple straight-through process online hard to achieve in practice. The concern is that without advice, clients will buy the wrong types and levels of cover or may not set up an appropriate trust. As a result, persistency may be poor as policyholders review expenditure in difficult times or compare costs with other products bought in other ways. Refer to See The protection gap and the demand for financial protection on page 1/9 The UK protection insurance industry is still substantial in international terms, but it is clear that there is huge potential for growth. This opportunity is compromised by a range of challenges that have so far led to a significant and increasing protection gap. Chapter 1 1/14 R05/July 2024 Financial protection Key points The main ideas covered by this chapter can be summarised as follows: The role of insurance in mitigating personal financial risk The most common way to categorise different types of risk is according to the severity of their impact and the likelihood that they will occur. Pooling the risk through insurance is the most effective way of financing the payment of benefits to the relatively few people who are affected by certain kinds of risk. Consumer attitudes and behaviour in relation to protection needs planning Lives have become less predictable and age is no longer such a reliable trigger for taking particular actions. Attitudes to protection assurance Changes in society have meant that attitudes to insurance have changed. The UK has a highly developed welfare state, which may lead some people to believe that insurance is not needed as ‘the State will always look after you’. Technological developments have had a major impact on the purchase, delivery and process of insurance. The range of options for other ways of spending income has increased. The main drivers of sales of life assurance products Individually, the demand for life assurance is driven by the income, age and life stage of the person. At the aggregate level, it is driven by affordability, the housing market and income per capita. Health and longevity trends The protection market has been affected by trends in improved general health and increasing longevity. Recent trends in life product design and pricing There have been recent innovations in life product design including the introduction of differential rates based on health. The value of advice on protection Most protection providers offer products both through financial advisers and directly to consumers. Sales of protection products are more likely to be achieved where there is face-to-face interaction with an adviser. It has become much easier to buy protection without advice, leading to a more standardised and simplified process, which tends to increase the likelihood of quick completion but is not without its problems. Chapter 1 Market factors and trends in financial protection planning 1/15 Chapter 1 Question answers 1.1 If a series of different preferred life regimes emerge, it can become difficult to get a basic indication of the likely cost of cover and will be very hard to choose the best deal in terms of the quality of the products on offer. Advisers will also struggle to decide the fairest way to advise a customer because of the complexity of the marketplace. Chapter 1 1/16 R05/July 2024 Financial protection Self-test questions 1. Why do insurers need to be aware of changing social patterns? 2. How does the distribution method used to access customers affect protection product features? 3. What does the life assurance protection gap signify? 4. How can insurers affect public attitudes to taking out protection insurance? 5. In what ways is the presence of the welfare state a hindrance and a help to sales of protection? 6. Which factors impact on sales of mortality protection? 7. What is preferred life assurance? 8. Does preferred life occur in any context in the UK market? 9. How can online portals lead to commoditisation of term life assurance? You will find the answers at the back of the book  2 Chapter 2 Financial protection needs Contents Syllabus learning outcomes Introduction A Main types of financial protection cover 2.1 B Areas of need for protection 2.1 C Divorce and relationship breakdown 2.2 D Relationship between insurance and assets and liabilities 2.2 E Sources of financial protection 2.3 Key points Question answers Self-test questions Learning objectives After studying this chapter, you should be able to: identify the main types of financial protection cover; identify the main areas of need for protection; outline the impact of divorce on protection needs; explain the relationship between insurance and assets and liabilities; and outline the sources of financial protection.  2/2 R05/July 2024 Financial protection Introduction This chapter outlines the need for protection planning, the main types of financial protection, Chapter 2 why they are needed and how the benefits provided by the State impact on the different covers available. Key terms This chapter features explanations of the following ideas: Accident, sickness Business protection Chargeable lifetime Critical illness and unemployment transfers (CLTs) insurance (ASU) Divorce Employee benefits Health cash plans Income protection Inheritance tax