A report from a global reinsurance specialist into the UK market has revealed that Britain could be underinsured by over £2 trillion. With the continued demographic changes meaning that we are living longer and will have to contribute to our social care in old age, this is a very worrying development.
The Swiss Re Term and Health Watch 2012 shows a growing gap between the cover that’s needed and what is actually in place and this looks like it is becoming a long term problem in the UK.
The effect on the life insurance market of a population that generally lives longer is that the price of cover has fallen and yet so has sales. Analysts believe that greater longevity has given people more optimism about their own prospects, however the whole point of life insurance is protection from accidents that prevent people from living to old age.
Single parents, couples with children and those aged 35 and under are least likely to have life insurance, which is unsurprising news. However, single parents and couples with children are also the group that needs lift insurance more than any other to cover obligations and provide an inheritance in case of catastrophe.
The Swiss Re report concludes that the protection industry is faced with the challenge of better communicating to consumers how to alleviate the financial burden placed on families and dependants in difficult times. Too often the selling of life insurance can put potential customers off.
A healthy man, aged 35 and who does not smoke will pay approximately £2 a week for £100,000 of life cover lasting until he is 65. Yet sales of new term assurance policies were down 3.4% last year, with 1.488 million plans sold.
And sales of income protection plans – which provide an income if the policyholder is unable to work – fell by 0.2% to 110,472 policies. The gap for income protection cover has increased by 46% over the past ten years.
For life insurance, the gap (the shortfall between what Swiss Re says is needed and what is in place) is now £2.4 trillion, which is 20% up compared with ten years ago.
However, sales of critical illness and whole of life insurance last year were higher. In 2011, there was a 3.1% increase in critical illness sales and a 7.9% rise in whole of life sales. 551,382 critical illness policies and 400,682 whole of life plans were sold last year.
Critical illness insurance pays out on the diagnosis of a serious medical condition. The report says that the increase in sales of these plans could be down to “positive messages” about the percentage of claims that are paid out on critical illness policies which improve consumer confidence in these plans.
Whole of life plans are sold mainly to elderly people for use in estate planning or for funerals. They are a combination of life insurance with a small investment element and have been criticised for their regular reviewing of premiums charged and the sums assured.
The future of the life insurance market in the UK requires that firms are more open, honest and clear about what their products provide. However, consumers also need to be realistic about what they need and how much they are willing to pay for it.