The Quiet Revolution

There is absolutely zero doubt that the UK and our valued clients are in the midst of a cost-of-living crisis, facing soaring energy costs and a serious bout of inflation.

We can, of course, look to the official figures – the Consumer Prices Index – which is now at 9% in the 12 months to April this year. The Bank of England, which is tasked with taming inflation to a target of 2%¹, now believes it could rise to 10%² this year.

For some people, this level of inflation will be a new experience in their adult lives. Some younger mortgage clients will need to be prepared for the impact on interest rates. Indeed, for the protection sector, apart from a relatively short spate of price rises after the financial crisis, this environment has not really been seen for many decades.

Understanding your clients’ priorities in this environment

For advisers, it pays to understand what kind of clients you have and what kind of inflation they face. The Office for National Statistics does an excellent deep dive into the drivers of inflation, alongside ongoing surveys of individual and business opinion. The latest update was published on 23^rd March³.

In the most recent responses to the Opinions and Lifestyle Survey, 81% of the public reported that their cost of living had increased in the previous seven days with 92% reporting an increase in the price of food shopping, 80% an increase in gas or electricity bills and 76% an increase in the price of fuel.

19% of people say their rent or mortgage payments are rising. More than 50% say they are cutting down on non-essentials. For advisers, this probably means that some of their clients and prospective clients will want to talk about how best to cut back. Within these statistics, unfortunately some families may be in financial distress.

How it impacts the protection sector

We see three main risks from a protection industry perspective. The first is that some clients may decide that their existing premiums are simply not affordable. They may stop paying premiums and their policies may lapse; or they could reduce their cover and become underinsured. Neither is a good outcome.

The second risk is that advisers and mortgage intermediaries find they meet more resistance to spend money on protection, even for clients at key life stages. The protection conversation may be a little more difficult this year, so we need to think about the fundamentals of those conversations.

The third risk is that on level terms, people may find inflation eats into the value of their cover, leaving them underinsured.

Let’s take each of these risks in turn to understand how we can mitigate. First let’s think about the risk posed by existing customers cancelling or reducing cover. If clients are worried about managing costs and outgoings, then in some circumstances the industry can help, given how policies and premiums are structured.

For example, for clients who are on escalating policies, who’ve chosen to link their sum assured to inflationary increases by paying an associated premium increase, with some insurers it’s possible to defer the annual escalations for up to 2 years without losing this policy feature.

This could help customers mitigate rising prices, but still retain much of their protection. We offer this feature at Guardian, for up to 2 consecutive years. If a client defers for a third year, then we move them on to level cover for the rest of the life of the policy. In this scenario, the result is that the client does have a little less cover, but fundamentally still has a decent amount of protection in place.

That brings us to the next important point and takes us to the heart of why we want to cover clients. Everyone in our sector knows that a reasonable level of cover is much better than none at all.

For me, this is the key counter-argument to the second risk. In a cost-of-living crisis, the last thing a client wants for themselves or their family, is to see a personal financial crisis due to illness or bereavement, exacerbate an already tough situation.

This concept will apply in different ways to different customer types. For instance, a young family looking to cover their mortgage costs may want to do that as cost effectively as possible. However, someone else may be looking to keep their families protected as comprehensively as possible. It all depends on their priorities.

Which takes us to the third risk – the risk of inflation eroding the value of cover. Policies are available with an associated RPI (Retail Prices Index) increase, to ensure the real value of the cover remains over time. At Guardian, clients with level cover policies can turn on this escalation to protect the value of their cover from inflation.

We don’t want to be too gloomy – this environment is also an important opportunity for advisers to highlight the value of protection

This sharp increase in the cost of living is actually an opportunity for advisers to talk with their clients about the value of protection. Far from being a 'discretionary' spend item, protection – whether it's income protection or protection against the financial impact of death and illness – becomes even more important when budgets are tight and finances are under pressure.

We believe intermediaries are well placed to understand their clients’ circumstances. Something we at Guardian want to do is to encourage conversations about how best to deal with this environment and help clients budget, but without losing the protection they need. The case for protection is a strong one in any economic context; we all need to do our bit to get that message across.

A version of this article first appeared in Health and Protection magazine: https://healthcareandprotection.com/winning-the-argument-for-protection-in-a-time-of-rising- living-costs-singh/

Inflation figures are correct at time of going to print.