Why are Sales of Income Protection Insurance Growing?

Introduction

The income protection insurance sector has demonstrated robust growth in recent years,as evidenced by the consistent increase in Annual Premium Equivalent (APE) figures. This sustained growth trajectory signifies a marked shift in consumer behaviour and market dynamics within the income protection sector. 

Gen re’s Protection Pulse - a business data sharing platform has revealed that the Income Protection APE, which stood at £58 million in 2020, is expected to reach almost double that figure in 2024.

In 2021, the APE stood at an impressive £66 million, representing a 13.8% year-on-year growth. This growth accelerated in 2022, with the Income Protection APE reaching £80 million, a substantial 21.2% increase from the previous year.

The most dramatic growth was observed in 2023, with the Income Protection APE soaring to £99 million, marking an impressive 23.8% year-on-year increase. Looking ahead, projections for 2024 suggest yet more growth, with an estimated Income Protection APE of £108 million - a 9.1% increase from 2023.

To gain deeper insights into the driving forces behind this trend, we conducted a comprehensive study of over 800 income protection policyholders in the UK.

The primary objective of this research was to elucidate the key motivations underpinning the increasing adoption of income protection products over the last 2 years. By analysing demographic data, economic influences, and health-related concerns, we aimed to construct a nuanced understanding of the factors propelling market growth.

This report presents our findings, offering a detailed examination of policyholder profiles, decision-making factors, and emerging trends in the reasons behind the increased adoption of income protection insurance policies. The insights derived from this analysis will serve to inform strategic decision-making, product development initiatives, and targeted marketing efforts within the industry.

As we navigate through the complexities of an evolving financial services sector, characterised by technological advancements and shifting consumer preferences, these insights will prove invaluable in aligning business strategies with market demands and optimising growth opportunities in the income protection space.

Demographic Analysis

Our demographic analysis reveals a significant shift in the age distribution of income protection policyholders, particularly when comparing recent purchasers (those who bought policies in the last 2 years) to those who purchased policies more than 2 years ago.

Among those who became policyholders in the last 2 years, we observe a strong uptake of younger age groups. The 25-34 age bracket dominates this category, accounting for 52% of policyholders. This is followed by the 35-44 age group at 30%. Interestingly, the under-25 category, while small at 4.2%, is represented in recent purchases but not in those with policies bought 2+ years ago, indicating a growing interest among very young adults.

In contrast, the dominant cohort for those who purchased 2+ years ago is the 34-44 group at 41%. There's also a significant presence of the 45-54 age group at 24%, almost double the figure of those who purchased less than 2 years ago. The 55-64 and 65+ age groups, while still minority segments, have a stronger presence in policies bought 2+ years ago. 

This shift towards younger policyholders in recent years is one of the key findings of our analysis. It suggests that younger adults are becoming increasingly aware of the importance of their need to have better financial options and view income protection insurance as a solution to this and are taking proactive steps to secure their financial future. This trend could be driven by factors such as increased financial literacy among younger generations, changing work environments with less job security, and the impact of recent global events on perceptions of financial risk.

Influencing Factors Leading to an Uptake in Income Protection Insurance

Economic Conditions Influence

Our research indicates that economic conditions and global health concerns have had a significant impact on the decision to purchase income protection insurance, with a notably stronger influence on purchasers from the last 2 years, compared to those who took out a policy more than 2 years ago.

For policyholders who purchased insurance in the last 2 years, economic conditions were a major factor for 18% and a minor factor for 29.0%, totalling 47% who were influenced by economic considerations. In contrast, only 15% of policyholders of 2+ years cited economic conditions as an influencing factor.

This significant increase in economic influence can be attributed to several recent events and trends:

1. The 2022 Mini-Budget Impact: This event had far-reaching consequences on the UK economy. The value of sterling fell by 4% against the US dollar and 2% against the euro, increasing the cost of imports and international travel. Gilt yields rose sharply, indicating higher government borrowing costs. This led to a surge in mortgage rates, with Londoners facing an average increase of £7,500 in annual payments. Additionally, pension funds experienced a staggering loss of £425 billion in assets due to bond market volatility.

2. Economic Instability: The UK has faced periods of economic uncertainty, characterised by increased government debt due to fiscal expansion and the need for the Bank of England to intervene to stabilise financial markets. In response to these challenges, new legislation was introduced to empower the Office for Budget Responsibility (OBR) to prevent future fiscal shocks, highlighting the severity of the economic situation.

3. Inflation: The UK has experienced high inflation rates, peaking at 10.1%. This rapid increase has created a cost of living crisis, eroded purchasing power and increased financial insecurity for many households, likely prompting more individuals to seek financial protection.

Global Health Conditions Influence

The influence of global health conditions on the decision to purchase income protection has also increased significantly. Among <2 purchasers, 33% cited health concerns as an influencing factor compared to only 14% of >2 year policyholders.

This increased concern about health can be attributed to several factors:

1. Ongoing Pandemic Concerns: The COVID-19 pandemic has had a lasting impact on public perception of health risks. Coupled with the emergence of new variants and other health threats such as monkeypox, there is a heightened awareness of the potential for unexpected health-related disruptions to income.

2. NHS Crisis: The pandemic has exacerbated existing challenges within the National Health Service. These include serious staffing shortages, significant patient care backlogs, and delayed treatments and diagnostics. Underfunding issues, compounded by inflation and salary stagnation, have led to the migration of both junior and senior staff overseas and declining staff morale. These factors have likely increased public concern about the reliability and accessibility of healthcare services.

3. Healthcare System Vulnerability: There is growing uncertainty about the NHS's ability to overcome its current challenges, leading to increased awareness of potential gaps in public healthcare provision. This realisation may be driving more individuals to seek additional financial protection to cover potential healthcare costs or income loss due to illness.

The heightened influence of both economic and health factors on recent purchasers of income protection insurance reflects a growing awareness of financial vulnerabilities in the face of economic instability and health uncertainties. This trend suggests that income protection is increasingly being viewed as a crucial component of financial planning, particularly among younger demographics who are showing greater interest in such products.

Household Status Impact

Our analysis reveals that family status plays a role in the decision to purchase income protection insurance, with noticeable differences between those with and without children.

People without children were more influenced by economic conditions and global health conditions when purchasing income protection insurance. 

31% of parents considered economic conditions as a factor, compared to 34% of non-parents; while 21% of parents considered global health conditions as a factor, compared to 24% of non-parents. The observed pattern may suggest a divergence in motivations for purchasing income protection between individuals with and without children. Those with children are likely more influenced by personal, family-centric factors. In contrast, individuals without children seem more responsive to external stimuli beyond their immediate domestic sphere. This dichotomy could imply that parenthood fosters a more inward-focused perspective, where the immediate family unit becomes the central consideration in financial decision-making.

Conclusions

The income protection market shows strong growth potential, driven by increasing awareness among younger generations and ongoing global uncertainties. The shift towards younger policyholders, coupled with the growing influence of economic and health factors, suggests a changing landscape in which income protection is increasingly viewed as an essential component of financial planning.

The integration of income protection into super-apps presents a significant opportunity to capture market share and meet evolving consumer preferences. This integration aligns well with the digital-first approach of younger consumers and offers the potential for more personalised and accessible insurance products.

Looking ahead, we anticipate continued growth in the income protection sector, with a particular emphasis on digital-first solutions and products tailored to the needs of younger demographics. The ongoing economic uncertainties and heightened health awareness are likely to sustain interest in income protection products in the near to medium term.