Approaching an economic turning point

Any financial professional will want to understand the economic context in which they’re operating. And advisers are often the experts when it comes to considering the financial challenges that your clients and our customers face.

In recent months and years, we’ve been having an ongoing conversation with you – through our ongoing research and December 2022 white paper – about the cost-of-living crisis, your experience of what is happening and to share ideas for helping clients cope.

Rate of inflation finally on target prompting a cut in the base rate

It seems we’re finally getting to the end of a period of rapidly rising prices, with the rate of inflation having stayed higher for longer than many experts had anticipated. We do appear to be entering a new phase, at least without very high price rises with base rate rises to match, as we saw in the last couple of years.

What is significant is that the UK did hit the Bank of England’s inflation target three months’ ago. The Consumer Prices Index covering the 12 months to June was 2 per cent having first hit the target the previous month.

That gave the Bank of England Monetary Policy Committee (MPC) the leeway to cut rates,  In its meeting on August 1.  The MPC voted to cut the base rate from 5.25% to 5%. The vote was very close with 5 members including the Bank of England Governor voting for a cut but with 4 members voting to keep rates on hold.

Looking at the minutes of the decision, the MPC suggested that CPI inflation would actually increase again to 2.75% before the end of the year, before falling back again to below the 2% target in 2025. (The MPC view seems to be been proved right as CPI rose to 2.2% in the 12 months to July, in the Office for National Statistics’ mid August inflation update.)

This small rise combined with the closeness of the base rate decision certainly doesn’t suggest rapid cuts in base rates in coming months but the change in direction does seem to be accompanied by a shift in sentiment suggesting we are entering the end game in terms of very high prices.

Still mortgage pain for a chunk of the market

Rate setting is not the Bank’s only task. It’s also meant to identify risks. Its Financial Stability report issued towards the end of June made an observation of significant relevance for mortgage brokers and financial advisers. It found that more than 3 million people are still paying mortgage interest rates of less than 3% with deals dating before 2021, i.e. before the rate rises. The Bank says the majority of fixed-rate deals will finish before the end of 2026. For the typical household, monthly mortgage repayments are forecast to increase by about £180, or about 28%. However, again according to the Bank, for around 400,000 households, monthly payments could jump by 50% or more.

This underlines what advisers already know – that every client faces a different economic situation often with their own personal or household experience of inflation.

We don’t want to take every bit of good news, both on inflation and on the base rate, and somehow assume dark clouds just over the horizon. For example, while we know that a falling inflation rate doesn’t mean falling prices generally, there are some important exceptions. There have been some actual reductions in prices because energy prices, another big chunk of costs for families, have dropped. Gas and electricity prices have reduced by an average 7% from the start of July as the BBC reports with a similar picture in Northern Ireland.

Impact on the protection market

We can cross-reference this news with some things we know about the protection market. We know that it has been a difficult start to the year, across the market. According to the Gen Re Protection Pulse report, Term and Critical Illness business were both down 8% in the first quarter of 2024 compared with 2023. However, Income Protection was up 8%.

Likewise, the Swiss Re Term & Health Watch showed sales of new long-term individual protection policies in 2023 decreasing by 5.5%, though again Income Protection brought better news increasing 10%. In 2022 overall sales fell by 7.8% so cumulatively the protection sector as a whole does face a challenge. But this contraction is perhaps not surprising given the close link between the mortgage market and protection.

The key point to make here is the continued relevance of protection products. Within the current economic context, the underlying nature of risk to people’s lives remains a key driver of demand for our products. People still need to protect their lifestyles, mortgages, and families. And if anything, their need is greater, when their financial resilience decreases. It’s a delicate balancing act between increased need alongside decreased household budgets.

It’s been interesting to observe how this has played out in the changing attitudes and mindsets among consumers first in the pandemic then during the cost-of-living crisis. Following the pandemic, advisers told us that making the case for protection insurance got easier[i], though inevitably big price rises then saw more clients focused on costs. This is not surprising, but it is important to be aware of this and consider how attitudes may change again as the economic context develops. It may be an opportune time to consider ways to foster greater demand as the economic environment improves.

Offering options for clients

We suggest that a somewhat better outlook economically should mean some consumers begin to feel a little more in control and that could be underpinned by help with ongoing budgeting – the importance of which, many advisers tell us – can’t be overestimated. Offering product flexibility and choice should, we hope, add to this increased sense of control.

We know Income Protection is growing in popularity and our own product, launched last year, offers a choice between short-term and long-term cover as well as the length of deferred period. This means clients can effectively find cover at the right cost for them.  Our product also offers flexibility if clients take an unpaid work break or change jobs. We also now offer a Life Essentials product for the more cost-conscious clients. And for those who are on escalating policies with Guardian, they can defer the annual escalations for 2 years without losing this policy feature.

Your views

The general picture is improving but some clients, such as those still to come off fixed rates as identified by the BoE, could face one last pinch in terms of outgoings. We continue to think of the best ways to support you with this going forward. Our emphasis right now is on providing choice – because we think choice gives everyone more control. And that control is important at a time when there are some reasons for optimism, but also continued realism. We’d love to hear your thoughts. Our BDMs are always happy to hear from you or drop us an email through the ‘Contact us’ form on the website.

Nischal’s article was published in Money Marketing on 5 September 2024. 

Source

[i] All results from Guardian adviser surveys throughout 2020. Survey 1 to 421 advisers from 14 April to 30 June. Survey 2 to 316 advisers from 19 October until 26 October 2020.