Income Protection – What’s Happening?

Barnett Waddingham hosted a dinner at its St Paul's office for clients and guests on 21 February to discuss the market for Income Protection policies. It must be said that the concept of discussing consumers' needs and how the insurance industry can meet them was something of a welcome novelty for someone in a profession that is frequently engulfed by a potential transition to a mythical new regulatory regime!

The discussion was opened by Peter Le Beau co-chair of the Income Protection Task Force whose stated mission is “… to make sure that as many people as possible will continue to receive a regular income when they can’t work because of illness or injury.” Peter is one of the best known consultants in life and health protection insurance. He worked at Swiss Re for 20 years before setting up his own independent consultancy. He founded the Protection Review which provides expert commentary on the life and health protection markets, including products, markets, distribution methods and key issues and innovations within them.

The discussion was not entirely comfortable for the author of this blog: sickness is something which is truly scary. Death is something of a non-issue for me: I have no dependants and I won’t be around to worry about the financial consequences. However the question of how I would pay the bills if I was unable to work is unanswered and is worrying.

Peter rammed home the point about the vulnerability of the population: his research is that 15 million people who might need sickness protection don’t have it. State Incapacity Benefits vary but are all the wrong side of £100 per week. The consequences of sickness can be severe and the likelihood of it occurring is not insignificant: at any one time 2.2 million people of working age are off work for six months or more through sickness or disability.

Attempting to address this stark need is that Cinderella of products: Income Protection (IP), which pays a regular income to policyholders whilst they are unable to work as a result of illness or incapacity. The market penetration for IP has always been disappointingly low and sales have been flat in recent years.

Why is this?

Low public awareness

People do not realise how vulnerable they are to sickness. Peter highlighted that few people have any idea what level of sick pay their employer will provide – this includes the author of this blog. One suggestion was that employers should produce an annual benefit statement for sick pay in the same way that they do for employees’ pensions.

“The State will provide”

This is a cherished British belief: the development of the Welfare State has been one of the most important and enduring achievements in British national life. However it might be worth considering whether the faith in the state is well placed. Demographic and economic strains have inevitably meant that government cannot provide adequate long-term income replacement as a state benefit: the level of Incapacity Benefit does not look especially comfortable.

Again, are people any more knowledgeable about the level of State benefits than they are about their occupational sick pay?

Mistrust of the industry

Put simply, customers do not trust insurance companies. This leads to people being reluctant to take out a policy in case their claim is not paid when they need it.

Claim acceptance rates are actually quite high for IP. However companies are often reluctant to publish statistics, or testimonials about claims being paid promptly, for fear it will encourage fraudulent claims.

Payment protection insurance (PPI)

There is confusion in the public mind between IP and PPI: the names are similar and both products pay out when the policyholder is ill (although PPI also pays out in other circumstances e.g. if the policyholder becomes unemployed). The reputation of IP has suffered from the mis-selling of PPI. The mistrust caused by PPI is being exacerbated by the activities of claims companies, some of who are behaving little better than the banks did in the first place.

Critical illness

IFAs often prefer to sell critical illness (CI) policies. When asked about protecting against sickness their response is frequently that they will take out a CI policy and use the lump sum it pays out to purchase an impaired life annuity. This approach has a certain attractiveness about it: a lump sum gives the insured more flexibility about how it is used and CI claims definitions are thought to be less subjective than IP’s so that claims settlements are assumed to be more certain.

However advisers should be aware of the pitfalls of this approach: IP and CI are not designed to protect against the same risk and regular income versus lump sum is not the only difference between them. CI will pay out upon diagnosis of specified conditions, normally something very serious. It is entirely possible to incapacitated from conditions that CI does not cover, particularly musculoskeletal disorders (bad backs).

Underwriting

IP tends to use non-standard terms more than most products and few policyholders are accepted on standard terms. This makes it very hard for advisers to estimate the premiums before underwriting and actual premiums often turn out to be much higher than the projections. Extensive underwriting results in delays (which in themselves put customers off) and this makes shopping around for the best price a very time-consuming process given that the initial projections cannot be relied upon.

How to market the product?

I accept that my description of the vulnerable population was blunt. This was intended to convey my own fears and not promote a product. However this does illustrate a problem: the need for IP stems from a scary set of circumstances.

In order to persuade more people to fill the “protection gap” they will need to be convinced that there is a gap to be filled. But educating people about their needs will probably lead to them becoming somewhat scared. Insurers are not impartial here, they make more profit if they sell more products, and they are vulnerable to accusations that they are scaring people into purchasing IP, or are playing on people’s fears.

Solutions

Peter put forward several ideas for the future including:

• Adviser education: making sure IFAs understand the needs addressed by IP and its unique selling points.
• Making it easier to buy, including online.
• Making the product simpler and easier to understand.
• A greater focus on consumer vulnerability: including sick pay statements.
• Increased disclosure on claim payment rates and case studies to help rebuild consumer trust.