Income protection, also known as permanent health insurance or long term disability insurance, has long been regarded as a ‘Cinderella’ product in the UK.
Just like the fairy tale character, it has clear attributes, yet is seemingly forever awaiting the attentions of a handsome prince before it can go to the ball.
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It has come close in the past. A generation ago, the UK’s life insurance market was led by direct salesforce-led insurers. In the mid 1980s the largest of those launched their own versions of this product and made it work to the extent that the biggest player, Allied Dunbar, which is now part of the global Zurich brand, wrote more income protection business in one year than its next two competitors put together.
They did so, partly through excellent training and saturation marketing to the distributors, and partly through a combination of attractive product features and price.
However, the combination of a worsening claims experience, the inevitable price rises that followed and the demise of the big salesforces saw such products fall away within just a few years.
As a result, income protection fell back to its previous position. The accepted view in those product silo days was that you never appointed your best actuary or your best marketer to manage the plan. It was a plodder of a plan and that was how you managed it.
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By GlobalDataPartly that reflected the nature of income protection. It was simple in theory, but had become far too complex in practice.
To sell it, brokers needed to be experienced enough to minimise the difficulties in getting an application accepted (tougher underwriting, long medical information delays and more ratings) and avoid the easy to make mistakes of getting a customer’s occupation class wrong, or trying to get a benefit level insured that the insurer believed was too high.
According to the Association of British Insurers (ABI), by last year, 2013, just 172,000 new individual income protection plans were sold in the UK – down from 185,000 in 2000 – and around 1.3 million policies were in force.
Group income protection schemes added a further two million lives insured, according to Swiss Re. For comparison, the UK’s workforce at the end of 2013 was 30.19 million and there were almost five million businesses in existence, according to the Office for National Statistics.
In other words, only around one in ten workers and a minority of employers had any kind of income protection cover.
The UK is known for having a generous welfare system but, for more than a decade, the state has been slowly moving the responsibility for having a meaningful safety net more onto employers and to workers themselves.
Nothing too severe – the UK is not going to give up the Welfare State system it so proudly established immediately after World War 2 – but it is making it harder to claim benefits and the sums payable are now growing much more slowly than before.
The basic Employment and Support Allowance, for example, is now just £108.15 a week for single people, although means-tested benefits can boost that, albeit never to generous levels. Again, for comparison, average total weekly pay for UK employees in August 2014 was £479 a week.
That in itself should encourage more people to look at taking out income protection, but it has not. The industry has faced a series of obstacles, some of which were self-induced:
– Consumers don’t understand the product, and don’t trust insurers to pay out when a claim is made. Research by broker Drewberry Insurance in 2013 found that consumers believed only 50% of claims were paid.
– Many intermediaries are in the vicious circle of not selling many plans, so they find it harder to sell and easier to run up against technical problems when they do.
– Sales are remunerated by commission from the insurer, but income protection is seen as a relatively long sale for a relatively small reward.
– Many consumers think their employer will carry on paying them indefinitely if they cannot work. Most will not.
– Many consumers think the state is much more generous than it actually is.
– Insurers seek a report from the customer’s doctor in most cases and may also require a raft of information before being prepared to go on risk. Paper application forms can run to 30 or 40 pages.
– Claims are effectively re-underwritten in order to ensure the customer still has a financial incentive to return to work.
But, after years of static growth at best, there are signs that things could be changing.
– The ABI and group risk trade body, GRiD, now publish claims data. They show that 91% of individual and 82% of group claims were paid in 2013.
– More insurers are now offering plans with a shorter, up to five years, benefit period. As well as being cheaper, underwriting is less strict too and tele-underwriting and intelligent quote systems are speeding up the process.
– Some policies no longer require financial checks when a claim is made – so minimising the risk of claims not being paid in full.
– Organisations such as the Income Protection Task Force, as well as some insurers directly, are promoting what the product can do, and embarking on better training for brokers. See www.iptf.co.uk.
– In October 2014, the ABI published a policy paper suggesting that income protection should be at the heart of the government’s continuing welfare reforms. Getting politicians and policy makers to understand what the product can deliver is important, the ABI believes.
– In November, a new Seven Families initiative, with cross-industry support and financing and managed by leading disability charities, started an innovative multi-media campaign to show the value of income protection. In effect, seven families have been given a second chance – being put in the same position they would have been had they taken out suitable income protection cover. See www.7families.co.uk for more.
Income protection was the child of Victorian British welfare reformers in the late 19th century. A total of 120 years ago a statue to its inventor – clothing manufacturer and Member of Parliament George Holloway – was erected in Stroud, Gloucestershire.
But for years it has under-achieved, despite its obvious potential. Britain’s Cinderella product must now be hoping that a more enlightened industry, coupled with a rising underlying need, is starting to behave more like the Prince Charming those workers who become ill or disabled need it to be. After more than a century, time will indeed tell…
www.protectionreview.co.uk
