Income underpins all of life’s financial plans from raising a family and paying the mortgage through to saving for retirement. But, while income protection enables someone to safeguard this key component, it has so far failed to appeal to consumers.
Although figures from Swiss Re’s Term and Health Watch 2013 show that sales of individual income protection grew by 8.7 per cent last year, the number of people with cover, either through an individual or a group policy, remains low, with estimates suggesting the penetration rate is only somewhere between 8 and 9 per cent. Furthermore, developments such as Unum’s decision to stop selling its individual product in March 2012 indicate the sorry state of the market.
There are many reasons for the public’s lack of appetite for income protection. As well as the commonly held beliefs that a long-term absence is unlikely to happen to them or, that if it does, their employer will take care of them financially, Roger Edwards, managing director of Roger Edwards Marketing, says the industry must also take some of the blame. He explains: “Insurers have had to make the product increasingly complex to compete but it is this complexity that is causing the market to decline. The industry has to move away from this if it wants to win consumers’ confidence.”
Simplifying eligibility
The latest product developments from Bright Grey and Aviva demonstrate that there is interest in taking this step. In mid-October Bright Grey launched a new product designed to make it easier for new customers to claim by enabling more people to have own occupation cover.
Rather than basing a claim on the individual’s ability to perform work tasks, the plan offers two income protection definitions – own occupation throughout the term and, for those unable to get this definition, own occupation for one year followed by an assessment against seven serious illnesses including cancer and terminal illness. If the policyholder fails to meet these definitions, their ability to work will be assessed against nine everyday tasks such as walking, sitting and getting in and out of a car. If they are unable to complete at least three of these, their benefit payment will continue.
While some people will need to fall back on this three-pronged approach, based on a sample of previous applicants, Bright Grey estimates that 95 per cent of people will qualify for the most generous own occupation definition. Among the occupations that will now be covered are tractor drivers, welders and industrial plant drivers.
This drive was taken a step further later in the month when Aviva announced that it would write all individual policies on an own occupation basis. This definition will apply throughout the life of the policy and the duration of any claim.
Taking this step has enabled an additional 90 occupations to be covered under its own occupation definition. Among those that now qualify are postal delivery people, fitness instructors and music teachers. Additionally, it has also been able to extend it to people who work less than 16 hours a week.
Consumer benefits
These moves will help to dispel some of the negative media coverage around the more ambiguous definitions, such as any occupation and activities of daily living, and help to gain consumer confidence. Ron Wheatcroft, technical manager at Swiss Re, adds: “It is a positive step. By removing all the debate around whether someone is suited to another occupation or not it gives consumers a benefit they can relate to. I expect to see more insurers move to only using the own occupation definition, especially through the intermediary channel.”
Indeed, while Bright Grey and Aviva have grabbed all the attention with their increased use of the own occupation definition, other insurers have been writing business on this basis for many years. This is particularly the case with the friendly societies that offer income protection. For example Exeter Family Friendly Society uses own occupation across its suite of income protection products.
There is also adviser support for a move to an own occupation definition. Peter Chadborn, director and adviser at Plan Money, says that the generosity of an own occupation definition means that an adviser worth his or her salt would always look for this form of cover. As a result, as more insurers move to own occupation only, those only prepared to offer the less generous definitions will struggle to compete.
Cover gaps
But, while increasing the numbers underwritten on an own occupation basis is a positive move for consumers, there is a potential downside. Mr Chadborn fears it could create an insurance underclass. “There have always been five or six extreme occupations such as astronaut and bomb disposal expert that could not get cover but, with a more generous occupation definition, this list could grow.”
To illustrate this, on Bright Grey’s new product, occupations including politicians, dancers and magicians, which would have been offered cover in the past, will now be declined. Although it might be possible to obtain cover from another insurer on a less generous basis, as more insurers move to own occupation only it could become more difficult to find cover for a growing number of people.
As well as being an issue for some of the higher risk occupations this could also create some real difficulties for other groups too. Peter Le Beau, managing director of Le Beau Visage and co-chair of the Income Protection Task Force, explains: “If you are covering a housewife or househusband it can be difficult to show they are unable to work without looking at activities of daily living. It is good to have a simple approach but it is not always easy to achieve this.”
More simplification
Further, while moving to own occupation only may help to gain consumers’ trust, few expect it to result in the level of growth the market would like to see. Edwards says that while other complexities are in place, it remains a difficult sale. “It should be top of an adviser’s recommendations but it will often come third behind life assurance and critical illness insurance as it cannot be explained as easily,” he explains. “Product features such as deferred periods and financial underwriting create a lot of uncertainty for consumers.”
Financial underwriting is a particularly good example of this. In addition to looking for evidence of income at the point of application, most insurers will also assess someone’s income at the point of claim. This could result in the benefit payment being downsized if the policyholder’s income has fallen, even if they have been paying for a higher amount of cover.
As this can cause confusion and reduce consumers’ confidence in the product, some insurers are already stepping away from this practice. For instance PruProtect and Legal & General will set the benefit level at the application stage, allowing policyholders to increase cover but guaranteeing it will not be reassessed and potentially reduced if a claim is made.
While a simplification of some of the product features will help consumers understand and trust income protection more, better communications are also important. As an example Jennifer Gilchrist, senior product development manager at Bright Grey, would like to see insurers issue an annual statement to policyholders, outlining the level of cover they have. “This would help to reduce the risk of both over and under-insurance,” she says, “but it would also make customers aware that it is not a ‘one and done’ situation and they might want to increase cover in line with income and expenditure.”
A more fundamental change may also be required to ensure consumers appreciate the benefits offered by income protection, with many within the industry calling for a new name to help differentiate the product. Certainly the similarity of its name with products such as short-term income protection and payment protection insurance (PPI) serves to increase consumer confusion and, given the issues surrounding the mis-selling of PPI, it is not surprising that sales figures remain low.
Improving the product by making it easier to understand and to have a claim paid if necessary will help to increase its saleability. But, if income protection is to achieve the market penetration it deserves, it may require a more concerted consumer education process.
