The UK falls behind the rest of Europe when it comes to its citizens being protected against the financial consequences of prolonged disability.
The market data for income protection coverage in the UK presents a depressing picture. According to the ABI, there were just 1.1m individual IP policies in force at the end of 2014. The number has declined by more than 20 per cent since 2006.
Although other data shows that, over the same period, the number of people covered under insured employer-sponsored arrangements has risen by 20 per cent, the number of insured schemes has fallen by 10 per cent. Across both individual and group products, we have seen a trend towards shorter benefit payment periods, both through the introduction of new individual product options and, in the employer-sponsored market, the gradual reduction in benefit payment periods to a maximum payment period which is typically no more than five years.
Overall, we are covering no more people now than in 2006 – the increase in people covered through employer schemes has been offset by the fall in those with their own individual policy. Some large employers and the public sector do continue to pay a proportion of income during prolonged disability but we have not seen anything to suggest a big increase here.
At best, around 20 per cent of the UK workforce is covered to some degree, even if it is just continuing income for no more than a year to allow breathing space to adapt their finances to changed circumstances. The remaining 80 per cent of people are presumably happy to rely on their savings to see them through or, perhaps more likely, have not given it more than a passing thought.
New individual income protection policy sales hover around the 100,000 level each year, in marked contrast to the 1.5m new life and critical illness purchases. Of those 100,000 policies, 35 per cent only pay for a limited period rather than through to expected retirement age.
In Swiss Re’s European Insurance Report, published in mid-2015, it was reported that the UK has a disability protection gap totalling £200bn a year. This is the largest shortfall in any European country yet many people in the UK continue to assume that their employer, if they have one, or the state, will provide for them. The indications are that people are gradually getting the message that the state is withdrawing, but this has not translated into taking any action.Swiss Re has found that the gaps in cover are greatest among people aged 25 to 40, single and married, with dependants.
This group may be very digitally aware, but deciding to purchase income protection and selecting the appropriate level of coverage without advice or guidance is not simple – even if people have every intention to do so. The product name does not help either. A Google search brings up a mixture of long-term income protection products as well as products protecting against the financial consequences of redundancy or unemployment.
Anyone considering how they can protect themselves against the financial consequences of prolonged disability would need to understand what provision, if any, their employer will make. There is a case for giving people annual benefit statements, whether to reinforce the cover that the employer has arranged or to highlight the shortfall they have. People also need to understand their likely entitlement to state benefits since, depending on their circumstances, private cover could simply replace benefits which would have been paid by the state. Against this, of course, deepening cuts to the welfare budget could mean that state benefits have become negligible or non-existent when disability occurs.
Protecting long-term income is one of the most fundamental financial needs people have, arguably more important than saving for a pension since, without income, other desired financial behaviours simply can not happen. Pressures on the welfare budget are likely to place an even greater responsibility on the individual to take action now. Auto-enrolment is, of course, expanding the number of people covered in pension arrangements, but extending this to continuing income on disability is something to consider in the longer term.
Consumer research identifies that perceived product complexity is a factor which determines whether consumers feel sufficiently confident to purchase a product or service without advice. Analysis of new retail protection sales shows that, in 2014, only 105 new income protection policies were purchased without the services of an intermediary.
New ways to access the market will be essential if, as widely forecast, fewer customers will have access to advice about their protection needs or just choose to purchase directly in the same way that they make other purchases. This might include a bigger role for employers as facilitators and through workplace education to raise awareness rather than necessarily as providers.
It is a sobering thought that the work on a suite of simple protection products, led by HM Treasury, began more than five years ago, yet we remain a very long way away from an income protection product which consumers could buy directly with any confidence. This is primarily down to the complex relationship between private and state benefits. Universal credit, based on the household rather than the individual, makes it even harder to quantify the need for cover.
Calculators can help people to assess their needs provided they have all the facts necessary to make informed choices. Although many firms are looking at ‘robo-advice’ to help people with their pension and investment planning, this is probably some way off for protection.
Simple steps to aid consumer understanding will begin to make people more aware of the financial consequences of prolonged disability and what to do to protect against them.The Money Advice Service and other organisations, including employers and self-employed trade groups, have an important role to play here.
Low new business sales cannot be attributed to a lack of market effort. The 7 Families initiative has shown how powerful real case studies can be in presenting a compelling case. Levels of financial literacy are low, yet historically, our classic way of delivering messages has so often been through statistics setting out the chances of prolonged disability and claims-paid rates. Market growth predicted by some people as a consequence of this greater transparency has just not happened.
Although it is too soon to determine the impact 7 Families has had on consumers, more than 250,000 people have viewed the family videos and stories which present such compelling messages. These stories can also support intermediaries in raising awareness and showing potential purchasers what can happen and how they become more resilient.
While the choice as to whether to advise on income replacement needs is ultimately a commercial decision for intermediaries, that £200bn figure represents a real opportunity to build on and grow customer relationships.
Ron Wheatcroft is technical manager of Swiss Re
Key points
There were just 1.1m individual IP policies in force at the end of 2014.
Protecting long-term income is one of the most fundamental financial needs people have.
Low new business sales cannot be attributed to a lack of market effort.
