Convincing consumers to take out income protection (IP) is far from easy. While some do not believe long-term sickness or injury is likely to happen to them, others fear the insurers will do whatever they can to avoid paying a claim.
Although this is not the case, with Association of British Insurers (ABI) statistics showing that 91 per cent of claims were paid in 2013, the protection industry is working hard to win consumer confidence.
The latest to flag up the benefits of IP is LifeSearch, which launched a customer promise in February that it would only recommend a policy with an own occupation definition of incapacity. This gives policyholders the reassurance that if they are unable to work due to long-term illness or injury, they would only need to show they could not carry out their own job to make a claim.
Own occupation only
Although the ink is still drying on LifeSearch’s customer pledge, an own occupation-only approach has been in place at the company for several years. Emma Thomson, life office relations director at the firm, says, “We will recommend own occupation wherever we can but if it is not possible we will look for the next best option. This might be a product such as accident sickness and unemployment (ASU) cover or critical illness insurance rather than a work tasks-based IP scheme.”
The own occupation-only approach is standard with other advisers too. For instance Drewberry has recommended this form of cover for the past three years.
Although lower risk occupations have always been able to find own occupation cover from the mainstream insurers, friendly societies helped to make this approach possible for those who were not eligible. For example, Exeter Family Friendly and British Friendly have never differentiated on occupation on their IP plans, offering the own occupation definition to everyone.
While the friendly societies were able to mop up the business that did not qualify for own occupation cover with the mainstream insurers, this started to change a couple of years ago. Aware of the support for the more generous form of cover, many of mainstream insurers followed the friendly societies into own occupation-only definitions, with Aviva and Bright Grey among the first to make the move in October 2013.
Rewriting the definition
The two insurers took slightly different approaches. For Bright Grey, the move was facilitated by the launch of a new product, Income Cover for Sickness, which has two definitions of incapacity. As well as own occupation, which applies to around 95 per cent of applicants, it also offers a one-year, own occupation definition.
With this, if a claimant is still unable to return to work at the end of a year, they are assessed against seven serious illnesses including cancer and terminal illness. If they do not meet the definition for these, they are assessed against nine everyday tasks such as standing for at least five minutes or climbing up and down a flight of 12 stairs. Fail at least three of these and the claim would continue to be paid.
At Aviva, the shift to the own occupation definition was applied to its existing product, with the definition applying throughout the life of the policy and any claim. Julie Higman, income protection product manager at Aviva, explains, “A few of the more artistic occupations such as sculptor and potter moved to decline but we were able to move many jobs including taxi drivers and postal delivery workers to own occupation. This definition makes it a lot simpler for the consumer as well as making it easier for the adviser to explain.”
Another approach to offering own occupation across the board was taken by LV=. Like Bright Grey it launched a new product, Personal Sick Pay, to accommodate people who would struggle to be accepted for the own occupation definition on its standard IP plan. This is aimed at riskier occupations such as nurses, tradespeople and construction workers and, by introducing it, it was able to do away with its work task-based incapacity definition and whittle down its declined occupations list from 314 to 89.
High levels of stress-related absence meant teachers would have struggled to get own occupation cover in the pastPrice of clarity
There is a price to pay for the increased clarity offered by the own occupation definition. For the mainstream insurers, policyholders regarded as having riskier occupations will see their premiums loaded to reflect the additional risk, while, if cover is taken through a friendly society, age-banded premiums are the norm. As an example, although policyholders can opt for guaranteed or reviewable premiums on LV=’s Personal Sick Pay, each year the premium will increase in line with their age.
Although this is designed to make it more affordable, with premiums stepping up as income increases, Tom Conner, director at Drewberry says policyholders with riskier occupations will end up paying more. “These policies tend to start low but can ramp up massively as the client approaches retirement,” he explains. “Over the life of the policy the total premium is usually at least double that for an office based worker with guaranteed premiums.”
The shift to the own occupation only definition has also led to a bit of a shake-up in the terms available for many customers. As an example, take teachers. High levels of stress-related absence meant they would have struggled to get own occupation cover in the past but now many will qualify for the more generous form of cover.
Revisiting clients
This has made rebroking a sensible option in some instances. For example, on an old style policy, even if a teacher was unable to work as a result of an injury or an illness other than stress, they would not automatically be eligible to claim unless they failed a further set of criteria such as work tasks or carrying out another occupation. An own occupation policy would remove this obstacle.
There are also moves to make revisiting these existing clients easier. The Finance & Technology Research Centre is calling for an annual statement to be sent to protection policyholders, outlining the cover they have, where there are any gaps and highlighting the events such as a new mortgage, baby or job, that could trigger a review.
Although there has been some resistance to this, due largely to concerns that it could raise awareness of a policy and drive up cancellations, Thomson says this is ungrounded. “We have a team that contacts existing clients and, as well as helping to identify people who would benefit from more cover or a different policy, it also found people who did not realise they could make a claim. It is a benefit to customers,” she explains.
Market move
Given the consumer confidence the definition brings, there are calls for the market to move entirely to own occupation-only. “There is a march towards own occupation-only,” says Chris McNab, proposition manager for protection at LV=. “It is the best form of cover and, alongside the Seven Families campaign and mortgage networks such as Pink making IP a compulsory part of advice, it really helps to present the product in a positive light.”
Advisers are also keen to see the less generous incapacity definitions scrapped. For instance Drewberry’s Conner says that while more restrictive cover is still available there is a risk of consumer dissatisfaction. “People see the name income protection and assume it will pay out if they lose their income. This is not always the case with these less generous policies,” he explains.
More innovative product design may help them make the move. This could include offering own occupation for a limited term, in the way that Bright Grey does; providing a safety net of cover, for example £1,000 a month, without underwriting, in a similar way to the products such as ASU; or offering payments based on severity, in line with the partial payments seen on critical illness cover.
While some resistance to move to the more generous definition is inevitable, as support for the own occupation-only approach grows, it is only a matter of time before it does become the norm. Given the benefits it offers, it is hoped that it will not be a long wait.
