The need for such protection is acute and rising. In the developed world, demand for government support (the traditional source of relief) is rapidly outpacing supply.
At the same time, illness and disability levels are rising due to an aging population, tighter labour markets and improved medical prognosis.
For families, the impact of illness or disability on income can be pretty devastating.
But not only individuals and households suffer. Income protection gaps can also profoundly affect businesses, governments, and the economy as a whole, undermining productivity and eroding social ties.
Mindful of the challenges, Zurich and the Smith School of Enterprise and Environment at the University of Oxford have embarked on a major global thought leadership programme to study income protection gaps (IPGs).
There is an urgent need to design new channels for income protection solutions.The project has three phases with the first, Income Protection Gaps: A Growing Global Challenge published in 2015, exploring why income protection gaps are becoming a global problem and to what extent.
The second phase, Understanding Income Protection Gaps: Awareness, Behaviour, Choices published in 2016, looked into why income protection gaps exist with an analysis of the causes of flow and demand for protection products covering 11 key markets over five continents.
The final part of the project is due to be published in the autumn and will make recommendations for action focusing on the role of the state, employers, individuals and insurers.
We aim to gain better insights into the key challenges by learning about people’s awareness, knowledge, and experiences of income protection insurance.
One of the key findings of the latest survey (Understanding Income Protection Gaps: Awareness, Behaviour, Choices) is that income protection needs differ across countries, demographics and for individuals.
The information has relevance both for those seeking to protect themselves and in many cases their employers. We know that working through an illness or disability due to inadequate support can cut worker productivity by 20 per cent to 60 per cent.
Other key findings from our most recent study include:
Experience plays a greater role than financial literacy
One of the most important findings was that having first-hand experience, or (to a lesser extent) knowing someone who has had such experience, was one of the biggest factors influencing demand. Experience trumps formal or abstract knowledge of insurance.
Misperceptions about the cost of income protection
The main reason people cited for lack of income protection insurance was a perceived high cost. Nearly a half (48 per cent) of UK respondents said that they would be willing to spend 5 per cent or more of their income on cover when in fact such protection can regularly be bought for significantly less.
Full-time workers are more likely to be insured
Full-time workers are more likely to be insured and there are more men working full-time. This issue existed in about half of the countries surveyed, particularly those where overall demand for insurance was lower. This means men are also more likely to have insurance overall.
Income protection solutions
There is a role for private partnerships and government. Appetite for income protection may reflect a reliance on public programmes in countries where a relatively high level of security has traditionally been available.
This could become problematic in countries like the UK with high levels of state support as access to benefits is curtailed, and claims periods are shortened.
The fact that 47 per cent of employees surveyed in the UK would prefer income protection cover as part of a benefits package, even if this means slightly lower take-home pay, shows the potential value of offering income protection insurance through the workplace.
More work could be done to identify the most effective workplace-based solutions and encourage employers to offer income protection benefits to their employees.
The pooling effect or ‘solidarity’ principle of such schemes also makes protection more cost effective. Governments have an important role to play to mitigate income protection gaps and this can be through public-private partnerships.
These may take many forms, for example, Hong Kong and Malaysia, currently sustain a mandatory arrangement. Others, such as Germany and Brazil, use tax concessions to encourage or ‘nudge’ private citizens into making additional personal contributions to supplement ailing state schemes.
A changing workforce
The changing nature of labour markets already has major implications for the way workers access income protection. An increase in short-term contracts, part-time positions and in particular the rise of the ‘gig economy’ is leaving many workers exposed to risk.
There is an urgent need to design new channels for income protection solutions that are both ‘portable’ (across jobs and borders) and appropriate to different country contexts.
We are committed to growing the income protection market in the UK given its social and economic significance.
We believe it has the potential to help the government address the UK's major welfare challenge and create a more sustainable model for UK workers.
Gary Shaughnessy is chief executive, Europe, Middle East & Africa, for Zurich Insurance
