Insurers and govt told to remove 'perverse incentives'

Peter Hamilton, head of market management for Zurich, warned any moves to promote protection policies and encourage better take-up were currently being hampered by the complex interaction with state benefits. 

He said: "For example, recent changes to the way income protection interacts with state benefits are to be welcomed, but right now the change only covers mortgage payments. It’s important not to lose sight of renters, but it’s a good first step."

The changes, which came into force in April this year, turned the support for mortgage interest (SMI) from a benefit - which did not need to be repaid - to a loan.

He said: "The more we can remove unnecessary, counter intuitive and counter-productive disincentives to individuals making their own provision, the better for all involved.

"The changes on mortgage interest support introduced in April, turning what was a benefit into a loan, simply reinforce the fact that state benefits are likely to continue to be eroded", he added. 

According to HM Treasury, individuals must repay the money they get with interest when they sell or transfer ownership of the home or on the death of the homeowner. 

The interaction of self-provision with state provision is extremely complex and can be a negative driver for consumers who are otherwise motivated to take out protection insurance against a catastrophic life event such as disability or long-term illness. Katharine Moxham

The interest added to the loan can go up or down, but the rate will not change more than twice a year. The current rate is 1.7 per cent.

Mr Hamilton said: "If individuals want to be sure they can meet their financial commitments if they’re unable to work through illness or injury, they should be considering insuring their income."

Responding to the Financial Services Consumer Panel's (FSCP) 11-page discussion paper, Understanding the Protection Gap, which was published earlier this month, Mr Hamilton welcomed the panel's recognition of the value that financial protection can bring.

The report pointed to the fact that improvement needs the co-operation of the regulator, product providers, reinsurers, lenders and intermediaries, something with which Mr Hamilton agreed.

"More broadly, it was good to see the report highlighting need to help consumers understand current provision (and it positively references the work the Association of British Insurers is doing on an IP calculator in this respect) and the report also highlights the benefits of advice.

"There is more collectively for us to do, but I think changes we’re seeing over the last 12 months suggest some really positive momentum", he added.

Katharine Moxham, spokesman for Group Risk Development (Grid), the industry body for workplace insurance, told FTAdviser Grid welcomed the FSCP's paper, as it highlighted the complexity not just of product choice but also the interaction of private insurance with state help.

She explained: "The basic premise of financial protection is easy enough to understand on a 'this happens; we pay' sort of basis but the choices to be made during the purchase can be complex and overwhelming for consumers.

"Added to this, the interaction of self-provision with state provision is extremely complex and can be a negative driver for consumers who are otherwise motivated to take out protection insurance against a catastrophic life event such as disability or long-term illness."

Ms Moxham pointed to Swiss Re's 2018 Group Watch report, which showed the importance of workplace protection. She highlighted that employer-sponsored group risk products could give 12.5 million employees access to "material levels" of financial protection, without them having to take financial advice, worry about it being affordable or worrying about the cost of advice. 

She added: "Of course, employer sponsored group risk products give people access to financial protection insurance without them having to do any of the hard work.

"The employer takes advice on the benefit design and cover levels. These can be aligned to their goals and contractual obligations or purely based on good or competitive practice.

"The employer will also take advice on the suitability of providers by way of a market review. This process is undertaken regularly and thus keeps design appropriate and costs down."

simoney.kyriakou@ft.com