The paper, ‘Understanding the protection gap’, is based on consumer research and discussions with industry representatives. It found that protection products were too complex, leaving many consumers vulnerable to the effects of catastrophic life events such as early death or long-term illness.
Among the areas the report highlights as potential barriers to take-up are the complexity of product choices, caveats in the small print, and clunky application and underwriting processes. Although it acknowledged some product innovation had taken place, it also found products had changed very little in the past 30 years.
Unfortunately, with the modern workforce more likely to be self-employed or have a volatile income, this means there is a widening chasm between product design and consumer needs.
Teresa Fritz, a member of the FSCP with responsibility for leading the project, explains: “Consumers do worry about not being protected, but while they understand critical illness insurance, they find income protection confusing and poor value for money. There is no one silver bullet that can solve this, but we need to kick-start the debate to find some solutions.”
Meeting consumer needs
One of the report’s key recommendations is the development of simpler products that meet the needs of the modern workforce. It suggests these products would be simple industry-wide umbrella protection plans, which could be accessed through the workplace, affinity groups or privately.
Ms Fritz says these products would need to be flexible: “With so many people self-employed, we need something that can adapt to their changing lifestyle. There are a few niche products out there that are more suitable for these individuals, especially from the friendly societies, but we need to develop something that is more mainstream.”
To enable this, the report proposes that the FCA put together a working group consisting of consumers as well as industry and government representatives, to re-examine the proposals put forward in the Sergeant Review of simple financial products.
This is welcomed by the protection market. Vincent O’Connor, senior business development manager for protection at Royal London, says: “The report gives us some food for thought and it could be the catalyst for product innovation.”
Back to basics
A review of products and consumer needs is also welcomed by Paul Avis, marketing director at Canada Life Group Insurance. He says the protection industry should undertake a root-and-branch review of the market, starting with something as basic as product names.
This is supported by research undertaken by Canada Life. It found that when employees were presented with alternative names for group risk products, only 11 per cent wanted to keep the names group IP and group CI, and just four per cent were happy with group life assurance.
Mr Avis says: “Rather than using names such as term assurance and life assurance, it should be called life insurance and employee life insurance. This is an absolute requisite to engage with consumers.”
Another basic issue the FSCP report would like to address is helping consumers to understand the need for protection. This could be achieved through the protection calculators being developed by the Association of British Insurers, which show employees what they would get from their employer if they were unable to work.
Extending critical conditions
As well as the basics, another of the panel’s recommendations was to explore whether CI could be extended to cover musculoskeletal injuries and mental health, while still remaining affordable. “People like the CI concept but it does not cover them if they are unable to work due to other conditions, especially musculoskeletal and mental health problems,” Ms Fritz explains. “Insurance could fill this gap in consumer needs.”
Some insurers have already explored extending CI in this way, with AIG Life adding cover for severe mental health problems to its policy in July 2018. To claim, a policyholder must meet four conditions: admission to a psychiatric ward where treatment was provided for at least 14 consecutive nights; chronic, unremitting symptoms; inability to work for at least a year; and no response to comprehensive management and treatment for more than a year.
While this recommendation might meet consumer needs, it gets much less industry support. “With a focus on simpler products, it is strange that they want to add musculoskeletal and mental health to CI,” Mr O’Connor says.
“CI may be easier to understand than IP, but at claim I would argue the opposite is true. Not every cancer and heart attack qualifies for a CI payout, but if any injury or illness stops you working long-term, this would qualify for IP benefit.”
Claims assessments
Differences in the nature of these two conditions compared with traditional CI claim triggers are also causing concerns. Although AIG has added severe mental health conditions to its CI plan, Mr Avis says some musculoskeletal and mental health conditions can be managed, allowing the individual to return to work.
He adds: “Unless these conditions were significantly life-changing, it would be very difficult to assess and pay a claim. I would also question the appropriateness of giving a large payment to someone with a serious mental health condition. This worries me from a risk perspective. Consumer needs would be better met with IP, with a small amount of CI alongside.”
The sales process also came under the FSCP spotlight. It recommended that the FCA should give mortgage lenders and intermediaries direction on whether they should talk to borrowers about the effect of a lost or reduced income. Some mortgage advisers are already making IP part of the advice process, but time pressures can make this difficult.
Mr O’Connor says there is room to support advisers by making the sales process simpler. His firm is piloting a simplified life insurance application process, adding three questions to the mortgage fact find.
He explains: “We have developed an underwriting algorithm that generates a quote at the same time the adviser is arranging the mortgage. This helps to make protection part of the mortgage advice process.”
Working together
The FSCP report also recognises that to achieve change a joined-up approach is essential. Kevin Carr, co-chair of the Income Protection Task Force, agrees: “We need collaboration with a range of parties including advisers, the Treasury, the Department for Work and Pensions, and the government.”
The industry has already achieved some success by working in this way, securing a disregard for mortgage payments from benefits means-testing earlier this year. Further work is under way, with the Building Resilient Households Group and the FSCP working with the DWP to agree further insurance-related disregards for expenses such as rent, utility bills and council tax.
This would certainly remove a significant obstacle for sales. Current state benefit means-testing rules mean that clients can find they are no better off with protection.
Securing these additional disregards could also make it easier to develop the simple products outlined in the FSCP report. When these were first mooted in the Sergeant Review, plans for simplified IP were quickly shelved due to the interaction between payouts and state benefits.
With the report stimulating plenty of discussion, the FSCP is keen to build on this momentum with an industry debate scheduled later this year. As this brings together advisers, product providers, lenders, regulators and representatives from the government, the protection market could get the attention it deserves.
BIG NUMBERS
65%
Proportion of UK adults who have no life insurance or protection cover (FCA, Financial Lives survey 2018)
28%
Percentage of UK adults that have life insurance (FCA)
10%
Proportion of UK adults that have critical illness insurance (FCA)
£2.4trn
Size of the UK protection gap in 2011 (Swiss Re Term & Health Watch 2012)
1%
Decrease in the number of new individual protection contracts in 2016 (ABI, UK Insurance and Long-Term Savings, The state of the market, 2018)