I welcome the publication of the new Income Protection (IP) Task Force White Paper.
It is an excellent and challenging document. The Task Force have rightly called for publication of claims data but the issues on IP claims go beyond the non-disclosure and meeting the definition of issues that drove industry progress on Critical Illness (CI). For IP, a key point is not so much if you get paid or not – but how much you get paid. The stats should cover these issues too.
That leads me to three areas for industry standardisation where there can be consumer detriment. As the White Paper points out, it has been the failure to identify consumer detriment that has prevented progress on standardisation.
The first is the limitation of benefit clause that affects the maximum amount of benefit that a policy holder can get. Some policies purport to cover up to 75% of income but the assessment is based on the policy holder’s income at the time they took out the policy and they may find they are under or over insured. Either way, they are unhappy – and if they are over insured they may not even get back the premiums they paid for the over-insurance. The Task Force suggest a base-line cover of essential expenses. This would work if the list applies to expenses at the time of the claim – otherwise we have confusion again. I prefer an explicit guaranteed cash cover set when the policy is taken out (as with CI). At least people would know where they stand.
The second area is calculation of fluctuating earnings when payment is linked to earnings just before the claim – particularly for self-employed or commission based occupations. Many people gradually get ill – especially for the main claims of mental illness or back pain – and the FOS have recognised this by suggesting an average of earnings over a longer period, e.g. three years.
Finally, we have deductions of other insurance from income protection payments. This will become more important as, during the recession, people move in and out of jobs that may or may not offer group income protection. One approach would be for the IP sector to establish a list of benefits that are deducted from IP in the vast majority of the market, and what the effects are. This could form a base-line. Any additional deductions would need to be clearly identified to the consumer. The alternative would be to take into account the other benefits, as far as they are known at the date of application, knock them off the level of cover that is sold and ignore any new ones. The latter would carry little risk of over-insurance if the essential expenses level or a low guaranteed cash cover is applied.
This may all look rather technical – but the consumer detriments are real and obvious when a claim is made and the product does not pay out what the individual was expecting. In the 2006/7 FOS survey, the percentage of general insurance complaints against IP was 5.5% (as opposed to 4.3% for CI). If we deal with what drives these numbers now, we will not be faced with lots more complaints when the IP market really takes off.
Richard Walsh is managing director of SPPR Consulting
