Industry research has shown that many policyholders do not have a clue about the extent of their IP cover - and that is not good enough, writes Will Adler
In 2003, Munich Re carried out consumer research which suggested 19% of the working population believed they had income protection (IP) cover.
Of workers asked how they would get by if they were unable to work for a year, 30% said they would turn to a spouse or partner, 18% would rely on State handouts, 14% believed their employer would provide for them, 13% would look to an insurance policy and 12% would dip into their savings.
Significant gaps
Examination of the group which would rely on their employer in the event of absence lasting more than one year revealed some significant "perception" gaps:
- Based on the Association of British Insurers' (ABI) statistics, we know about 6% of the working population are covered by group IP. So even if all those covered said they would depend on their employer, more than half of this 14% would be in trouble, given that the most generous employer sick pay schemes rarely extend beyond six months without a group IP scheme.
- However, the vast majority of this group had neither personal IP cover nor group IP cover and so presumably believe, mistakenly, that their employer operates a very generous sick pay scheme.
- Many group IP scheme members do not see the benefit for what it is, since few with group IP cover saw this as relying on their employer or recognised it as an insurance benefit.
So, many employees have over-optimistic expectations of their employer in the event of long- term absence. Where group IP schemes are in place, many employers do not understand them.
Munich Re has argued for many years that all employees should be given a benefit statement showing what the employer would provide and what the State would provide in the event of long-term absence, in monetary terms and as a percentage of income.
Disability product
Equally, there are perception gaps around individual IP. The types of policy the 13% who said they would rely on insurance if they were unable to work broke down roughly equally between IP, critical illness (CI) and mortgage payment protection insurance (MPPI).
This demonstrates some of the common perception gaps around disability products:
- Many CI policyholders believe they are fully covered in the event of occupational disability. However, CI will not pay out on musculoskeletal and mental and nervous causes of absence from work unless they trigger the total and permanent disability (TPD) definition. But TPD can take months - or even years - to assess.
- Many MPPI policyholders believe their mortgage repayments are fully protected in the event of occupational disability. They do not understand that the policy will only pay out for a maximum of 12 (occasionally 24) months or that many claims will not trigger a payment in the first place due to pre-existing condition clauses.
In summer 2005, we conducted further research to examine what people who reported that they held IP actually had. Many realised from basic screening questions that they did not hold group IP, but of those screened who still believed they held IP, there was still evidence of product confusion.
Smell the cover
Even more worrying than the huge protection gap is that those with protection do not know what they are covered against. We do not know what cover people have, because they do not know themselves.
As an industry we must find ways for consumers to "wake up and smell the cover". The perception gap must be tackled first and this is a manageable problem.
For IP, the most obvious perception gaps are those around the illusion of cover - where there is none or where it is seriously limited.
At the most basic level, to start eliminating these perception gaps, MPPI and accident, sickness and unemployment products should not be promoted as "income protection".
Another step could be to focus on long-term benefits of group IP, by showing lump sum benefit equivalent (annual benefit multiplied by benefit period) on all disability policy quotations.
This will ensure the size of the IP cover is communicated in a way the customer can understand and can easily compare to other covers.
We would also argue that the quality of the cover (benefit period, guarantee of future cover, and exclusions) should be further highlighted to the consumer, through some form of rating guide.
