Which way now for the income protection market? Kirstie Redford reports on the latest Think Tank
Alex Broad: On today's agenda is income protection (IP), looking at the opportunities for both the group and the individual markets. The first question I would like to put forward is: why is the IP market achieving only modest sales compared with critical illness (CI) cover and how can we help close that gap?
Peter Hamilton: One of the issues that is often overlooked is the fact that the total payout on IP can often amount to more than the lump sum payout received on CI cover.
Bob Cheesewright: I think we also have to make clear the different eventualities that would lead to each payment.
Peter Hamilton: That is right. Conditions such as back pain and mental illness would not pay out under a CI policy.
Diane Saunders: But at the end of the day, CI is an easier sale. It is so much easier to bolt on CI cover to another plan at the same time as you are selling a life policy.
Rosalind Pearson: Sales of CI cover are also helped by the fact they are linked to the sale of mortgages. However our research shows that 70% of people felt they wouldn't be able to survive if they were unable to work for six months. That is quite a high percentage. And 35% said they would not be able to survive on State benefits of £70 a week.
Mansel Aylward: That is not true ' it's a misconception. I will have to check my records for the accurate figures, but we wrote a paper recently looking at the incomes of people living on Incapacity Benefit and something like 25% or more of people are in the upper income level in this country. This means that somewhere in the region of 25% of people living on benefits are very comfortably off. 50% or more of people on Disability Living Allowance are also on Incapacity Benefit and Housing Benefit - when you add that up, the total benefits received comes to a lot.
Rosalind Pearson: Then surely there is an education issue here.
Mansel Aylward: I agree.
Diane Saunders: When talking about IP, what I ask clients is: how important is next month's income? And most say very important. Then I ask how important is the income after that? And they say even more important. If you paint that picture, people do say they have never thought of it like that before. I do not think of anything that the Government can provide as anything but a maybe ' because it can change. A new government can come into power and change everything.
Mansel Aylward: I am not here to defend the Government ' but I do not believe things could change as easily as you make out.
Diane Saunders: But if they do change, people need financial independence.
Kirstie Redford: What can the industry do to help educate people about the need to protect their income?
Richard Walsh: I think it is clear that central to this debate, there are a number of products available ' IP, CI cover and mortgage payment protection insurance (MPPI). MPPI is being sold in an isolated way, often without considering the client's full needs. People think it provides the same protection as IP, but it does not. At the Association of British Insurers (ABI), we have had discussions with the Government and the Council of Mortgage Lenders about this ' to address the need to give information about different products to clients so they can make a rational choice and not be automatically pushed into the wrong route. The ABI is also planning to launch a consumer guide explaining why you may need IP and why you may not and how you make that decision ' the kind of choices you will have to make to ensure you have the right product for you.
Kirstie Redford: How would this guide be distributed to make sure the right people are reading it?
Richard Walsh: It would be distributed to all our member companies and they will be able to adopt it into their product literature.
Peter Hamilton: The very complexity of IP also means that advisers need to understand both corporate and State benefits, which may require more knowledge than some advisers probably have.
Doros Nicolaou: Most of our business comes from client recommendation. And the CI cover we sold five years ago is now different. What I fear is that IP products will go the same way.
Bob Cheesewright: I hope it does go the same way because I do think the IP proposition needs to be modernised.
Doros Nicoloau: However what we have found is that in most cases when you would claim on CI cover, an IP policy would pay out.
Mansel Aylward: Surely not for conditions such as multiple sclerosis?
Doros Nicoloau: No, but in many cases.
Peter Hamilton: You have to remember that 50% of our claims extend to more than four years ' it is a long time. Getting back to work is actually pretty hard.
Alex Broad: What other problems is IP experiencing that act as a barrier to sales?
Doros Nicoloau: IP is not sexy like CI cover.
Richard Allison: The cost of the IP product has escalated over the last four or five years, meaning the price of premiums has gone up.
Diane Saunders: One thing I often do with clients is compare the cost of IP to what they pay for car insurance. It seems ridiculously cheap at £30 a month, when some people pay £80 a month for car insurance.
Jamie Winter: We can talk about cost, but that is not the issue. What is the issue is the perceived value for money ' and the problem that there is a lack of education.
Rosalind Pearson: That is right. And it is not just about the amount of money you are going to get because IP is a holistic product.
Alex Broad: What can we do to improve on current IP products?
Kevin Carr: I think we need to move closer to the MPPI product and, in my opinion, develop a combination of the two. At the moment there is a contradiction between mortgage lenders, which will in most cases recommend the MPPI product and other financial services, which will in general, recommend the IP product. There is conflicting information, which does nothing to help the consumer.
Alex Broad: Is MPPI often sold when an IP policy would have been more appropriate?
Kevin Carr: Yes.
Diane Saunders: It is the difference between a temporary solution and permanent one. If you have a permanent problem and a temporary solution, it's not going to fit.
Peter Hamilton: Too many people think they are fully covered when they have MPPI, when really they are not.
Mansel Aylward: The Government does actually want to encourage the uptake of IP. I am sure that it would support any initiatives to increase uptake.
Diane Saunders: What we need is someone from a soap opera to come out and endorse IP products.
Richard Walsh: It would be good if one of the Department of Health's ministers was to make rehabilitation services one of the main issues on their agenda. Perhaps they could develop a national service framework for rehabilitation services.
Mansel Aylward: Whether or not the Department of Health (DoH) would do that, I cannot comment. But I can say that as far as the Department for Work and Pensions (DWP) is concerned, it is one of the top priorities for the department. Even if the DoH decides not to go ahead because of whatever commitments, we are going to take it further. I think the DWP is going to have a much bigger role ' particularly looking at rehabilitation, evaluating it, and looking at early intervention and health and safety in the workplace.
Alex Broad: Does everyone agree that rehabilitation will and should play an important role in the future design of IP products?
Peter Hamilton: There is the issue of misconception ' that insurers use rehabilitation as a way of getting out of paying claims. We need to make it clear that it is also for the benefit of clients.
Mansel Aylward: I think the message has to be: there's no such thing as a free lunch and expenditure on unnecessary things has to be reduced ' whether this is with insurance or State benefits.
Kevin Carr: Something that we find is people who buy IP tend to be wealthy and in high paid occupations. What the rest of the public needs is to know that something will provide for them should something happen ' an operation or replacement income, for example. What people struggle to deal with is that you pay a premium and if something happens you might not get the benefit. The problem is the range of different products. We need something to be designed that says if your lifestyle or income is seriously impacted upon, this policy will cover you.
Bob Cheesewright: But there is a crucial problem. We have a situation in the UK where many of our population are refraining from work. I think we have to change employers' attitudes. We have to change the expectations of those who believe it should be someone else's problem because it is everybody's problem. We have failed when we have paid out a benefit.
Mansel Aylward: The difficulty here, of course, is that it is difficult to sell the concept that you are buying this product to help you should you become ill and be unable to work ' when all the evidence says we're not going to let you hang around for more than six weeks. Early intervention means getting in very early. Early intervention means persuading people that we have their best interests at heart. Surely the challenge is to be able to package and sell the product so that people understand early intervention is in their best interests.
Peter Hamilton: People need to understand the value of rehabilitation. Many people presume that services are readily available when actually treatments such as physiotherapy are not.
Alex Broad: Are there any other issues specific to the group IP market?
Jamie Winter: In terms of group IP, the traditional product as it stands is increasingly losing value for the employer. It is not meeting the needs of the employer. That suggests the insurance market needs to react to that and come up with some more appropriate ways of providing a benefit that the employer will see the value of rather than the employee. With that, bearing in mind that group IP is usually sold as a standalone product, there is potential there for insurers and intermediaries to say: let's redesign this product and give the employer something that suits their business. The insurer then has the opportunity to add things to that. And if those requirements are issues such as early intervention and absence management and a holistic approach then that will clearly drive us nearer to where we want to be. Employers, at the moment, provide IP because they have to. If you ask an employer whether their current IP product is what they want, most will say no.
Alex Broad: Should mental illness be a growing concern for insurers?
Mansel Aylward: The fact is that in this country, there has been a very dramatic increase in people who are said to have mental health problems as a cause of illness and absence from work. Mental health problems used to contribute to 14% of the benefit population ' it is now 39% of the benefit population. 70 to 80% of that increase is due to what we may call minor mental illness problems. Are they depressed or are they just sad? Are they worried or are they anxious? We are not talking about a national increase in the amount of mental illness; we are looking at problems with life becoming more important to certain people.
Peter Hamilton: One example of the effects of workplace stress is teachers. Ratings have moved quite dramatically over the last few years. Clearly teaching has changed over the years, but maybe it's also that there is a greater acceptance of stress.
Mansel Aylward: I am not convinced there has been any increase whatsoever of stress in the workplace.
Peter Hamilton: It is possibly more socially acceptable than it used to be.
Mansel Aylward: Exactly. And it is maybe because mental illness is more acceptable as a result of workplace stress. People do distinguish between mental disease and work-related stress.
Alex Broad: Could changes to current definitions of incapacity make IP more attractive?
Jamie Winter: Speaking from a personal point of view, the idea of tiered definitions of disability is a good one. I think employers by and large are not too sympathetic to stress-related claims, but the idea of applying a far more restrictive definition excluding those kind of claims would be more difficult. So tiered definitions would be a good way to go and satisfy the needs of the employer, while providing a good benefit for the employee.
Mansel Aylward: There needs to be a more structured approach based on social evidence and Government policies. Everything points to the fact that people are less wealthy and happy if they are left out of work for the rest of their lives.
Diane Saunders: But the danger is from a policyholder's point of view, that an insurer may use that evidence as a way to make sure they don't have to pay.
Mansel Aylward: That is why we need a culture change.
Rosalind Pearson: Maybe the key is to call it 'stop gap' insurance, instead of IP.
Alex Broad: Now that the Financial Services Authority has decided to remove the high risk category for IP products, how is forthcoming regulation likely to affect the market?
Ron Wheatcroft: I think we must look at it as a positive. I also think it has to be good news that the FSA has abandoned the proposals that small commercial businesses would be classified as private customers. The fact there will be no exam requirements for advisers is also good.
Peter Hamilton: When it comes to exams however, I do think it is a dual edged sword. Education and exams would have been an opportunity to raise overall awareness of some of the issues in the market.
Alex Broad: Does anyone have any closing comments on the IP market?
Ron Wheatcroft: There is one concern I have about the group IP market. With the demise of final salary pension schemes and those that have survived being essentially under-funded, one consequence could be that if employers decide one employee benefit has to go, the IP product really has to stand out in the market and become more credible. It has to become a product that employers have to have, rather than one that is nice to have.
