The government is aware a considerable expansion in the group income protection market (GIP) is one option for its review of the welfare and sickness absence system.
It acknowledged that insurers could work in an incentive based approach but noted there could be problems with involving them.
Speaking at the Health and the working population conference hosted by the ABI and Bupa, Lord Freud, the Minister of Welfare Reform, explained the potential for increased involvement by the insurance sector to aid its welfare reform agenda.
"For us to prevent people going onto Employment and Support Allowance in the first place, we need a much more sophisticated approach to occupational health & well being," he said.
"According to Legal & General figures just 7% of UK employees are covered by GIP, equating to around 1.8m people. So, one of the options is for a considerable expansion in this market."
Lord Freud also remarked that insurance sector measures in reducing sickness absence brought significant benefits. However he revealed some concerns about the industry being too separatist in its actions.
"One of review team's options is going to risk based insurance which creates those incentive based structures (for keeping people in work)," he added.
"But, one of the interesting things about throwing everything to the insurance industry is one of the things you must not cut is the relationship between line manager and employee.
"And the risk is as soon as someone gets sick, its off to the insurance company, and the line manager wipes their hands of the situation, and that makes it harder."
Peter Staddon, head of technical services at the British Insurance Brokers Association, told COVER after the conference that insurers could also cause problems with claims being contradicted by their doctors.
"If there are two GPs and the patient's one signs him or her off, but the one acting for the employer and insurer does not, patients can end up stuck in the middle," he said.
