Opinion & Analysis
The Need for Income Protection is Greater Than Ever
06 Sep 2023
The world is in the middle of a cost-of-living crisis, with significant increases in the prices of food and energy. Following the pandemic and impacted by the war in Ukraine, energy bills have reached an all-time high. Energy bills are now more than double the previous year which, along with food prices, contributed to the highest Consumer Price Inflation rate in the United Kingdom: 11.1% in October 2022. It has since fallen to 10.1% in March 2023.1
As the cost-of-living crisis continues, consumers will need to make tough choices about how to spend their money and insurance might not be top of their list.
In 2021, the ABI reported that the insurance industry paid GBP734 million in income protection claims, demonstrating the importance of the product to society and the value it brings to consumers when they need it most.2
In the UK, on average, 150,000 individual Income Protection (IP) policies are sold each year, which equates to less than one percent of the working population. According to the Income Protection Task Force (IPTF), only six percent of the population had any form of income protection (including employer sick pay schemes) in 2021.3
During 2022, insurance providers in the UK reported a 21% increase in Income Protection premium sales, compared to the same period last year (Gen Re’s Protection Pulse). This equates, approximately, to a 10% share of the overall protection market. In contrast, the Australian Disability market makes up around 30% of the individual market, with in force premiums of GBP3.3 billion.4
Whilst it is positive to see an increase in sales, one might ask why? The increase does tend to follow the end of the UK Government-backed furlough scheme. Is it that consumers are appreciating the value in the product because of the pandemic?
The insurance industry has made significant progress in raising awareness of the value Income Protection brings, but more needs to be done. Initiatives such as the Income Protection Task Force Awareness week (IPAW) helped raise awareness to advisers about the importance and the benefits of income protection.
Despite this, significant challenges for the industry remain. How does the industry continue to grow in difficult economic times and develop products that are more accessible to consumers who need them?
Changing consumer needs
A potential area for future growth is the currently underserved insurance market. Designing products that cater for a changing workforce, including those who are more digitally aware and whose working patterns are more flexible, is challenging.
Working patterns have changed substantially over recent years, particularly since the pandemic. Individuals are not necessarily working full time in a single job. They might instead choose (or have to) work in multiple jobs, often in completely different industries and with reduced hours. Therefore, the design of products must reflect these changing work patterns.
To engage with this changing situation, South Africa has seen a general shift in the market to find more objective ways of measuring and assessing disability. Our colleagues have developed a new definition for disability, called Abilities of Modern Work (AMW), whereby the customer takes out insurance on a set of abilities that are selected at the underwriting stage rather than naming a single occupation. Although still in the development phase, there is a lot of interest from the market. Some insurers have taken the step to allow policyholders IP cover for more than one occupation, listing primary and secondary occupations. Some request confirmation of the percentage of time spent in each occupation, or confirmation of the percentage of the sum assured allocated to each occupation, based on the average monthly income received from each job.
This shift to objective measurement of disability has also been driven by the need for easier and more convenient onboarding and claims processing, preferably on a digital platform. This would typically include a simplified application question set with no medical or blood test requirements, offered as an online or digital solution. The aim is to simplify the application process and avoid barriers to entry, leading to a better customer experience.
Cost is a major consideration in the current climate. Options such as age costed premiums (premiums increasing with age), popular with Friendly Societies, are one way to keep initial costs low. However, they are typically based on reviewable rates and many advisers and consumers prefer the certainty of knowing the cost for the whole duration of the policy.
Budget income protection plans are another solution. Limited pay products are a common market feature, appealing to the customer as being more affordable and more simple than traditional products. The claim payment period is limited to 12 or 24 months (depending on the option chosen), but multiple claims can be made.
Existing customers
What about existing customers, what can be done to make sure existing business is retained?
Responding to the cost-of-living crisis, the Financial Conduct Agency (FCA) wrote to UK insurance CEOs in December 2022, outlining their expectations of insurers.5 The FCA understood that existing consumers’ finances were becoming stretched and that they would need to make difficult decisions about where they make savings. Cancelling existing insurance policies may be seen as an appealing option because there appear to be no immediate, tangible benefits.
The letter highlighted the standards expected of insurers to support customers, specifically those in financial difficulty. It also reminded the protection industry of the ‘Customer Duty’, which comes into force later this year, whereby insurers must consider how they act to deliver the best outcomes for their customers in the changing economic environment.
In conclusion there is no ‘one-size-fits-all’ solution that will maintain and grow the IP market in these difficult financial times, but there are some significant steps that can be taken including:
- Raising awareness of the importance of income protection, particularly for people traditionally underserved.
- Educating advisers on the valuable benefits already available in income protection products
- Designing income protection products that meet the need of a changing work force
- Ensuring existing customers are aware of the options available to them
Endnotes
- https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/march2023
- https://www.abi.org.uk
- https://iptf.co.uk/app/uploads/2021/09/infographic-v1a-1.pdf
Endnotes last accessed on 16 May 2023
Lynn Timmons, Chief Underwriting Officer, L&H London