Britain’s middle classes no longer feel as sheltered from economic hardship as they have done in the past. Sam Barrett reports on how the importance of group protection benefits is set to come to the fore
Protecting against the risk of long-term ill-health, disability and premature death is important for most people but there’s one group of people, Britain’s so-called squeezed middle, that need protection most.
“People on a low or minimum wage are pretty well cushioned by state benefits but those on a middle to high income will suffer a much greater shortfall if they lose their income,” says Katharine Moxham, spokesperson for Group Risk Development (GRiD), the trade body for group protection insurers and intermediaries.
The needs of this group were also highlighted recently in a couple of industry reports. The reports, from Demos, which was supported by Unum, and from Friends Life, show that people on salaries of between £16,000 (£25,000 in Friends Life’s report) and £50,000 will be the most seriously affected if they become sick or disabled and lose their income.
“It’s not just the gap between their income and benefits but it’s the life stage these people are in,” says Tim Jackson, head of marketing strategy at Unum. “They’re often on their first mortgage with a young family which means they have a lot of fixed financial commitments.”
Just how precarious the financial position of people in this demographic is can be seen in Friends Life’s report, The Coping Classes. It found that 59% of respondents would be unable to provide for themselves and any dependants for longer than six months if they lost their main source of income. Further, 79% would be unable to last for more than a year.
In line with Jackson’s comments regarding commitments, Friends Life also found that this group has more debt than other groups. Eighty percent of the coping classes have some form of debt, compared with 61% of other groups, and 56% of them have a mortgage, double the percentage of people in other groups.
In addition to highlighting the potential problems someone in this group could be exposed to if they lost their income, the Demos report also puts forward a number of recommendations. Many of these are aimed at increasing penetration of income penetration and include a reform of statutory sick pay, which would compel employers to take out insurance for their employees; and the introduction of incentives, in the shape of national insurance tax breaks, for employers and individuals who take out cover.
Naturally these recommendations come with some financial figures to add weight to the arguments. According to Demos, even if a suggested incentive of £100 per policy was made to those individuals who purchased an income protection policy, the state could still save as much as £2.24 billion a year in benefits.
“It’s a great opportunity for the government to make a significant saving while also ensuring people get better cover to support their lifestyle if something does happen,” says Jackson.
And the government may be increasingly receptive to these money saving ideas as there are already question marks hanging over the extent of the savings that could be generated by its proposed changes. In particular, there are concerns about the savings from the proposed change to eligibility for Employment and Support Allowance (ESA), which would see the contributory element of ESA means-tested after it had been paid for one year.
This has already had its savings potential downsized from £2 billion to £1.4 billion a year by 2014/15 but this may fall further still. Supporting this are statements made in parliament on May 19 by Maria Miller, the parliamentary Under Secretary of State for Work and Pensions. She stated that estimates show that only 20% of claimants would lose their eligibility under the proposed changes.
“This suggests the government’s unlikely to generate the billions of pounds savings it needs by introducing means-testing,” says James Walker, technical manager, group protection at Legal & General. “It needs to look at ways to encourage greater take-up of income protection.”
Targeting employers is regarded as the best way to reach this group and increase penetration of GIP.
“Incentivising individuals could be difficult to administer, possibly requiring systems to identify those people taking out a new policy,” says Declan White, group risk marketing manager at Friends Life. “It’s much easier to incentivise employers through national insurance and tax breaks.”
Jackson agrees. For him the employer route helps to make the product more affordable as well as being an easy way to reach a large number of people.
“The squeezed middle aren’t your typical IFA customer so the workplace is a good way to target them,” he says. “Additionally the workplace is a really trusted place when it comes to financial information.”
Because of this, more financial education is regarded as key to increasing penetration. White would like to see employers either bringing financial advice into the workplace or introducing a financial education programme, such as the insurer’s My Money and Me programme or that offered by the Money Advice Service. “Education is important before an employer introduces group risk benefits. If they’re part of a flex or voluntary scheme this will help to drive demand and, even if they’re part of the core scheme, if employees understand what they are they’ll appreciate them more. This could lead to improvements in staff retention and recruitment,” he explains.
As well as using financial education to increase employee demand for GIP, Paul Avis, sales and marketing director at Canada Life, believes there needs to be a bit of re-education for employers, showing them how to make the product more affordable by being a little more creative.
“A limited payment term product makes cover much more affordable for the employer,” he says. “It also provides a realistic buffer between employment and ill-health retirement, providing support to help them get back to work and, where this isn’t possible, giving the employee and their family the breathing space to come to terms with the disability.”
For instance, according to figures from Canada Life, while a generous GIP scheme paying 75% of salary escalating at RPI, pension contributions and employer national insurance contributions for 89 employees will cost 1.20% of pay roll, slice the benefits down to 50% of salary and introduce a two year limited payment term and the cost falls to 0.26% of pay roll.
Although limited payment term products only make up a small proportion of the market, they are growing in popularity. Figures from Swiss Re’s Group Watch report show that, in 2008, 6.7% of plans were written on limited term basis, rising to 7.1% in 2009 and 10.1% in 2010. Looking forward, a spot of crystal ball gazing suggests this could be as high as 20% to 30% by 2015.
Moxham also believes that reducing the cost of cover for the employer is a valid way to target the squeezed middle.
“Employers could provide a core level of cover and give employees the option to top up,” she says. “The industry also needs to promote all the added value services that are included on policies, for instance employee assistance programmes and helplines, as these can help employers save money elsewhere.”
The communications message
As well as beefing up their sales messages in readiness for the increased demand, the group risk industry is ensuring it remains on the agenda in other ways too.
Unum is launching a television advertising campaign in October to raise awareness of the need for protection. This has been welcomed by the industry.
“The time is right,” says Jackson. “The public assumes that the welfare state would be there for them but it’s scaling back its support.”
Other work is also being carried out to help raise the profile of protection and the group risk industry, as Moxham explains.
“The Association of British Insurers is looking at ways to get financial advice to people as this would help to make people aware of the need for protection,” she says.
And there are signs that all this work is starting to pay off, with the government becoming more receptive to working with the insurance industry to help people access insurance. For example, speaking at the Association of British Insurers’ Health and the UK’s working population event in March, Lord Freud, the minister of welfare reform, said the UK needed a more sophisticated approach to occupational health and wellbeing, with expansion in the GIP market a viable option.
The government is also looking at introducing a range of simplified products, one of which would be an income protection plan.
“It makes sense,” says Walker. “If the government can encourage better take-up, it will save money.”
And there does appear to be an appetite for these simplified products. In Friends Life’s report, respondents were asked which of a number of measures would benefit them most financially. The second most popular answer, just behind less complexity in the tax and benefit system, was financial products tailored to needs.
Given this appetite, from individuals as well as the government, it appears the group risk industry is set to have a larger role in protecting the nation’s lifestyles.