Only 13% of the working population has some form of income protection, either group or individual. Sales are slowly rising but are still far from impressive when compared to the 65% with life cover.
Naturally the providers are keen to boost these sales figures, especially in the group income protection market. The obvious way in which this can be achieved is by making the product more attractive to employers. And this “beautification” process is being approached in a variety of ways.
Keeping costs down may be the way to the heart, and wallet, of a company’s finance director, but this may not always be the case with protection products. Defined benefit period products were designed as an answer to the “it costs too much” argument. These restrict the maximum length of a claim, for example, to two, three or five years. This restriction has the effect of reducing the premiums by up to 65%. However, despite the reduced cost, they have not proved popular.
Andrew Smith, public relation officer at UNUM, believes this is really to the credit of intermediaries. He explains: “Although advisers are not necessarily regulated on the sale of these products, because they are primed to offer `best advice’ they recognise that a limited benefit term does not sit comfortably with this.”
This view is reinforced by Brian Lentz, principal IFA at Portfolio Insurance Consultancy and Mortgage Brokers. He has found that the defined benefit period products have had little appeal. Sales have, for Lentz, been mainly to smaller employers for whom the cost is a primary consideration. Other groups which have been attracted to this product, he claims, tend not to understand what they have taken out.
Another area which Lentz feels is under-utilised is the free cover offered by the insurance companies. However, in this instance, he feels it deserves much more interest. By using this option companies can provide cover for their employees without the need for medicals, and, as Lentz explains, this is where an IFA can give added value to a client.
“Part of the IFA’s role is to negotiate the free cover limits for a company. If you can get a free cover limit of £30,000 and the person only needs cover of £27,000, this saves a considerable amount of time and effort filling in forms and having medicals,” says Lentz.
He has noticed that the insurers have become increasingly flexible in their approach to free cover; allowing more leeway to attract more business.
One company which may not need to be as flexible on free cover limits, at least for a while, is UNUM. It recently raised its free cover limits, from 6% of total insured income to 12%. This means that for a company where there are 10 employees with an average salary of £20,000, each individual can benefit from £24,000 of cover, free of underwriting.
Nick Lomas, marketing manager, explains how this will help to grow the market: “As companies renew existing contracts with us they may want to take advantage of the increase in free cover limits. This will drive the amount of premium income. Also, we hope it will help to attract new business. Not needing to have a medical does make taking out cover much easier.”
Lentz highlights a potential pitfall of taking this option. “You have to be careful if the free cover limits aren’t indexed. If someone’s benefit levels rise with their salary, this could lead to them exceeding the free cover limits.” This excess would trigger the need for underwriting, and possibly even a medical.
However, as Lomas explains, this may not be as arduous as it seems. “If, perhaps as the result of a salary increase, someone does exceed the free cover limit, they will be required to complete an application form. Generally they are fine and wouldn’t need to take a medical. There is also the benefit of having the claims history for that person and company.”
Lentz’s experience of the application process reinforces Lomas’s comment. He feels that over the last few years it has become much easier to take out group income protection.
Initial application forms are now simpler. Rather than filling in a lengthy medical history questionnaire, insurance companies now ask broader questions which may generate further, more detailed questionnaires, medical reports or medicals.
One of the products which may be waiting in the wings for a more receptive audience is the shared liability scheme.
This works in a similar way to incorporating an excess into a motor insurance policy; the employer agrees to take on a set amount of the cost of a claim, for a reduction in premium. These schemes can have premiums as much as 40% cheaper than a full insured scheme.
Although these schemes have not had huge sales to date, they could appeal to employers who may want to contain the premium costs, or those who feel they look after the health of their staff well. Taking on this type of policy may make companies more conscious of their health and safety policies.
Lomas believes shared liability schemes could particularly appeal to larger companies. “These companies will have a regular flow of people off work through sickness. Taking out this type of scheme will give them protection for the really long running claims and those which are high cost.”
These types of schemes, and others yet to be developed, may gain in popularity as a result of the insurers’ more pro-active approach to claims management. This places the emphasis on getting people back into a working role as soon as possible. It can involve o wide range of activities, not all directly related to the sickness or disability.
One important difference with this method of claims management is it kicks in much earlier. Colin Fitzgerald, UK broker sales manager at Generali, explains how it works: “Traditionally the insurance company has not got involved with the claim until the fifth month of a deferred period of six months. However, it has became apparent that the best time to get hold of the employee is when they first go sick and it is possible they will become claim.”
Getting in early can change the nature, and length, of the claim. Fitzgerald highlights this with an example of the timescales involved before a person cap see a specialist. “The first thing the doctor is likely to do is sign them off for three weeks. Then they may decide to refer them. Actually seeing a specialist can then take anything up to two months.”
This can mean the person has already absent from work for three months. By alerting the insurance company, often via the personnel department, within the first month, it can be determined whether the claim will run beyond the deferral period, and the process of solving the problem can be started earlier.
Rebecca White, marketing manager, group risk, at Legal & General, believes that the faster someone can get back to work the better. She gives the following example. “Technology can change dramatically in six months making a claimant’s skills out of date by the time they return. That is why a combination of occupational therapy, counselling and career’s advice is important.”
Similarly the sooner the problem is addressed the easier it could be to cure it. For example, leaving someone with a mental health problem for six months before a claim can kick in could mean that actually discovering the initial problem is very difficult.
This interaction may go beyond the needs of the claimant and consider the company as a whole. Fitzgerald explains: “If it is clear that some of the problems relating to a claim are work-related then someone from Generali, perhaps a nurse, will visit the workplace.
“If, for example, the claim was for a musclo-skeletal problem, there are factors in the work environment which may have contributed to this, for example the height of the chairs. And, if we believed there was something which could be improved, or needs to be changed, we would highlight this with the employer.”
This has the potential to prevent other claims caused by the same problems. And, with claims experience playing a part in the costing of the policy, premiums can be kept down.
A cynic may say that the only reason an insurance company would change their involvement with a claim is to increase profits. However the companies insist that this is not the case. Fitzgerald comments: “There are really two views on this one. Under the old system the insurer wouldn’t have incurred any costs during the deferred period. However under the new system there would be expenditure doing this period but the claim may be shorter as a result of this. Costs should just about balance.”
White adds that this type of interaction during the claim is still in its infancy so it is too early too gauge whether premiums will be reduced. However, she does believe that by reducing the length of time benefits are paid, there will be a long-term impact on premiums.
Containing these costs is important. Lomas points to the experience of the private medical insurers as an example of how escalating costs can make a product significantly less attractive. This is clearly an experience the providers of group income protection are keen to avoid.