The seemingly imminent rise in the retirement age could have massive implications for income protection (IP) insurers, most of which do not offer cover beyond the age of either 60 or 65.
The clear message from the incentives discussed in the recent pensions Green Paper for people to delay taking their state pensions past 65 is that we will have to work longer, save more towards our retirement, or do both.
It is also possible that EU legislation could be introduced in 2006 which would abolish the practice of a mandatory retirement age, but the relevant consultation process is not due to take place until later this year.
It is, therefore, reasonable to anticipate a situation in which it becomes fairly commonplace for people to continue in employment well into their 70s. It is more a question of “when” rather than “if “ such a change occurs.
Policyholders who have paid premiums thinking they had a policy until the point of retirement but who suddenly find they have a five or 10 year gap in their cover are not likely to be too amused.
Roger Edwards, product director at Bright Grey, says: “If I had an IP contract that ran out at 65 and the retirement age was raised to 70 then I would be quite upset.
“The most logical and easiest answer would be for insurers to offer some form of extension but this would assumably have to involve not asking for further medical evidence. Consumers may not therefore be able to afford it and those aged over 65 would be far less likely to be able to obtain a policy with an own occupation definition.”
Implications for group IP
The situation will not arise in the group market because schemes tend to be renewed every two years and an extended retirement age could therefore be incorporated as and when it became appropriate. Nevertheless this could still have severe cost implications.
Peter Hamilton, head of protection marketing at Friends Provident, says: “At the heart of IP is the desire on the part of claimants to get back to work but if the term goes up to age 70 there will be a strong moral hazard. Managing claims becomes far more difficult when you get much past the age of 50 because the incentive to return to work diminishes. The real danger is IP being perceived as an early retirement mechanism.
“I’m not saying it’s an impossible pricing problem but no-one knows what the claims experience would be over 65 so we would be going into unchartered territories. This would mean having to anticipate adverse claims experience which will involve an extra cost. Yet there is already a misconception that IP is too expensive.”
Although many critical illness (CI) policies extend well beyond the age of 65 GE Frankona Re reports that its data set is too small to be worth referring to. Furthermore, even if more data was available it is debatable how much light it would shed on potential IP claims. A heart attack sufferer, for example, would stand a very good chance of returning to work within a six-month deferred period.
It is also far from clear exactly which types of worker are most likely to want to prolong their careers. Will we be concerned primarily with senior staff wishing to continue full-time or perhaps with lower paid staff just wishing to continue on a part-time basis?
If it is mainly the latter it could actually result in stress claims amongst those over 65 proving lower than average. After all, those turning up a couple of days a week in retirement tend to be enjoying the best of both worlds and are relatively stress free.
Liverpool Victoria is unusual in having instructed its product development department in December 2002 to consider the implications of a raised retirement age. Other IP insurers merely acknowledge that the potential issue is something that cannot be ignored but are doing nothing to address it at present.
Nicola Smith, employee benefits communications manager at Swiss Life, goes so far as to suggest that IP insurers could consider imposing exclusions on conditions that are basically a product of ageing.
Otherwise insurers are notably devoid of suggestions on how to tackle the problem. Indeed they are splendidly non-committal on whether covering the costs of older lives will even actually present a problem. But intermediaries do not necessarily have to be so guarded.
John Dean, director of healthcare and risk benefits at national employee benefit consultants Gissings, says: “We think that a rise in the retirement age will be the straw that breaks the camel’s back for the group IP market. Current premium increases of 10% to 20% are clearly unsustainable and product innovation is the only way forward.”
If innovation is indeed forthcoming, the raising of the retirement age could prove the most significant watershed ever in the history of the IP field.
After all, IP insurers have become renowned for talking about exciting new product launches which never actually materialise. In the group market this situation can possibly be explained by a preoccupation with mergers during the last couple of years.
Eugene McCormack, director of marketing at UnumProvident, says: “The market clearly needs a shake up and we would like to be at the cutting edge. Eventually we will have to look at growing the business by innovation rather than acquisition.
“We’ve got the innovative products here but we don’t want to press the trigger until we’ve exhausted the possibilities available by growing in a conventional way.”
In order to reduce costs in the group market insurers may have to look no further than covers that have already started to become available such as those which are specifically tailored to suit part-time workers or which pay out for reduced benefit payment periods.
The individual market
In the individual market, on the other hand, a raising of the retirement age would seem an ideal opportunity for insurers to focus on promoting a hybrid product which starts by offering income protection and allows the option to convert to a long-term care (LTC) policy at any time past 60 or 65 that the policyholder feels appropriate.
Such a product, because the long-term care component is more of an add-on than the central feature affecting the purchaser’s decision making, could stand far more chance of getting people to sign up for LTC than a standard pre-funded contract – sales of which have traditionally been hampered by the consumer’s inability to look far enough ahead.
The key to achieving affordable pricing would be to smooth the costs over as long a period as possible but the obvious stumbling block here is that the young are probably just as apathetic towards IP as the middle aged are towards LTC!
Chris Ellicott, technical manager at Age Concern Financial Partnerships, says: “It would certainly make sense if people who need IP when working can convert to LTC when they retire without evidence of health and they will already have become used to paying out on the premiums.
“But those who already have group cover will not need individual IP and many others who do need it will not be able to get it because they have a very high risk occupation. The subject is something we feel we should be looking at but it hasn’t been top of our list yet.”
Bupa, in fact, already offers a product similar to this but the switch-over to LTC, which involves simply converting from occupationally based cover to cover based on activities of daily living (ADLs), occurs at a pre-selected retirement date.
For ages up to 40 the premium costs around 12.5% more than Bupa’s standard IP product. Nevertheless claims experience has been far too limited to suggest whether this pricing is sustainable.
Geoff Brown, chief actuary at Bupa, says: “The concept has met with only moderate interest so far. During the three years since we launched it I’ve been to a number of conferences at which people have heralded this as the way forward, but nothing has happened yet.”
A further possibility for innovation would be to have a whole of life income protection policy that simply pays out on the basis of ADLs from the very beginning.
Brian Lentz, principal at Portfolio Insurance Consultancy, says: “I’ve spoken to loads of insurers about this, saying that the reason that IP hasn’t taken off yet is that it’s too complex at the claims stage. ADLs would work well enough for the more physical occupations but could pose problems for sedentary workers, so it becomes very difficult.
“Converting to an ADL basis at retirement age works for whole-of-life CI cover and I believe there are a lot of new things being thought up at the moment by income protection insurers. But it all boils down to the appetite of reinsurers to get involved in a completely new area of risk.”
There are certainly some indications from existing product designs that ADLs could represent the way forward. Insurers seem happy enough to use them for homecare protection for non-working partners, albeit subject to fairly restrictive benefit limits, and are becoming increasingly willing to use them to cover the riskier occupations on standard income protection contracts.