Striking a balance
The employer/employee relationship is evolving. Both income protection products and employment law need to change to reflect that, says Edmund Tirbutt
A gradual increase in the amount of limited term income protection appears inevitable as it more accurately reflects the employer’s perception of their responsibility towards their employees, said delegates at the Welfare Reform and Group Risk round table hosted by Corporate Adviser last month.
The emergence of limited term stood at the centre of a debate about product innovation, as employers look to more affordable types of cover. Swiss Re research shows limited term IP, which typically pays out for between two and five years, still accounts for only around 7 per cent of total income protection sales. Advisers pointed out many employers could be forgiven for wondering why they should provide cover for life when they don’t expect the average employee to remain with them for more than seven or eight years.
But Glenn Thompson, customer solutions director at Unum, questioned whether limited-term was the right way to control costs because it could create a very difficult situation for employer and employee alike if an employee’s benefit ends after two years but their incapacity lasts for much longer. He therefore felt it made more sense for cost-cutting employers to look at varying definitions of disability, emphasising that employers generally most want to cover those who are going to be disabled long-term and who will really suffer financially.
Jamie Winter, senior consultant at Towers Watson, offered a different perspective, arguing that limited term was probably the only design that would be sustainable as many employers didn’t want to impose an age exclusion, despite the group risk industry having obtained an exemption from the scrapping of the Default Retirement Age. Winter has already had employers saying that they want to provide employees with income protection until they are 75.
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, was another to feel that a swing to limited-term is inevitable eventually. He said: “As an industry we are quite slow to adopt new ideas but it will come and the penny is gradually dropping. I have never liked two year limited term but if you can show an employer that the costs of five year limited term are pitifully low compared to pensions then they are often quite willing to consider it.”
“A 100 per cent voluntary market won’t get us to where we need to be, but it’s definitely a very important piece of the jigsaw”
Amanda Gill, consultant at Bluefin, felt there could be a place for critical illness cover being combined in some way with limited-term income protection to cover the severely disabled in a similar way to that in which some limited-term income protection policies offer capital options.
Attitudes towards the idea of voluntary income protection were, however, decidedly lukewarm.
Indeed, when asked where they expected to see the greatest growth in new income protection business through the workplace if knowledge and understanding of the benefits of income protection was greater amongst the general public, only 33 per cent of attendees expected it to come from employees buying income protection through voluntary benefits.
Even Marco Forato, chief marketing officer at Unum - which is unusual in that it offers voluntary income protection as an option - was far from pinning all his hopes on the approach.
Forato said: “A 100 per cent voluntary market won’t get us to where we need to be but it’s definitely a very important piece of the jigsaw. I like the idea of offering core cover and letting employees top up, and I think this is very important. Employer contributions give more credibility to the product and improve take-up rates. It could be on a basis of matched contributions but it doesn’t have to be.
“In this country income protection is the thing that ties you to your employees but in the US it’s actually the key to letting them free. A US employer can say with a completely clear conscience to a poor performer that they are covered by the insurer until retirement ’so thanks for your service and goodbye’. We are talking to the government about changing employment law to make it easier. But it’s a very long term process”
Herbert begged to differ, however. He said: “The great advantage of income protection as it currently stands is that those that get it don’t have to pay for it and, once you start asking for contributions, take-up will be very low indeed, particularly if we as an industry don’t start seeing the employees and explaining benefits to them.”
Forato threw a new product concept into the ring when revealing that his company’s main income protection product in the US pays out benefit until the age of 65 for the majority of conditions, but limits to only two years claims for mental and nervous disorders which are not medically proven. Forato admitted that he didn’t necessarily think that the format would prove to be the solution in the UK, and attendees were not slow to share his doubts.
Herbert said the idea was a “complete non-starter” on the grounds that it was far too complex, but Gill was more open to the concept and drew an analogy with developments in the private medical insurance (PMI) market.
Gill said: “In the PMI market we’ve been distinguishing cancer claims and reducing cover for them. Not everyone likes to go down that route but then again not everyone can continue to afford to pay for full cover. Employers will need to think very carefully about it but it could be a solution for those seeking greater cost-effectiveness.”
Advisers wanted to know how much could be saved off premiums by introducing term restrictions on certain specified conditions. Carlos Correia, senior consultant, risk benefits consulting at LCP felt that just chipping off a bit of cover was probably not worth it unless a 20 per cent premium saving could be realised because it could give rise to all sorts of employment law issues.
Winter was also wary of the potential for discrimination claims. He said: “It would be introducing the potential for getting dragged into tribunals, and the unknown costs of tribunals will concern employers. I’m sure that some companies would take it up but I can’t see it as a general thing adding much value, and I don’t think it will fly.”
Employment law considerations also figured very prominently when it came to discussions about the possibility of designing a product that enabled employers to avoid having to keep employees on the payroll. If an employee is actually claiming, this is already available through the Pay Direct option - for which Marco Forato revealed Unum was working on a waiver-of-premium solution to allow claimants to keep their life cover.
Nevertheless, Forato said Unum is hoping to go a significant stage further than Pay Direct and come out with a workplace product that is actually a contract between the insurer and the employee as opposed to between the insurer and the employer - as is currently the case. Such a concept, which is already widely used in the US, would work in a similar way to group personal pensions.
Forato said: “In this country income protection is the thing that ties you to your employees but in the US it’s actually the key to letting them free. A US employer can say with a completely clear conscience to a poor performer that they are covered by the insurer until retirement ’so thanks for your service and goodbye’. We are talking to the government about changing employment law to make it easier. But it’s a very long term process.
“We would like it if employees couldn’t sue employers who let them go because they have a disability but it’s not currently very clear if employees can come back at them in such situations. We need to get the government to understand these issues, and we are talking to people involved in welfare reform but a lot of them don’t even know what income protection is, which is pretty scary.”
Forato stressed that lobbying on such a complex issue, which could require significant changes to politically contentious disability laws, would not be achieved overnight.
Correia agreed, saying: “We need to get to a situation when the employer can provide genuine financial security without worrying about commitment and the dangers of unknown problems arising in the future. We need to strike a balance and to clear away some of the commitment aspect. So I can see group personal income protection becoming popular as the employer is not tied to the employee.”
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