Protection has always been expensive for those in high risk occupations, but is it fair that consumers may compromise on product quality? Paul Wood examines the case for IP
Whether living to work or working to live, we're all defined to a certain extent by our occupation. It has a major impact on almost every facet of our lives. It affects where we live, the friends we make and, most importantly, it directly impacts the size of our bank balance.
However there are more tenuous, less obvious impacts that a person's occupation may have. It may have an impact on how we dress, how we speak and even the insurance premiums paid.
Income protection (IP) has long been seen as the black sheep of the protection market, the underperforming younger brother to term assurance and critical illness. Over the years, few have questioned its importance within the overall protection portfolio but the lack of policies sold indicates that this belief has not been carried through into positive action, boosting sales figures.
Cut to the chase
Why is this? Well IP providers are certainly no contenders for a Plain English Campaign award; poor communication has led to confusion and disputed claims that have undermined consumer and intermediary confidence. However, intermediaries must share some responsibility for weak sales by failing to understand IP products fully and making them a 'core' recommendation when advising clients. This lack of understanding has often resulted in inferior and unsuitable income replacement policies being sold, a fact that has not escaped the attention of the regulator.
There have also been failings related to the product, most of which have been well documented over the years. It is fair to say providers accept it. Crucially the service has not performed as effectively as it could have done over the years, but some of the failings can also be placed at the feet of intermediaries who in some cases have backed inferior and unsuitable products as replacements.
One issue, inherent within the industry, has been the failure of insurers to produce products that are truly available to all. Providers have long been blowing the 'IP for all' trumpet but how achievable has this vision been? If those in high risk occupations - or their intermediaries - were asked, their answer would paint a fairly negative picture.
The core market for the majority of IP providers has always been those in low risk, office-based and professional occupations. This focus has consequently had a huge knock-on impact on product and rate design where those who fall outside these occupations - the list of which differs according to the individual underwriting criteria of each provider - can suffer from either dramatically increased premium costs or a reduction in the quality of terms and conditions offered.
Across the IP market, occupations are generally classified according to risk (usually into four categories) and priced accordingly. The difference in premium between a low-risk class one and high-risk class four occupations can be so large that often what should be a crucial and affordable type of cover becomes unrealistic to the majority of budgets.
To highlight this point, it is not unusual for those in a high risk occupation to pay three times as much for their IP cover as those in professional or office based jobs. However, the story does not stop at the size of a monthly direct debit payment.
The true value of an IP policy is experienced at claim; there can be no real dispute about it. If the provider performs and the policy offers a lifeline and stress free income in difficult times, most policyholders will be happy with their decision to take out cover. However, if this is a negative experience, many customers will question their choice of policy and provider.
This is where the plot thickens for those in high risk occupations and for those intermediaries striving to provide 'best advice' to match the client to the policy which offers the best value and a stress free claim.
There are many crucial aspects of any IP policy, but the focus should be placed on a few major features.
A policy's definition of incapacity is crucial. How ill are the ill? How injured are the injured? Does the illness 'qualify a person for benefit? If these questions sound unappealing, the only definition of incapacity to strive for is 'own occupation'.
Cloudy outlook
Under an 'own occupation' definition, if someone is not well enough as a result of illness or injury to undertake their normal occupation they are entitled to benefit. For any other definition, a large amount of 'grey' can come into the picture, eroding customer confidence and, most crucially, complicating the claims process.
For those working in a high risk occupation however, this definition has not always proved attainable. In addition to the higher premiums that have been applied in the past, the majority of insurers have added alternative definitions such as 'suited', 'any occupation' or 'activities of daily living'.
A key feature of any IP plan is the deferred period - the amount of time a claimant has to wait before benefit is paid. Again, this has been a stumbling block for many in high risk occupations which is ironic because the group that requires payment the quickest due to little or no sick pay from employers is precisely the one that has been unable to achieve short deferred periods due to limiting of access to this feature.
A few years ago, people may have had to accept the problems that have affected this sector; this is no longer the case.
There are now a number of providers in the IP market offering viable, comprehensive and affordable solutions for many in high risk occupations. All intermediaries have to do is look beyond the usual suspects.
If an adviser now wants an 'own occupation' definition for a builder, they can get it; if a client wants to secure cover on a four week or even shorter deferred period, they can get it, if they want to remove any further complications and go for a policy with no standard exclusions, this is also available.
Rather than the market 'leaders', the high profile insurance brands, this innovation has come from a more unlikely source.
Traditional approach
Many friendly societies specialise in healthcare. These so-called 'Holloway societies', are based on principals proposed by 19th century MP George Holloway and are drawn on over a century of experience. Some Holloway societies, including Pioneer, have further enhanced the IP propositions while maintaining a competitive and affordable pricing structure.
Has the remainder of the market responded and developed a quality proposition that offers those in high risk occupations high quality cover and crucially affordable premiums? The answer is not yet. So intermediaries wanting to take advantage of this potential income stream in an increasingly difficult financial climate now know where to look.
Paul Wood is UK intermediary sales director at Pioneer.
