After four years with Swiss Re's Australia and New Zealand business, Russell Higginbotham believes the UK could import some ideas from the Australian life and health market
Abrief paragraph in the recent Comprehensive Spending Review (CSR) document reiterated the coalition government's commitment to the UK's National Employment Savings Trust (NEST). This was soon followed by the announcement setting the minimum threshold for participation at £7,475; an increase over the previous government's proposed threshold of £5,035.
The continued support for auto-enrolment among employees is welcome news, irrespective of whether this is into NEST or into a qualifying workplace pension. Auto-enrolment is a step towards a strong mechanism for a future improved level of pension provision for the UK's workforce, and could provide a stimulus for growth in the UK pensions market.
We will wait to see the finer detail, but employers and employees can now plan with a bit more certainty. It could be argued, however, that this was a missed opportunity to spread the net wider than just retirement products. While we start to fix the problem of pension under-provision, are we leaving the consumer less likely to protect other commitments?
More channels required
With the Retail Distribution Review (RDR) also coming into force at the end of 2012, there will be a reduction in the number of advisers. This will reduce the availability of advice for middle earners, which might, in turn, prevent them from gaining a full picture of their retirement planning requirements and what protection products are available and necessary, as fewer of them visit an adviser.
Consequently, more channels need to be opened up for consumers to access appropriate financial products and now could be the ideal opportunity for government, employers, advisers and insurers to work together and address this issue.
Although there is a healthy group risk market in the UK, it is discretionary and there are still many employers who choose not to, or do not see the need to, provide protection products. The in-force figures for death-in-service cover are a firm foundation - around 40% of employed people enjoy some form of life cover, with an average sum assured of just over £100,000. However, only 7.5% are covered by income protection benefits. There are more in self-insured schemes, but there is still very significant potential demand.
Looking beyond the UK, protection products have become an integral part of the Australian superannuation market. Since 2008, it's been mandatory for superannuation funds to offer a minimum level of life cover and this means that 100% of the working population has some level of financial protection in the event of their death during their working life.
This has promoted innovation with improvement in benefits for employees. Insurance is now used by superannuation funds to differentiate themselves from competitors, with cover a key part of members' and their dependants' financial security. Trends are emerging for superannuation funds to increase their level of death and total permanent disability cover as well as offering a wider range of protection products to members.
With their superior purchasing power and low cost of distribution, schemes provide death and disability cover to employees at very competitive prices. It is thanks to this competitive environment - and the increase in access - that these products are being used as employee incentives, and the take-up in Australia is promising to say the least. Thirty percent of all Australian employers have set up a default income protection plan through superannuation, with a further 20% offering such products on a standalone basis.
Where default income protection cover is not offered by a superannuation fund, approximately 3% of fund members take out cover on a voluntary basis, although this number is expected to grow along with the number of employers offering default cover. For example, Australia's largest superannuation fund - AustralianSuper - introduced income protection cover to approximately 800,000 members last June, from which less than 2% opted out.
Swiss Re's research all points to a promising proportion of UK employees willing to purchase protection products from an employer. Our 2009 Insurance Report tells us that 41% of employed consumers would be "very likely" or "fairly likely" to consider buying insurance through their employer. For people with children under 18, this rose to 54%. This figure was echoed on the continent in our European Insurance Report, with 47% likely to consider making such a purchase through their employer.
A clear vision
The vision is therefore clear: if we were to take the best practice from Australia and use the good groundwork formed by auto-enrolment and NEST as a catalyst, we could allow more employees to access protection products with cover that sits alongside, and complements, existing employer-sponsored benefits. The timing is particularly relevant when state benefits are facing substantial reductions in cover.
In the Australia model, when selecting a superannuation vehicle, each employer can select a basis or level of life cover that is relevant to the needs of its employees. If the employer makes no selection, a default level of cover kicks in. Eligibility for cover is simple, based on the employee being actively at work, so there is usually no need for further underwriting.
If the products are easy to buy and to understand, more employees will see the merits, as well as take action in financially protecting themselves against unforeseen misfortune. Those who are inexperienced at purchasing protection products would no doubt appreciate straightforward processes like opt-in or opt-out systems and payment through their payroll.
Easier transfer systems
When changing employers, consumers tell us they find it confusing that they can't continue their life cover policy when changing jobs. In the world of a more transient workforce, an easier transfer system should also be considered. The outline plans for NEST would certainly support this and could easily be extended to protection.
The CSR revealed the biggest public spending cuts since the 1970s. Many state benefits will be withdrawn or reduced significantly and much emphasis will be put on the private sector and employers to help individuals take personal financial responsibility. This can only work effectively if carried out in partnership with the government.
There is an opportunity for the insurance industry, employers and those providing financial advice to help workers obtain an element of financial security and peace of mind against unforeseen eventualities, such as death, illness or disability. If these parties work together, with the government supporting these efforts by providing the appropriate infrastructure, it will enable the migration from the current reliance on state benefits to personal provision.
If the government intends the private sector to take a greater role in addressing the services once provided by the state, then it's essential that government departments work together with industry to form a shared vision and to get behind this aim. The insurance industry offers a logical private solution to the withdrawal of state benefits, but a government framework should be developed to allow this paradigm shift to take place.
The Australian superannuation model provides some good ideas for how this can be built on to expand beyond retirement saving and into the territory of protection products. While it's unwise to copy another country's model literally, the Australian approach has many merits. We need not shy away from taking a fundamentally good idea and adapting it to the UK model.
Unfortunately -while not wanting to end this article on a negative note - the current development of NEST is not heading in the direction of providing a wider range of life and health benefits alongside pension savings. I personally feel that we might be missing a very timely opportunity as a result.
Russell Higginbotham is CEO of Swiss Re
