Can simple IP really work?

In November the COVER website ran a thought-provoking blog from Phil Veale who argued income protection (IP) had not seen significant product development in recent years.

As a major provider it is not certain we would entirely agree, but any concerns Phil has should be allayed by looking at the work being done by Carol Sergeant's Review of Simple Financial Products.

The simple products review, which is expected to publish its final report in February, has the potential to be a huge opportunity for the financial services market, but particularly for the income protection category.

By concentrating minds on what a certified simple IP product might look like, particularly the benefits of group products as opposed to individual policies, the Sergeant review should provide significant impetus for further product development, boost the reputation of IP and deliver significant growth for the market.

To understand the opportunity presented by the review, we should start by considering the apparent barriers to creating a genuinely simple IP product. There are four competing requirements that such a product must reconcile:

• The need to make the product affordable for a broad range of people;

• The need to ensure that eligibility is not restricted and cover is open to the majority;

• The need to ensure individuals receive an appropriate level of cover; and

• The need for the product to be commercially attractive for providers.

These potential barriers may lead some to question whether a simple IP product is viable. That is the wrong attitude.

How could a product for which there is a clear need (consumer organisation Which? calls IP a ‘must have'), yet has such a comparatively low market penetration (just 1 in 10 people have IP) not be viable? Given those competing demands, it is clear that simple IP must be carefully structured to ensure it is successful.

Individual Versus Group policies

So how can those four distinct requirements be reconciled? The key to the successful roll-out of simple IP will be favouring group policies through the workplace, rather than individual cover. There are four main reasons for this: affordability, accessibility, availability and consumer acumen.

Affordability

If simple IP were to be offered through the workplace, premiums can be calculated for a group of employees, thereby spreading the risk for the product provider and bringing down the cost of cover.

In addition, progressive employers would have the opportunity to subsidise the cost, either in full or in part, by incorporating IP within their employee benefits package. There would be bottom line benefits to this approach for employers through improved staff morale and loyalty, as well as helping with talent attraction, especially given that it is a tax-deductible benefit.