Bah humbug!

Again, the camps are divided about the extent that these regulatory duties require firms to take account of the welfare system when selling protection insurance. Judging by the FCA’s views on packaged bank accounts, they expect (at the very least) that the customer in their current circumstances would benefit financially from a claim.

Other benefits, such as peace of mind, rehabilitation, a long-term contract are all helpful, but the main event is all about the money. Being ‘better off’ with a financial product has to mean more than feeling more secure before a claim. Surely, it also has to mean being better off after a claim.

Complex system

Part of the issue is the immense complexity of the welfare system. Unlike the NHS, where we all have a good understanding about what it provides, most people have no idea what to expect from the welfare system in the event of needing it. However, just because it’s complex and unfamiliar, doesn’t mean it’s not an effective financial safety net for millions of households.

It doesn’t help that the debate comes in the middle of the transition to a new system: Universal Credit (UC). This is a new means-tested benefit that brings together and replaces some of the previous welfare benefits: Income Support (IS), Income-based Jobseeker’s Allowance (JSA), Income-based Employment and Support Allowance (ESA), Housing Benefit (HB), Child Tax Credit (CTC) and Working Tax Credit (WTC). Other available benefits will remain separate, such as Council Tax Support (CTS – formerly Council Tax Benefit), Disability Living Allowance itself becoming Personal Independence Payment (DLA/PIP), Child Benefit, contribution based Employment and Support Allowance (ESA) and contribution-based Jobseeker’s Allowance (JSA).

UC includes three main elements: living expenses, children and housing. The elements are added together and checked against an overall cap of £500 a week for couples and single parents with children, and £350 a week for others.

One way to approach this would be to do a full welfare benefits assessment for each customer, factor in any proposed insurance, and then look at the interaction. This is likely to take beyond the attention span of most customers, and ultimately would be pointless.

The customer won’t be making a claim straight away and any future entitlement to welfare support depends on many factors we can’t predict – for example, the extent of any future disability they might acquire. In addition, the interaction with insurance is only with means-tested benefits, not all benefits.

So the key to unlocking this puzzle is by recognising that you don’t need to understand precisely what people would get from the welfare system today to know how well they would fare generally under it. As one actuary put it: “Better to be roughly right, than precisely wrong!”

One fundamental difference between the welfare system and insurance is that welfare looks at households and needs – not individuals and benefits they have paid for. For example, the welfare system looks after households with children better than those without to prevent child poverty.

The complexity means that households can’t be segmented by simple factors alone, such as income. However, technology now allows us to ask up to five reflexive questions (but could be as few as one for some) about the household’s make-up, finances and home, and apply an algorithm to segment the households into three types whose insurance needs are very different:

• Those where the welfare system works very well;

• Those at the other extreme who would get hardly any support;

• Those in between who would get some support, but nothing like enough.

Benefits traps

Politicians often talk about ‘the benefits trap’, where welfare provides a disincentive to return to work, trapping households on benefits. There is another benefits trap that seldom gets mentioned: means-testing discourages personal provision, trapping households into living on welfare alone when the worst happens.

We need a welfare system that encourages people who can afford to do so to plan ahead and take responsibility for their financial security. We have the exact opposite now, so we should lobby for change.

Sadly, change won’t come any time soon. Until then, we need to navigate the complexities of the system, helping customers make the most of their hard-earned income. Technology now allows us to automate questions and algorithms into something really easy for customers to use, whether it’s a tool for Money Advice, employer websites for workplace self-select/self-pay schemes, D2C propositions, or helping advisers give clients the right advice.

Perhaps it won’t be long before we see an app to navigate the space between welfare and insurance, helping customers choose the right protection products. The future of the industry depends on being aligned with the interests of consumers, so let’s hope that day comes soon.  

Nick Kirwan is director, care funding advice at the International Longevity Centre-UK