Another look

The sales story for income protection (IP) is well known ' it has achieved a market penetration of around 11% to 12% of the working population. Even in the comparatively successful niche of mortgage protection, surveys suggest around 80% of mortgages have no disability cover.

So presumably the product needs to change? Actually, no ' but everything else around it does. Everything from underwriting to claims can be improved and the product needs to be repositioned in the market as offering more than just a cash benefit.

Changing the product name to 'income protection' has certainly helped customer understanding, but in general the marketing of IP has been poor. Public understanding of the need for cover is low: people think the State will provide, or else the paternalistic employer will. They also drastically underestimate the chances of being sick on a long-term basis. Against this background, it is hardly surprising sales have been low, or premiums are viewed as expensive.

The problems also extend to advisers. Research commissioned by GeneralCologne Re shows a lack of confidence among advisers when selling IP. The reasons are familiar ' lack of awareness of the need for cover or the levels of State and employer support. The research also shows advisers think IP is more important than critical illness (CI) cover. Sales however, are about six to one in favour of CI. Viewed positively, this shows the potential for IP if we get it right.

Information

There is therefore a need to educate both advisers and the public. This could be through advertising, press articles, clearer product literature and ' in the case of advisers ' improved sales training. Advisers would benefit from better sales aids with case histories as well as information on State and employer benefits and the probability of being sick in the long term.

The message is simple. If people do not know IP exists, or they think the State or their employer will provide, then do not be surprised if sales are low. If advisers are only slightly better informed, then we are lucky to have sold as many policies as we have.

Assuming the adviser and their client get through the awareness barrier, there is the underwriting process to contend with. However, some leading insurers have made improvements.

One office increased the non-medical limits for GP reports (GPRs) and instead used paramedic nurses for the screening process. It also worked on its adviser communications, ensuring they were aware of the application's progress and implementing priority communication for key brokers. This resulted in 40% of cases going on risk within 48 hours with low non-disclosure rates.

Another insurer introduced fast-track underwriting. The application form was expanded in order to collect medical information from the applicant rather than the GP; the thinking being that the applicant is best placed to know about their medical history. Together with a strict approach on non-disclosure, which was understood by advisers and a sampling of GPRs for post-issue underwriting, the insurer put 65% of cases on the books immediately. Fewer cases were lost during the underwriting process and non-disclosure rates were only 2% to 3%.

The right systems

A more technological approach is to use an expert underwriting system. This generates less evidence requests than the human underwriter since the decision over whether or not to obtain medical evidence is parameter driven. There is no erring on the safe side and obtaining evidence just in case. The system can underwrite the more straightforward cases itself and the point-of-sale version can give immediate acceptance. This leaves underwriters free to concentrate on the more complex cases with speed and efficiency increased.

Plenty can be done to ease the underwriting process and get more, well-underwritten business on the books more efficiently.

Having said the product design does not need to change, there are several elements that could improve its attractiveness. A benefit could be paid on becoming totally and permanently disabled (TPD) ' this could be an increase in monthly benefit or a lump sum. Lump sums in general may be attractive to the policyholder, perhaps payable at the start of a claim where extra expenditure by the claimant could be necessary, at the end of a claim or on becoming TPD. A no-claims bonus is a feature used by some insurers in the form of reducing premiums for in-force business, or by allowing a premium holiday in the last few years of the policy term if no claim has taken place. There is also scope for improving flexibility through guaranteed insurability options as long as they are well worded to manage any anti-selective risk.

GeneralCologne Re's research also shows demand from advisers for a lump sum component, no claims discounts and clearer literature highlighting the need for IP and giving statistics on sickness rates.

More importantly, the product proposition needs to be reconsidered. We should be moving away from a product that gives cash when customers fall sick to one that helps people back to work, provides ancillary services and gives a cash payment in the meantime. This is a more rounded proposition for the customer and takes account of the fact that more than cash is needed if someone is ill (see graph one).

Another possibility for a lump sum component to the product is if cash for private treatment is paid direct to the policyholder. This might be for physiotherapy, for example, or a private operation. If the IP benefit is £1,000 a month, it is worth spending £3,000 on a private operation if the claim is otherwise expected to last more than three months. The insurer would, however, need to be careful about pushing the treatment and need to liaise with the claimant's GP.

Some leading insurers already do this, but many others do not. Even those who do tend to hide it away as a claims management tool. There is a real opportunity to highlight this as part of the sales process, giving the product a marketing boost and a more rounded proposition. If the policyholder knows this is a product feature, it can also encourage early notification of sickness. This is absolutely vital in terms of managing the claim and may even ensure this valuable product feature has a negative cost.

Back to work

Rehabilitation is another product feature used successfully only by few insurers. Many still have to come to grips with rehabilitating their claimants into the workplace. Again, those that have, tend to hide it away in the claims department rather than highlighting it as a valuable product feature at point of sale. Why do we hide away some of our most valuable benefits? This is a chance to emphasise the 'caring' side of the insurer, something the industry sorely needs.

If one talks to people involved in rehabilitation, they will say many claimants want to return to work, but need some help. Even among those not wanting to go back, some are pleased once they are rehabilitated.

Of course, there are always those who see IP as an early retirement opportunity. Changing the product's positioning away from the provision of cash to a 'back to work' plan may help discourage these people from taking out the cover in the first place ' or at least make them understand what will happen at claims stage.

The final opportunity for IP is in the area of added value services. These can be provided cheaply covering areas such as help completing the claim form, home visits by a nurse, links to networks of medical service providers and even links to more mundane services such as shopping or gardening.

Helplines can be provided offering telephone access to nurses, legal advice, employment advice and counselling. In order to avoid a lack of trust, these services need to be handled by someone other than the insurer. The PR and marketing benefits are obvious, the focus on price is reduced, extra costs are low and there is a claims management benefit making these services partly self-funding.

Advisers and insurers need to let people know what IP can provide ' there is more to this product than simply cash benefits.

Neil Reynolds is a consultant at Mercer Risk Finance and Insurance Consulting