Freedom of choice is key
At the end of last year DEMOS, with support from Macmillan, published a wide-ranging report “Getting to Grips with the Financial Consequences of Cancer – Paying the Price”. It is an exceptionally well researched report. The area I want to focus on is the role of income protection insurance in meeting the financial implications of cancer and other illnesses.
The key recommendations are that income protection and pension providers should explain clearly to employees what their risk of income loss due to cancer is and what they can do to protect themselves and their families. And that the Government should work with the insurance industry to develop a kitemarking scheme of minimum standards in the income protection industry. Such a scheme would take place in partnership with the Treasury’s Simplified Products Review and would set a standard model for income protection. In return for compliance, income protection could then be incorporated as an optional opt-in to the new NEST workplace pension scheme.
Those who have read this column for a while will be aware of my enthusiasm for a Quality Standard for income protection. Linking this to auto-enrolement results in some new challenges and revisits some of the existing ones. It is also particularly relevant given the plethora of short term IP products entering the market, where we have little information of how much is being bought, how often they pay out, which of them are genuinely IP and which are simply re-branded ASUs.
So what should we be aiming for? The first thing to recognise is that the auto-enrolement market could be very different from the current set up where we have group schemes entirely paid for by employers and individually bought IP. In some cases insurance through a group scheme might be the only way an employee could get IP at all, or at reasonable cost. In other cases people who move jobs, the norm these days, might be much better off with an IP product that would transfer to a new employer. Employees should be able to choose between the group scheme offered by their employer (assuming the employer is paying for it) and an individual quote. Employers should then pay the equivalent of what they would have paid to their own supplier to the scheme the employee chooses – if they choose the individual option. And insurers of group schemes should guarantee not to exclude an individual from their scheme just because they had been turned down for an individual scheme.
Second, at point of claim, individual policies bought though NEST should be treated exactly the same as those bought through group schemes when assessing welfare entitlement ie as earned income. Currently this is not the case and can mean that some people who have bought individual policies are no better off as their income is taken in on a £ for £ basis. The principle should be, if you pay more in you get more out. What I am suggesting would open up a competitive market between group and individual income protection, benefit employees, and provide new opportunities for IFAs.
Finally we move to the other fundamentals for a Quality Standard: that it should go beyond the lowest common denominator (ie it should not allow the poor products accreditation); that IP should be easy to buy and sell – the NEST idea would help here; that people should know what they have bought – ie it does what it says on the tin; that it should be easy to claim on – and pay out what people expect to receive; and that it should be transparent – publish claims stats, as existing individual IP providers are currently doing. All to play for in 2014.