REFORM

WELFAREREFORMFOR THE 21ST CENTURYThe role of income protection insuranceabi.org.uk@BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYContents3 Introduction4 Executive Summary7 Understanding the problem13 The impact of serious illness or injury15 Income Protection18 Barriers to buying IP20 The role of employers and the workplace21 International and alternative models23 Looking to the future24 Summaryabi.org.uk2

IntroductionThe purpose of this paper is to consider options forfurther welfare reform, and the role that IncomeProtection insurance (IP) can play in a new welfareframework. The paper explains how IP works,including its interaction with the current welfaresystem. We address the impact of employee ill healthon productivity, household income and the economy,and explain how IP provided through the workplacesupports all three through better management ofemployee absence due to ill health or injury.Alternative models of combining state andprivate insurance are explored, including somemore innovative international models. The case ismade that it is time to think differently and createa new framework that will make it easy forpeople to see how much support they will getfrom the state and their employer, and put inplace their own safety net that meets their needs.This paper will be of interest to anyone engagedin the policy debate on welfare reform;household financial resilience; the impacts of illhealth or disability on households, businesses,and the economy; the benefits of earlyhealthcare rehabilitation; the role of employers;and the role of income insurance.‘It is time to think differentlyabout welfare, incomeprotection insurance and whatis required to ensure morehouseholds can cope withunexpected financial shocks.’3Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYExecutive summaryIt is now widely recognised across thepolitical spectrum that economic anddemographic factors are creating irresistiblepressure for further reform of the UKwelfare system, to reduce the cost of thewelfare budget to a level that is affordableand sustainable for the UK economy.Yet even under existing levels of welfarespending many working age households in theUK have little or no safety net to fall back on iftheir income falls significantly, for example if oneearner in the household is unable to work formore than a few weeks due to illness or injury.The reality is that millions of UK householdsrelying on income from employment have notput in place a realistic safety net.Each year one million workers suddenly findthemselves unable to work due to seriousillness or injury.Around 250,000 people leave employmenteach year due to ill health, around 1% of theworkforce. 60% of these are the mainhousehold earner.There are a very large number of middleincome working age households that wouldsee their household incomes fall substantiallyif the main earner left work due to ill health. of working families - would see theirincome fall by more than one third if themain earner had to stop work due to illhealth, and they have no insurance to givethem a financial safety net if this happens. 40% of working families - would see theirincome fall by more than half withoutinsurance to provide a safety net.Policy under future governments needs to bemuch more effective in motivating greaterpersonal responsibility and self-sufficiency inmanaging the balance between householdincome and spending. Government needs tocommunicate very clearly and consistently thatthe welfare system is a safety net againstabsolute poverty – it does not exist to replaceincome from employment.THE UK WELFARESYSTEM IS BASED ONA FUNDAMENTALLYFLAWEDASSUMPTION THATHOUSEHOLDS THATWILL GET LITTLE ORNO SUPPORT FROMTHE STATERECOGNISE THIS,AND ACT TO PUT INPLACE THEIR OWNSAFETY NET.EACH YEAR ONEMILLION WORKERSSUDDENLY FINDTHEMSELVESUNABLE TO WORKDUE TO SERIOUSILLNESS OR INJURY.Private income protection insurance (IP) shouldform an important part of the solution to furtherwelfare reform, both to help reduce the cost ofwelfare and increase household income safetynets. IP is a form of contributory benefit.Households that are covered by IP receive anincome from the insurer that replaces theiremployment (or self-employment) income – at alevel they need - when they are unable to workdue to illness or injury.The challenges of improving working agefinancial security, while preventing the cost ofstate support spiralling out of control, are verysimilar to the challenges that led to fundamentalreform of pension provision, and to currentpolicy on meeting the growing costs of longterm care. As a nation we have recognised thatthe model of state provision we have relied onfor decades is not economically viable for thefuture, and new approaches are needed.Pension reform is an important first step on thatjourney, but now we need to continue thejourney to address working age incomeinsecurity.Households need a system that will give them acrystal clear understanding of:how much income support they can get fromthe state if they have to stop work due to illhealth;how much income support they will get fromtheir employer; andhow they can top up their income safety netto the level they need.There is clear potential for the insuranceindustry to contribute to building and deliveringnew models combining state and privateprovision that are fit for the future. In particularwe see great potential for greater use ofinsurance based income safety nets through theworkplace as part of the solution.The ABI is engaging with policy makers,employer representative bodies, and otherinterested stakeholders to develop detailedproposals for a greater role for employers inproviding insurance based income safety netsthrough the workplace.abi.org.uk4

Income risks facing householdsand governmentIdeas and opinions abound about how thewelfare system should be reformed. Someideas focus on refining the existing welfaremodel, others advocate more radical reforms.There is growing political support for creating astronger contributory element to givehouseholds that contribute the most a higherlevel of support in return.But in order to create solutions that will work inpractice to deliver a fair, effective andeconomically viable model, a strong evidencebase and understanding of the problem and thechallenges involved is needed.Current welfare policy – and indeed policyover recent decades – assumes thathouseholds that would get a poor incomereplacement rate from the State will realisethis and take action to put in place a privatesafety net. The reality is that relatively fewhouseholds in this situation have put anadequate safety net in place. In part theproblem is caused by households not havinga clear and accurate understanding of howmuch income support they would be entitledto, from the State and from their employer, ifthey were to need it.The welfare system is extremely complex (andwill remain so even with the full implementationof Universal Credit) but no government hasmade any concerted effort to inform householdsabout the level of support they can expect fromthe State if they fall on hard times. The picture isconfusing even for professionals. For individualsand families, it is all but impenetrable. In addition,most people do not adequately consider thepotential risk of something preventing themfrom working, or the impacts of the loss ofemployment income on their household finances.There are powerful psychological andbehavioural factors that have a negativeinfluence on households putting in place anadequate safety net to protect themselvesagainst these risks: really bad will happen to me or my family”;present and the (uncertain) future. Greaterweight is given to the (certain) present – suchas the cost of an insurance premium – thanthe (uncertain) future benefit of income froma claim on that insurance;Emotions such as fear of loss and regret(loss aversion) often have a strongerinfluence over decisions than an objectiveassessment of costs and benefits.Even for households that decide they want toput in place a greater safety net than the Statewill provide, there are complex interactionsbetween private safety nets and State support.Policy makers must recognise that theassumptions underpinning current welfarepolicy are flawed. If further welfare reform isto achieve its objectives it must be informedby an accurate understanding of householdincome risks, as well as household behaviourin managing them. It must also ensure thatthe interaction between private, State andemployer income safety nets is easy forhouseholds to understand and producesclear, predictable and appropriate outcomes.How can insurance contribute tonew safety net solutions?This paper builds on the growing debate aboutthe role of the welfare system and the rightbalance between State and self-provision ofsafety nets. It aims to contribute to the evidencebase and the understanding of the problem, butalso to illustrate how greater use of privateinsurance based solutions can contribute tofurther welfare reform, particularly through theworkplace.Insurance based solutions can play animportant role in providing the right type andlevel of safety net that diverse modernhouseholds need, but which a taxpayer fundedState model struggles to provide. Indeed, it isdifficult to see how it is possible to both reducethe cost of the welfare budget to taxpayers and,at the same time, increase safety nets forhouseholds through a tax and NationalInsurance funded State model.Excess confidence and low accuracy in abilityto assess the probability of future events;Difficulty in judging trade-offs between the5Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYIn order to reduce the cost of the welfarebudget, many more households need tohave a safety net outside of the welfaresystem. IP is a private contributory safetynet. It replaces lost employment (or selfemployment)income when an individual isforced to stop work due to serious illnessor injury.Parliament has already recognised the powerand importance of innovative workplacesolutions in overcoming the psychological andbehavioural forces that inhibit people acting tosupport their financial wellbeing in retirement, byintroducing workplace pension automaticenrolment.The current Government has recognised theimportant impact of early health andrehabilitation support on how fast and how farsomeone recovers from illness or injury, andtherefore their ability to return to work. In light ofthis, the Government is reforming State supportfor those who sign off work due to ill health, byimplementing the main recommendations of theindependent review into sickness absence ledby Dame Carol Black and David Frost 1 , ‘Healthat work – an independent review of sicknessabsence’. The new ‘Health and Work Service’ isto be implemented as a result ofrecommendations from the Black/Frost Reviewand will provide advice and signposting to thoseoff work for health reasons for more than amonth. It will be funded through the abolition ofa previous subsidy for employers with highlevels of sickness absence (the PercentageThreshold Scheme). The service will not,however, go so far as to provide or arrangerehabilitation support. This will be left to theindividual, hopefully with the help of theiremployer or GP. This contrasts withrehabilitation services provided by insurers forthose IP claimants where it is judged thatrehabilitation support can make a significantdifference to recovery.“For many households withmoderate incomes, ESA willno longer provide a long-termsafety net against ill health ordisability.”Given the context of institutional welfarereforms, the shrinking income safety netavailable through the State, and thepotential for greater use of rehabilitationservices to support recovery, it is time toreview the role of IP, the interaction betweenprivate and State insurance, and the role ofemployers in building necessary andaffordable income safety net solutions.1Black, C. and Frost, D. (2011) Health at work – an independent review of sickness absence, Department for Work and Pensionsabi.org.uk6

Understandingthe problemThe ABI asked the Centre for Economic andSocial Inclusion (CESI) to conduct research andanalysis to identify what impact loss ofemployment income has on households’income, taking into account entitlement to Stateincome support through welfare and tax credits.(Through the rest of the paper we will use‘welfare’ to refer to all forms of State incomesupport.) The ABI asked CESI to focus theirwork on loss of employment income due toserious illness or injury impacting ability to work,and to identify types and numbers ofhouseholds that would experience a significantdrop in income, and those that would not. Wethen asked them to compare the impact onhousehold income with - and without - IP.The objectives of this work were to:Identify the types and numbers of householdsthat would (and would not) have asignificantly better income safety net with IP;Identify the nature and scale of the issues;Build the evidence base around the fitbetween IP, State welfare and householdrisks;Provide a basis for more informed debate onthe role of private and State insurance inmeeting households’ income safety netneeds; andScope out key areas for future policydevelopment.CESI assessed the direction of travel forwelfare, including reforms already introducedunder Universal Credit. Changes made to put atime limit entitlement to contributoryEmployment Support Allowance (ESA) areparticularly important when considering thepotential role of private insurance. For manyhouseholds with moderate incomes, particularlythose with two or more employed earners, ESAwill no longer provide a long-term safety netagainst ill health or disability.BY ‘INCOMEREPLACEMENT RATE’WE MEANHOUSEHOLD INCOMEAFTER ANINDIVIDUAL HASSTOPPED WORK,INCLUDING ANYINCOME FROM STATESUPPORT, AS APROPORTION OFHOUSEHOLD INCOMEWHEN THATINDIVIDUAL WASWORKING.CESI used the Family Resource Survey andother sources of data to divide the employedpopulation into 200 household types, andwelfare entitlement calculator software to modelincome replacement rates from welfare and taxcredits in the event of losing employmentincome due to ill health or disability.By ‘income replacement rate’ we meanhousehold income after an individual hasstopped work, including any income from Statesupport, as a proportion of household incomewhen that individual was working.CESI focused on long term absence from work,so modelled incomes after the expiry ofStatutory Sick Pay (SSP) and ContributoryEmployment Support Allowance (ESA). TheCESI research showed that for those who fallout of work due to ill health or disability, whereprevious earnings were low and otherhousehold income is nil or low, the State systemwill generally provide a decent incomereplacement rate. The State provides little or nosupport – and a low income replacement rate- for those with moderate or higher earnings,and other household income.However, the picture is far more complicated formiddle income households. Entitlement to Statesupport is based not only on income, but alsoon whether the household has children,savings, a second income, and whether thehome is owned or rented. Two households witha similar level of income can therefore receivevery different levels of State support based onthese factors.CESI found that there are 10.8 million middleincome households in the UK that would beentitled to relatively little or no State supportif the principal earner had to stop work, andwould see their income drop substantially ifthey rely on State support alone as theirincome safety net.7Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYWhat happens if an employeeleaves work due to ill health?When an employee leaves work due to ill healthor disability, employers are required to pay weeks. But nearly half (43%) of employers offersome form of sick pay provision over and aboveminimum statutory requirements in the form of where SSP is no longer payable, if an employee submit a claim for State welfare benefits. If theyhave paid National Insurance for at least twoyears they can claim contributory Employmentand Support Allowance (ESA).The Carol Black and David Frost ‘Health at WorkReview’ estimated that around 110,000 people year – i.e. they were unable to work for more straight from employment to claiming ESA.ESA is paid initially for 13 weeks at around £70per week, during which there is a WorkCapability Assessment to determine whetherthe individual is entitled to the benefit. Aroundone third of ESA claimants end their claim beforethe assessment is complete, most because theyget better and return to work. A further third arejudged ‘fit for work’ and so not entitled to benefit.They can submit a claim for Jobseeker’sAllowance, which has tougher conditions and ispaid at £70 a week. The remaining ESAclaimants receive around £100-110 per week,and about half are required either to join theGovernment’s ‘Work Programme’ or attendregular interviews at Jobcentre Plus.As a result of recent welfare reforms,contributory ESA can be claimed for only oneyear. After this time (and for those who do notqualify for Contributory ESA), income-basedESA is available. This pays at the same ratesbut is very tightly means-tested. Those living inhouseholds with no other source of income willusually qualify for income-based ESA, but othersources of income (earnings, savings, pensionand insurance income) are usually deducted £for £ from the amount of ESA claimable.Self-employed people are not entitled to SSP,so if they do not have other forms of protection(like IP) they can immediately claim ESA if they estimated to do so.In addition to Employment and SupportAllowance, the welfare system provides thefollowing means-tested support for those onlow incomes:Tax credits provide financial support forthose with children, and for some workers onvery low incomes without children;Housing Benefit provides (partial) supportfor the costs of renting accommodation; andSupport for Mortgage Interest providestime-limited support for mortgage holders.The Personal Independence Payment alsoprovides non-means-tested financial support todisabled people who meet qualifying criteriarelated to their care and mobility needs. This hasrecently replaced the Disability Living Allowance,which continues to be paid to existing claimants.The ‘journey’ through statutory occupationaland state support is set out below. As thisillustrates, many of those leaving work dueto ill health will only engage with structured,State-funded support after being off workfor a year or more, if they receive support atall. Overall, IP does not fit easily into thisState welfare ‘journey’. Group IP policies (GIP)effectively occupy the space before an ESAclaim is made; while individual policies (IIP) runalongside, and interact with, all stages of thewelfare journey.The journey through occupational and State support (Source: Black / Frost Review, 2011)28 Weeks 39 WeeksESAbenefit and supportWorkSicknessabsenceClaim toEmploymentSupportAllowance(ESA)WorkCapabilityAssessmentJSAbenefit and supportWorkInactivityabi.org.uk8

Trends in Health and WorkThe Black / Frost ‘Health at Work Review’found that every year 140 million workingdays are lost due to sickness absence,equivalent to 2.2% of working time with acost to employers of £9 billion per year.Most of this absence is short term, but eachyear one million workers are off sick longterm (for more than four weeks).Although high, sickness absence levels havebeen in decline in recent years. A 2013 CBIsurvey of employers echoed the findings thatabsence (not just sickness absence) levels areat record lows, currently 5.3 days per employeeper year. 2 Labour Force Survey data suggests that theincidence of poor health among the workingpopulation has not declined – and may evenhave increased. This is illustrated below.Number reporting health problems,by economic status(Source: Labour Force Survey & CESI analysis)10m9mRecessionEconomically activewith health problemsEconomically inactivewith health problemsThese trends show a steady increase in thenumber of people in work with health problems(the dip at the end most likely reflects samplingvariations) while the number out of work withhealth problems is broadly flat. This may reflectemployers and employees getting better atmanaging health conditions in the workplace, ora greater pressure on employees to stay in workwhen ill or injured.‘Economically active’ includes people who arecurrently unemployed but looking foremployment, or required by the State to look foremployment to quality for certain welfarebenefits. So part of the growth may beaccounted for by reforms that have made itharder to claim ESA, which in turn means thatmore people who might previously have beenon ESA are instead on JSA, and required toactively look for employment.CESI’s analysis finds a strong workplacegrowth in mental illness (which has morethan doubled since 2005) and depression/anxiety, with growth also in progressiveillnesses (e.g. Cancer, Multiple Sclerosis,Parkinson’s Disease, Muscular Dystrophy,Diabetes).Reason for IP claims(Source: CESI / ABI data collection)8mProgressive illness (e.g cancer)0 0.05 0.1 0.15 0.2 0.25 0.3 0.357mMental illness or depressionMusculoskeletal problemsOther health problems or disabilitiesHeart, blood pressure orblood circulation problemsStomach, liver, kidney or digestive problemsChest or breathing problems, asthma, bronchitisDifficulty in seeing or hearingEpilepsy6m5m4m20062007200820092010201120122CBI (2013) Fit for Purpose: Absence and workplace health survey 20139Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURY found that mental ill health costs the UKeconomy £70 billion a year - the equivalent of4.5% of GDP – through lost productivity, Statewelfare benefits and healthcare payments. Forthose out of work, there is similar but smallergrowth in both depression and progressiveconditions. This is illustrated in the figure below.“6.6m households would seetheir income fall by more thanhalf if the principal earner leftwork due to ill health.”Change in incidence of main health problems(Source: Labour Force Survey & CESI analysis)Incidence of main health problems among those inactive due tohealth reasons: index (2005 = 0)140120100806040KeyMental illness, phobias, panics orother nervous disordersHeart, blood pressure or bloodcirculation problemsDepression, bad nerves or anxietyProblems or disabilitiesconnected with legs or feetIncidence of main health problems among those in employment:index (2005 = 0)140120100806040200-20Problems or disabilitiesconnected with back or neckProgressive illness not includedelsewhere (e.g. cancer, MS, etc.)200-20-40-4020062007200820092010201120122006200720082009201020112012Characteristics of people that leave work due to ill healthCESI found that around 250,000 people eachyear leave employment due to ill health –equivalent to around 1% of the workforce.60% of these are the main household earner.Those who leave work due to ill health aregenerally lower paid than the workforce as awhole, with an average salary of £15,000 (and somewhat more likely to be working part time,but no more likely to be women than men.These lower wages are also reflected in thebroad occupational groups of those leavingwork due to ill health. The figure below showsthe relative likelihood of individuals in differentoccupations leaving work due to ill health.Proportion of workforce each quarter who are inactive due to health reasons one year later(Source: Labour Force Survey & CESI analysis)0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7Managers, Directors & Senior OfficialsProfessional OccupationsAssociate Professional & Technical OccupationsAdministrative & Secretarial OccupationsSkilled Trades OccupationsCaring, Leisure & Other Service OccupationsSales & Customer Service OccupationsProcess, Plant & Machine OperativesElementary OccupationsProportion of workforce inactive due to health reasons one year onabi.org.uk10

This clearly shows that risks are greater in lowerlevel occupations than in those that are moresenior – with someone in an elementaryoccupation at least four times more likely toleave work due to ill health than someone in asenior profession. However, those in skilledtrades and middle-level occupations also haveabove average likelihoods of leaving work. Wesee similar trends in individuals’ qualifications– with those with low or no qualifications (andthose with trade apprenticeships) around twiceas likely to leave work due to ill health as thosewith A Levels or degrees.However, it is important to note that theabsolute number of people with degreesthat leave work due to ill health aresubstantially higher than the number withlower qualifications.The number and proportion leavingwork due to ill health, by highestqualification held(Source: Labour Force Survey and CESI analysis)Around 2.2 million people of working age areeconomically inactive (not in work, looking forwork, or available to work) primarily due to illhealth. This number has fallen by around 10%since 2005, but most in this group have beeninactive for at least 5 years, and aresubstantially more likely to be older, with morethan half aged over 50.This presents an economic problem in lightof the need for many people to continueworking later in life to meet living costs,save for retirement, and delay drawing onpension savings. It also presents a socialand healthcare problem, given the ampleevidence – as highlighted in the Frost /Black report – that continuing to work aslate as possible in life produces enormousbenefits in physical and mental wellbeing.Economic inactivity for health reasonsby age(Source: Labour Force Survey and CESI analysis)00.001 0.002 0.0030.004 0.005 0.006NQF Level 4 & aboveNQF Level 3Trade ApprenticeshipsNQF Level 2Below NQF Level 2Other qualificationsNo qualificationsProportion of those employed moving from employment tohealth-related inactivity02000 4000 60008000 10000 12000 14000 16000 18000NQF Level 4 & aboveNQF Level 3Trade ApprenticeshipsNQF Level 2Below NQF Level 2Other qualificationsNo qualifications50 – 64 35 – 49 25 – 34 16 – 24Numbers moving from employment to health related inactivity11Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYThe Nations and Regions of the UKThere is a clear national and regional dimensionto the likelihood of leaving work due to ill health.As shown in the diagram below, those living inWales are twice as likely, and those in the NorthWest around 50% more likely, to leave work dueto ill health than in almost any other nation orregion of the UK. The South West and the NorthEast also have relatively high probabilities ofleaving work. For all other nations and regions,less than 1% leave work each year.Number and proportion leaving work due to ill health, by Nation and Region(Source: Labour Force Survey and CESI analysis)RegionNorth WestSouth EastLondonSouth WestScotlandWalesYorkshire & HumbersideWest MidlandsEast of EnglandEast MidlandsNorth EastNorthern IrelandNumbers moving fromemployment to health-relatedinactivity per quarter10,3658,0187,5786,4475,5335,1844,6124,5294,4153,8432,9601,244Proportion of those employed movingfrom employment to health-relatedinactivity per quarter0.33%0.19%0.20%0.26%0.22%0.39%0.19%0.19%0.16%0.18%0.27%0.16%By comparison, the following figure shows theestimated proportion of the workforce with IPby nation and region, and demonstrates aparticularly strong mismatch between need anduse of IP in Wales and the North West.(Source: CESI / ABI data).Northern IrelandSouth EastScotlandWest MidlandsEast MidlandsSouth WestLondonNorth EastNorth WestWalesYorkshire and the HumberEast of England0 0.02 0.04 0.060.08 0.1 0.12 0.14 0.16 0.18 0.2abi.org.uk12

The impact of seriousillness or injuryIn addition to the obvious financial impacts oflosing an employment income, householdsoften face additional expenses as a result of aserious illness or injury. Evidence fromMacmillan, for example, highlights the costs ofcancer of someone suffering cancer.Macmillan ‘Cancer’s Hidden Price Tag’ surveyreport published April 2013 3 shows that:4 out of 5 cancer patients were hit by thefinancial cost of cancer, which averagedaround £570 a month for those affected.This is comparable to the average monthlycost of a mortgage. expenditure costs, averaging around £270 amonth. Typical extra costs included travel toand from medical appointments,appointment parking costs, treatmentprescription costs, home help or live-insupport.54% of cancer patients experienced higherday-to-day living costs as a result of theirdiagnosis (e.g. higher fuel bills as they spendmore time at home), which cost them onaverage £63 a month.51% of cancer patients were in work whendiagnosed with cancer. 33% stoppedworking permanently or temporarily, while unpaid leave.30% cancer patients experience a loss ofincome - because they are unable tocontinue working or need to reduce theirworking hours - which costs an average of 47% of cancer patients’ financial situationgets worse after diagnosis.42% COULD SURVIVEONLY A COUPLE OFMONTHS ON THEIRSAVINGS. ONLY 26%COULD SURVIVE ONEYEAR OR MORE.Are savings a safety net?Multiple sources of research tell us that manyhouseholds have very little or no savings to fallback on, to replace lost employment income.For example, the Scottish Widows 2013Protection Report 4 and 2014 Savings Report 5showed that: 19% of people have no savings 23% of 35-49 year olds have no savings 14% of people aged 50+ have no savings. 15% don’t know how much savings they have 55% have between £1 and £50,000 in savings 12% have over £50,000 in savings. 47% have savings under £20,000 When the Scottish Widows survey asked howlong do you think your savings would last,responses were: Less than one month: 14% A couple of months: 21% Six months: 15% A couple of years: 16%So 42% could survive only a couple of months year or more.The obvious conclusion is that it isunrealistic for the vast majority ofhouseholds to rely on savings as a safetynet against loss of employment income.Savings take a long time to build up. Theyare often dipped into for planned andunplanned expenses. Contrast this to IP,which provides the level of incomereplacement chosen from day one of thecontract.3Macmillan (April 2013) ‘Cancer’s Hidden Price Tag’, http://www.macmillan.org.uk/Documents/GetInvolved/Campaigns/Costofcancer/Cancers-Hidden-Price-Tag-report-England.pdf4Scottish Widows (April 2013) ‘Protecting our Future report – Britain’s Protection Landscape’5Scottish Widows (2014) ‘Savings Report 2014’13Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYThe financial impact of low savingsHouseholds that do not have large savings, or asource of income to replace the lost income,find themselves in serious financial difficulties,unable to meet financial commitments such as,mortgage or rent and other credit repayments.Increasing use of credit to make ends meet, butwhich they can not afford to repay, can lead tothem spiralling into unmanageable debt.The Citizens Advice Bureau report 6 thatIllness and disability was the third major reason survey (24% of clients gave this as a reason fortheir debt). In many cases, the debt had arisenwhen the client had to give up work because oftheir ill health. In other cases, the client had togive up work to care for an ill or disabledrelative. Not only do the clients’ income drop,but also their expenditure may rise becausethey need to keep the heating on for longer orrequire a special, more expensive diet”.It also matters to the economy. Households inthis situation are unable to pay their bills in full.They have to substantially reduce their spendingand therefore, the money they contribute to theeconomy through purchasing goods andservices, providing savings that can be used forinvestment, and through income tax, VAT andNational Insurance Contributions.In May 2014 the CBI reported 7 that in 2012the direct costs of absence to the economywere estimated at over £14 billion. Totalpublic sector spending on incapacity,disability and injury benefits in 2012-13 wasover £36 billion, with Employment SupportAllowance being claimed by 2.47 millionpeople in August 2013.The Malcolm / Zurich report showed that IPclaim payments mean that the State paysout less in welfare payments and receiveshigher taxes than when IP is not in place.Overall UK taxpayers already gain around£165 million annually from the presence ofGIP policies (£85 million from lower welfarepayments and £80 million from higherincome tax and National InsuranceContributions). Individuals with higherincomes also gain by £190 million than in theabsence of IP. If UK coverage of IP reachedthe same level as that seen in the US, thegains to UK taxpayers would be around£725 million.THE CITIZENS ADVICEBUREAU REPORTTHAT:“ILLNESS ANDDISABILITY WAS THETHIRD MAJORREASON FOR DEBTPROBLEMS GIVEN BYCLIENTS IN THE 2008SURVEY”.Gains for taxpayersLower welfarepayments£85millionHigher income taxand NationalInsuranceContributions£80millionTotal £185millionGains fromrehabilitationactivities£20millionIn addition, financial difficulties create intensestress, and over recent years have contributedto a substantial increase in the numbers ofpeople experiencing mental illness, with theobvious knock on effects on workplaceproductivity, family and social problems, andpressures on the healthcare system. The Frost / health disorders are one of the biggest causesof long-term absence and, according to anumber of business surveys, are on theincrease as a reason for absence. It isestimated that each year 1 in 6 workers inEngland and Wales is affected by anxiety,depression and unmanageable stress”. major driver for labour market exclusion in theUK. Each year mental ill-health costs the UKeconomy £70bn a year – the equivalent to 4.5%of GDP – through lost productivity, socialbenefits and healthcare costs. Mental disordershave become the most common reason for a new claims.”6 7CBI (May 2014) ‘Getting Better – Workplace Health as a Business Issue’8 abi.org.uk14

Income ProtectionThere are 17.4 million working households inthe UK. The IP market in the UK is small relativeto this group, and by international standards 9 . people covered by Individual IP (IIP) policies,meaning that individuals buy the insurancecover themselves, typically through a regulatedfinancial adviser. IIP may be particularlyattractive to the self-employed, who do nothave entitlement to SSP.Almost twice as many people - 2,016,000 – arecovered by Group IP (GIP), meaning policiesthat are arranged and paid for a group ofemployees by an employer 10 . GIP policies described above, through the payroll.IP policies vary in terms of the level of incomereplacement they provide – typically between50% and 75% of earnings before illness / injury.Income from an IIP claim is treated by thegovernment as ‘unearned income’ and istherefore not subject to income tax or NationalInsurance Contributions. For this reason IIPincome replacement is always below 100% ofthe previous gross earnings. IIP is designed toensure that a claim does not result in a netindividual income that is higher than before theclaim. Income from a GIP claim is paid by theemployer, through the payroll, at a level equal toor below income before the illness / injury. It istreated by the government as ‘earned income’,subject to income tax and National InsuranceContributions.When buying IP the consumer or employer canchoose what length of ‘deferral period’ theywant. The ‘deferral period’ is the time betweenthe individual stopping work due to illness/injury and when the policy starts paying thereplacement income. Deferral periods typicallyrange from 3 months to 2 years, althoughdifferent IP providers offer different options. Theconsumer or employer may decide they canuse other means to cover short term incomeloss, but want insurance to cover them ifserious illness or injury prevents work for a longperiod. The length of time for whichreplacement income is paid also varies. Somepolicies will pay until 60 or 65, while some payfor only 1 year, 2 years or 5 years.Having IP enables households to maintainincome levels at, or close to, previous earnedincome if they have to stop work due to illhealth or disability. This is illustrated in the casestudy below. This is for a working couplewithout children, who own their own home andmoderate to high earnings. Around a quarter ofa million families have similar characteristics andearnings to this. In this case, the household hasa relatively low income replacement rate (RR)without IP (41%). They are not entitled to anyState benefits because of the partner’searnings, so have to rely entirely on theirpartner’s earnings. But with IP their incomeremains much closer to its previous level, with a Young couple, healthy, both working, no children, own theirown house with a mortgage; IIP at 65%, deferred period ofone year - £18.35 per month premiumIN WORKAnnual salary: £35,000(+ partner earns £23,000)H’hold weekly income £860(£515 net earnings+£350 partner net earnings)ABI claims data 11 shows that in 2013insurers paid a total of £138,443,000 in IIPclaims to 12,004 households. The industrypaid 91% of IIP claims in 2013, which issubstantially greater than the one third ofESA claims that lead to a full ESA award.Around one third of IP claims are due to aprogressive illness. A further third are due tomental health problems – such as depression,anxiety or stress. Around one in six claimsrelate to a musculoskeletal condition.POST SICKNESS WITHOUT IPHousehold weekly income £350(partner earnings))POST SICKNESS WITH IPHousehold weekly income £705(£355 IP payments + partner earnings)RR41%RR82%9 10Black, C. and Frost, D. (2011) Health at work – an independent review of sickness absence, Department for Work and Pensions11https://www.abi.org.uk/News/News-releases/2014/05/270-families-helped-every-day-by-Life-Critical-Illness-Income-Protection-insurance-payouts-201315Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYInteraction between IP and StateWelfareEntitlement to welfare support is subject tomeans testing – i.e. an assessment of thehousehold’s financial position and needs. Underthe current (pre Universal Credit) welfare systemincome from an IIP claim is treated as‘unearned income’. This means it is taken intoaccount in calculating entitlement to meanstestedwelfare benefits, but not in calculatingentitlement to tax credits. For every £1 ofunearned income a household receives, theylose £1 in entitlement to welfare support. GIPclaim income is treated as ‘earned income’ bythe government in assessing the individual’sentitlement to welfare benefits. For every £1 in‘earned income’ entitlement to welfare benefitsis reduced by 65 pence. Tax Credits arewithdrawn at a rate of 40 pence for every £1above a threshold, which varies according tohousehold circumstances.The key factors that determine a household’sreplacement rate from State support are:Previous earnings – i.e. the income that isbeing replaced;Young couple, healthy, both working, no children, own theirown house with a mortgage; IIP at 65%, deferred period ofone year - £18.35 per month premiumIN WORKAnnual salary: £35,000(+ partner earns £23,000)H’hold weekly income £860(£515 net earnings+£350 partner net earnings)Household weekly income £350(partner earnings – no additionalbenefit entitlement)Single, two children, owns with mortgage; IIP at 55%IN WORKAnnual salary: £44,000H’hold weekly income £655(£620 net earnings +£35 CB)POST SICKNESS WITHOUT IPPOST SICKNESS WITH IPHousehold weekly income £790(partner earnings + £440 IP payments)POST SICKNESS WITHOUT IPHousehold weekly income £350 +£35 CB)POST SICKNESS WITH IPHousehold weekly income £610(£460 IP payments + £115 TCs + £35 CB)RR41%RR91%RR53%RR93%Children;Housing tenure – i.e. renting vs. homeownership (including with a mortgage); Household savings, which are deemed bythe State to provide a source of income.The combined impact of these factors onentitlement to State support, results in widevariations in income replacement rate fromState support, even within income bands. Forexample a household that loses employmentincome of £25,000 will have a much lowerincome replacement rate if they have nochildren and a mortgage than a household thatloses the same amount of employment incomebut has children and rents their home. 3.06million households with total earnings below£50,000 have a replacement rate of 50% orlower from State support. Households wherethe principal earner has an income of £60,000or more have poor replacement rates fromState support regardless of their householdcircumstances.Under Universal Credit the impact of incomefrom an IP claim on entitlement to welfarebenefits and tax credits will change. Across theworking population as a whole, the CESImodelling and analysis estimates that incomeOlder couple, health problems, both working, no children,mortgage, savings income; IIP at 60%, deferred periodone year - £31.40 per month premiumIN WORKAnnual salary: £27,000(+ partner earns £19,000)H’hold weekly income £755(£405 net earnings + £295partner net earnings + £55savings income)replacement rates under Universal Credit will onaverage be slightly lower – 57% compared to60% now - but the variations betweenhousehold replacement rates will be greater.This is because the equivalent of Tax Credits willtake income from IIP into account in calculatingentitlement.The following CESI case studies demonstratethe range of outcomes faced by different types rate).POST SICKNESS WITHOUT IPHousehold weekly income £350(partner earnings + savings income)POST SICKNESS WITH IPHousehold weekly income £660(£310 IP payments + partner earnings+ savings income)RR47%RR87%11https://www.abi.org.uk/News/News-releases/2014/05/270-families-helped-every-day-by-Life-Critical-Illness-Income-Protection-insurance-payouts-2013abi.org.uk16

Couple, both working, two children, renters; GIP at 65%IN WORK (+ partner earns £9,000)H’hold weekly income £540(£290 net earnings+ £175 partner net earnings+ £40 Tax Credits+ £35 Child Benefit)POST SICKNESS WITHOUT IPHousehold weekly income £470 + £65 Housing Benefit + Child Benefit)POST SICKNESS WITH IPHousehold weekly income £512(partner earnings + £90 Tax Credits +Child Ben + £210 IP payments)RR87%RR95%Rehabilitation benefits of IP –getting people back to work fasterIn a March 2014 report for Zurich on group IP,Kyla Malcolm highlighted that as well as providingincome benefits while individuals are unable towork, GIP insurers also offer early responserehabilitation services that can help individualsreturn to health and work faster than theyotherwise would 12 . The success of rehabilitationdepends on a range of complex factorsincluding the nature of the disability, the role ofthe employer, and the motivation of the individual.Single, no children, renter, self-employed; IIP at 60%IN WORKAnnual salary: £31,000H’hold weekly income £470(£470 net earnings)POST SICKNESS WITHOUT IPHousehold weekly income £180(£70 JSA + £90 Housing Benefit + £20 CTS)POST SICKNESS WITH IPHousehold weekly income £360(£360 IP payments, no other benefits)RR38%RR76%A study by the Work Foundation 13 of 13,000employees in Madrid with musculo-skeletalproblems found that referring employees forspecialist treatment after 5 days reducedtemporary work absence by 39%, andpermanent absence by 50%. It is estimated that35 million work days are lost across the EU tomusculo-skeletal problems each year, at a costof 2% of EU GDP. The Work Foundation reportestimated that if the UK had a similar system,employees would be able to work an extra62,045 days a year.CESI’s modelling and analysis of householdsacross the UK showed that there are 10.8million households that would see theirincome fall substantially if the principalearner left work due to ill health. working families – would see their incomesfall by more than one third if the principalearner lost employment income due to illhealth, even after taking into accountentitlement to State support; 40% of working families – would see theirincomes fall by more than half.While precise impacts from rehabilitation aredifficult to identify in all cases, the annualgains from return to work activities areestimated at around £20 million for taxpayers,£5 million for individuals and £15 million foremployers. Taxpayers, individuals andemployers are all better off by gettingpeople back to health and back to work asquickly as possible.Building on the recommendations of the Black /Frost review, there are potentially substantialbenefits to be gained from increasing theavailability of rehabilitation services for employeesexperiencing serious illness or injury. Rehabilitationwill not help in all cases, but for those for whichit is effective the benefits are substantial foremployee and employer, in terms of faster andfuller recovery to fitness and return to work.However, robust and statistically significantevidence on the impact of rehabilitation in theUK is lacking. The ABI and CESI see this as anarea that merits further evidence gathering andanalysis. We also see the potential for the IPindustry (and rehabilitation providers) to workwith the government’s Health and Work Serviceto gather and assess evidence on the impact ofrehabilitation, particularly to assess which typesof rehabilitation intervention are most effective.This evidence could then be used to ensurerehabilitation resources are efficiently targetedwhere they can have greatest impact.12Kyla Malcolm (2014) ‘Income Protection – Working together to improve take-up’, Zurich13The Work Foundation, Bevan (2013) ‘Reducing temporary work absence through early intervention: the case of MSDs in the EU’17Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYBarriers to buying IPResearch from CESIand other sourcesidentifies fourprincipal reasons forlow take-up of IP:perceptions of value,complexity, trust andinertia.Perceived valueResearch suggests that many people simply donot consider that a loss of work due to ill healthwould happen to them. For example, ABIconsumer research (conducted throughYouGov) finds that two fifths of consumers hadnever even thought about what they would do ifforced to stop working by a long-term illness orinjury 14 . For those that do consider the impactsand consequences, the perceived cost ofinsurance is cited as the most common reasonfor not taking out a policy. 15 to say that not everyone will experience a seriousillness or injury that prevents them working for asignificant period. This happens to only 1% ofpeople in work each year. But none of us knowif it will happen to us, or someone in our family.While it is very easy to see the cost of theinsurance, it is more difficult for people toanticipate – and therefore weigh up the costagainst – the likely benefits of claiming on theinsurance. The likelihood and financial impact ofa serious illness or injury, and therefore theamount of income that may be received fromthe insurance, is unpredictable. 16In reality, this is a more deep-rooted problemthan a rational consideration of the costs ofpremiums against the value of benefits. There isextensive evidence from behavioural science thatindividuals put more weight on losses than gains(so-called ‘loss aversion’), and we place less we do benefits and costs we can see today.ComplexityComplexity is created primarily by acombination of the risks and impacts we areasking consumers to understand, and theinteraction between IP and State welfaresupport. The uncertainty and complexityinherent in the welfare system – and in itsinteraction with IP – contribute to poorunderstanding of risks.It also contributes to difficulties in evolving thedesign of IP to make it simpler and moreappealing for consumers. For example,households buying IP want to know how muchreplacement income they are buying, and howmuch net income they will have as a result ofthe insurance. But the complex interactionbetween State and private insurance makes itall but impossible for many households tocalculate the net impact of IP on theirhousehold income, taking into account theimpact that income from an IP claim would haveon their entitlement to State support.Universal Credit will simplify the welfare systemsomewhat, but it will remain a complex picture.Replacement rates under Universal Credit willbe lower on average than under the currentwelfare system – 57% rather than 60% now -but the variations in income replacements rateswill be even greater.14ABI Consumer Survey Q3 2012 results15http://protectionreview.co.uk/events/event/the_syndicate_press_release_october_201116 abi.org.uk18

TrustVarious pieces of consumer research –including a 2012 ABI consumer survey – showthat consumers estimate that somewhere The reality – as demonstrated by 2013 claimsdata published by the ABI – is that 91% ofindividual IP claims were paid in 2013. The ABIpublishes annual industry-wide claims data forprotection insurance products to demonstratethat consumers can trust IP and other types ofprotection insurance to pay claims.InertiaA range of research sources identify that inmany cases individuals either simply do notconsider what they would do in the event oflong-term illness, or do not get around tobuying insurance. This, in turn, is driven by theother factors described above.As Defaqto put it in their own review of the IPmarket 17 , Independent Financial Advisers report being sick for any length of time; many believethat the State will provide if they are; and somehave or believe they have sufficient collateral totide them over.”The ABI is working with the Money AdviceService to increase consumer understandingand engagement with household income risks,entitlement to State welfare support, and whathouseholds can do to put in place an incomesafety net that meets their needs.However, the challenge here is much greaterthan the industry and the Money AdviceService alone can overcome. The lessons ofpension reform have shown very clearly thattelling people they should do somethingbecause it will be good for them is notsufficient to persuade many to do it. Inertiais a powerful force. Innovative solutions –particularly through the workplace - areneeded to be effective in changingbehaviour.“ABI claimsdata for 2013showed 91%of individual IPclaims werepaid out”.17Defaqto (2012), Income Protection – The way forward19Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYThe role of employersand the workplaceA recent survey by the Chartered Institute ofPersonnel and Development (CIPD) estimatesthat 11% of employers offer GIP to all staff ,and a further 4% offer it to at least some staff.Swiss Re research 19 , on the other hand,estimates that only 2% of employers offer andpay for IP for their employees, while another 6%of employers offer to arrange IP cover for theiremployees but the employee has to pay for it ifthey want it. Swiss Re also estimate that in2013 there were 17,193 workplace GIPschemes, covering 2,039,059 employees 20 .However, the factors negatively influencing useof IP apply to employers as well as individuals.Many more employers than currently use groupIP could benefit from the support it provides.Some employers do not provide group IP fortheir staff because of concerns about the costand value for money, that it may not beappropriate to their needs, or they simply donot get round to it.Group IP protects both the employer andemployee from the impacts of serious illness orinjury. The employee benefits from theiremployer continuing to pay their salary evenwhen they are unable to work. The employerbenefits from the insurance reimbursing themfor the cost of paying the salary of an employeewho is not productive. Many group IP policiesalso provide additional support such as payingfor replacement staff, staff absence managementservices, and rehabilitation services which helpemployees return to fitness and work quickerthan would otherwise be the case.SWISS RE ALSOESTIMATE THAT IN2013 THERE WERE17,193 WORKPLACEGIP SCHEMES,COVERING 2,039,059EMPLOYEES .Employers have a central role to play insupporting employees back to work. Throughthe cross-government Health, Work andWellbeing Initiative, a range of approaches havebeen tested – in particular ‘FunctionalRestoration Programmes’ that attempt tosupport those with chronic or long-lasting painto stay in work - and have been shown toimprove the speed at which people return towork 21 . Among insurers that offered suchintervention in the United States, it was found tobe 43 percent more effective than nonintervention.22 A more recent two-year trial bythe Royal Mail led to three quarters of those offwork returning to work, with a rate of return of£5 for every £1 invested. 23The factors that led to the introduction ofworkplace pension auto enrolment, and thelessons that have been learned from theexperience of designing and delivering it,demonstrate that the workplace offers greatpotential as a means of increasing access to,and use of, IP.Lessons can also be learned from experiencesin other countries such as Australia and theNetherlands, that have already implementedreforms to the role of employers in managingthe impacts of ill health on the ability to work.18CIPD (2013) Absence Management 2013: Survey Report19Swiss Re (2013) ‘Connecting Generations, Protecting Generations’20Swiss Re (2014) ‘Group Watch 2014’21S.A Burke, C.K Harmes-Contas and P.S Aden, ‘Return to work and retention outcomes of a functional restoration program. A multi-center, prospective study with a comparison group, European Spine22 23 24Health and Safety Executive, http://www.hse.gov.uk/msd/experience/restoration.htmabi.org.uk20

International andalternative modelsIn the Netherlands the system for replacingincome for those who leave work due to illnessor injury rests on employers’ shoulders.Employers are mandated to pay theiremployees sick pay for at least two years, at aminimum of 70% of prior earnings. The statealso enforces clear requirements on theemployer and employee as to how they mustwork together to support the return to work.Employers are penalised if they do not ensure astrict and effective rehabilitation and return towork process and plan, or the state thinks toomany of their employees are returning to workafter two years of sick absence (‘theGatekeeper Protocol’). Research by De Jong,Thio and Bartelings (2005), and van Sonsbeek(2011) found that this reduced the flow ofpeople onto state disability benefits by 15-33%.In addition, employer contributions fund thelong-term state disability benefits that individualsflow onto if they reach the end of their sicknessbenefit period, and employers have to pay highercontributions if the number of their employeesthat move onto these benefits crosses athreshold (‘Experience Rating’). Research byKoning (2004) 24 and van Sonsbeek (2011) 25found that this measure reduced the flow ofpeople onto state disability benefits by 13-15%.This significant risk to employers, both in termsof paying sick pay and contributing to statedisability benefits, has created an active marketfor private insurers to protect businessesagainst this risk. This, in turn, has mobilisedsignificant efforts towards preventative andrehabilitative work with employees, to minimisethe employer costs associated with short- andlong-term sickness absence. 26 This has also ledto significant resources being directed intopreventative health measures. The 2011 vanSonsbeek evaluation found that the combinedeffect of these measures reduced the long-runforecast disability benefit caseload by 50%.In Australia IP (known there as ‘Group SalaryContinuance’, GSC) is mainly available as anon-compulsory option within the compulsory‘Superannuation’ workplace pension system. IPawareness has been raised by placing it in thecontext of employer-organised retirementsavings, and employers offering GSC are seenas better employers to work for. TotalPermanent Disability (TPD) is a compulsory partof an employer’s Superannuation scheme.However, it is now becoming apparent thatclaims on the product are much higher than theindustry anticipated or priced for, as a result offactors including collective bargaining onpremiums, price competition, lack of a claimtime limit, and increased consumer awarenessof the ability to claim. The experiencedemonstrates both the benefits of IP as part ofthe workplace retirement savings system, aswell as the risks and challenges.CESI have proposed two further possiblemodels for building the role of IP through theworkplace into future welfare reform:Time-based collective insuranceThis model would broadly go with the grain ofcontributory insurance models (as found inScandinavia) but with a strong market elementmore in line with the approach taken in Australiaand the US.The model could work broadly as follows:1. Require all employers to put in placeinsurance that provides full incomereplacement for all employees for up to oneyear of serious illness or injury.2. Individuals/ employers would then beexpected (through auto-enrolment) orrequired (through compulsion) to have someform of income insurance to cover furtherabsence up to a specifiedlimit – for example5 years.This could be limited to employees forwhom the state would provide an incomereplacement rate of less than 2/33. After 5 years of absence due to illness orinjury, the state would provide an incomesafety net (for those that meet certainconditions), potentially at a higherreplacement rate than now.24Koning, W.P.C. (2004) ‘Estimating the impact of Experience Rating on the inflow into disability insurance in the Netherlands.25Van Sonsbeek, J.M. (2011) ‘Estimating the long term effects of recent disability reforms in the Netherlands’, VU University.26Black, C. and Frost, D. (2011) Health at work – an independent review of sickness absence, Department for Work and Pensions21Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYIf the second tier were auto-enrolled - forexample with a lower rate of NICs as anincentive – it would need to be underpinned bya basic state safety net for those that choose toopt-out. This could follow the model of a basicflat rate state pension.If the second tier were compulsory, commercialinsurance providers would need to competewithin a regulated market to offer collectiveinsurance to individuals and employers. Clearlythis would be a big step from the currentsystem. The experience of introducing a similarapproach in Australia offers the potential tolearn lessons about what would be needed tomake this kind of approach workable in the UK.A further option could be a compulsory tier forhigher earners, with an associated NICs rebate.However as the CESI research has shown, thebenefits of IP are not entirely determined byearnings but also by household circumstances.This model would need to be simple enough foremployers, advisers and individuals to explainclearly and convincingly the benefits of stayingin an auto-enrolled scheme.Individual income replacementinsuranceAnother option could be to introduce voluntaryor compulsory ‘individual accounts’ whichindividuals would pay for through their own -and perhaps also employer - contributionsalongside their pension and other workplacebenefits. This could be an auto-enrolmentopt-out model, with NICs incentives.This would go with the grain of pensionauto-enrolment policy, as well as the recentremoval of the requirement to annuitise pensionpots. It could also build on extensive academicdebate on how insurance and retirementpolicies could be better aligned (for example inthe US 27 and more recently on its application inScandinavia ). This argues that we should takea ‘life course’ approach to managing financialsecurity - smoothing income over the workinglife, by borrowing when young against futurehigher incomes, building up a safety net whilewe can afford to, and then drawing on it whenwe cannot work. Individual accounts couldsupport this, by simplifying the system andincentivising individuals to make provision forthemselves.As with the collective option above, thisapproach would require the issues aroundawareness, complexity and perceived value tobe addressed, and would need simplification ofthe welfare system to ensure that the benefits ofinsurance for individuals were clear. In addition,there would likely need to be additional statetop-ups or ‘credits’ for those that could lose outdue to absence from work for caringresponsibilities (as exists in state pensions) orlong-standing health conditions.27 2037-206728Bovenberg, A. L., Hansen, M. I., & Sørensen, P. B. (2012) ‘Efficient Redistribution of Lifetime Income through Welfare Accounts’, Fiscal Studies, The Journal of Applied Public Economics, Wiley, Volume abi.org.uk22

Looking to the futureThere are clearly many challenges in reformingthe UK welfare system, but the need forsubstantial change is clear, including the needto ensure households top up welfare supportwith adequate private safety nets. This is vitalnot only to support solid economic recovery,but also to reduce the severity and impacts offuture economic downturns. income replacement safety net than the Statecan afford to provide. Every household thatrelies on income from employment needs to bemade aware of how far their income will fall ifthey have to stop work and rely on governmentalone for income support. They need a strongunderstanding of the fragility of their financialsituation, and the motivation and confidence toincrease their financial resilience. But there arepowerful psychological, emotional andbehavioural factors inhibiting purchase of IP bymany individuals and employers who wouldbenefit from the security it provides. Policysolutions must be effective in overcoming these enrolment – working with them instead ofignoring them.It should be a matter of serious nationalconcern that so many households do not havean adequate income safety net. Yet despite theimplications for millions of UK workinghouseholds, there is a very low level of publicdebate and awareness on health, work andwellbeing, and little political debate on how tobetter support households to understand therisks and impacts of ill health and to prepareaccordingly.The next government will need to reform thewelfare system to contain the rising cost ofwelfare, and to minimise economic inactivityamong the working age population. Recentreforms to workplace and State pensionprovision illustrate the direction of travel thatneeds to be followed to increase working agefinancial resilience, while at the same timereducing and containing the cost to theeconomy of the State safety net. The insuranceindustry, Government, Parliament andstakeholders – such as national and sectoralemployer representative bodies - need to worktogether to develop effective and economicallyviable solutions using the workplace to buildbetter household income safety nets andcontain the rising costs of Welfare.Where reforms have successfully been made insimilar areas – for example, pensions reform inthe UK and in Scandinavia – this has beenbased on a long process of building politicaland social consensus on the need for change.Political and public debate is needed now tobuild engagement with the problem, and buildconsensus to support effective solutions. TheABI is well positioned to play a key role in this.In considering how to reform welfare to achievethese objectives, careful and well informedconsideration needs to be given to how greateruse of IP – and early, targeted rehabilitation –can form part of the solution.Research by NEST finds that British moneyhabits are changing:“Money worries during the recession havegiven way to an increasing sense of personalfinancial responsibility. One of the mostsignificant examples of this trend is theresponse to the government’s new automaticenrolment workplace pension reforms, withopt out rates significantly lower than manyhad forecast. Tim Jones, said:“The recession has evidently changedconsumer behaviour and for the first time wecan see the impact it’s had on Britishattitudes as well. Many households are stillfeeling the pinch and people are worriedabout the future, but they clearly thinktomorrow is worth saving for and automaticenrolment seems to be a welcome helpinghand. Although it can be a struggle to find afew extra pounds each month, the moneyfrom employer contributions and relief atfinally doing something has convinced morepeople to stick with saving than we everexpected in this economic climate.”These changes in attitude and behaviourpresent an opportunity, which needs to begrasped quickly, to address failings in thecurrent welfare model and working age households having no real income safety net.23Follow us on Twitter @BritishInsurers

ABI WELFARE REFORM FOR THE 21ST CENTURYSummaryIn summary, as a society we need to:Increase public debate, awareness &understanding of health related incomerisks;Develop a role for all employers inproviding access to, and use of, IPthrough the workplace;Build and use evidence on the impact ofrehabilitation, and what interventionshave a significant impact;Explore the potential to expandrehabilitation services to help morepeople back to health and fitness – andback to work – faster, as well asminimising long term health anddisability problems;Ensure the tax and welfare systemsprovide effective incentives andrewards for using IP;Achieve an easy to understand balancebetween State and private insurance.abi.org.uk24

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