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Income Protection - UK - February 2015

“The majority of UK households have no income protection insurance, and a low level of savings. Providers must continue their efforts to lower the barriers that are preventing the market from reaching its full potential: low product awareness or, at least, ongoing confusion over the different product types available, as well as high levels of consumer inertia.”
– Sarah Hitchcock, Senior Analyst – Financial Services

This report discusses the following key topics:

  • Educating mortgage borrowers will help improve the market’s fortunes
  • Trade body promotes the idea of group income protection to reduce the sickness absence bill 
  • Welfare reform creates a fresh opportunity to remind people of the benefit of having income protection

Inability to work due to illness or injury can have a catastrophic impact on a household’s finances. Traditional long-term income protection is designed to reduce the impact of this loss of earnings, by providing a replacement income until the insured is well enough to return to work, or reaches retirement or death. Yet despite the central importance of income in the maintenance of a comfortable lifestyle, the majority of workers in the UK have no income or expenditure protection whatsoever. Many also have no or limited savings to fall back on should they experience a reduction in income due to illness.

Despite the value of the product, the industry has failed to substantially increase the take-up of income protection. Sales are held back by cost, product complexity and consumer apathy. As a result, there remains a significant income protection gap. This does, though, mean that there is still huge potential for market expansion. Protection providers realise that raising the profile of the product among financial advisers, employers, policymakers and the public is key to its future success, and strides are being made in this area.

Mintel’s report examines these issues and trends in detail. By drawing on a range of information and trade sources, it explores the market’s prospects for growth over the medium term. Mintel’s market analysis is complemented by the results of an independently commissioned consumer survey, which provides insight into the attitudes and behaviours of those covered by both short- and long-term income protection policies, as well as general public perceptions of protection insurance.

Definitions:

Income protection – a long-term policy that is designed to replace a proportion of lost earnings in the event that the policyholder is unable to work due to sickness, accident or injury. Subject to certain conditions and level of cover, the insurer will pay, after a pre-agreed deferred period (eg four, eight, 13, 26, 52 weeks), a tax-free monthly benefit to the policyholder if they are too ill to work. The amount will usually be equivalent to between 50% and 65% (but can be up to 75%) of the individual’s gross earnings and is paid until the policyholder reaches their selected retirement age (usually between 50 and 70), or their recovery or death if these are sooner. The monthly premiums are determined via a detailed and personalised underwriting approach, and are usually fixed for the term of the policy. The longer the deferred period selected, the lower the premium.

This type of cover is also known as permanent health insurance or family income benefit and can be held jointly. It should not be confused with ASU insurance (see below).

Accident, sickness and unemployment (ASU) insurance –this is designed to provide cover for accidental death, disability and sickness, as well as unemployment, for a limited period. In the event of a claim, benefits are typically paid out on a monthly basis for up to a maximum of one or two years (unlike with an income protection policy, which is designed to pay out until the insured’s specified retirement age). As with other types of insurance, cover can be extended to a partner and/or children. This product is sometimes marketed as a form of short-term ‘income protection’.

Personal accident and sickness insurance – as above but excludes cover for redundancy.

Unemployment cover – provides short-term cover in the event of redundancy or other involuntary unemployment.

Personal accident insurance – a variant product, which pays out a lump sum (as opposed to a regular income) to the insured in the event of accidental death, serious injury or disability.

Mortgage payment protection insurance (MPPI) – a short-term insurance policy specifically designed to cover the policyholder against the inability to make monthly mortgage repayments due to accident, sickness and/or unemployment. The policy will pay out for a fixed period of time, usually a maximum of 12 months.

 

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Table of contents

  1. Introduction

      • Product definitions
        • Income protection versus ASU cover
          • Figure 1: Summary of the main differences between income protection and ASU cover
        • Other related long-term protection products
          • What income protection offers
            • Abbreviations
            • Executive Summary

                • The market
                  • Individual sector is not expected to see real growth until 2018
                    • Figure 2: Forecast of new individual (long-term) income protection premiums – Fan chart, 2009-19
                  • Recent performance – Individual sector
                    • Recent performance – Group sector
                      • Market factors
                        • Low product take-up
                          • Competition from short-term protection products
                            • Demand inhibitors
                              • Recent and forthcoming regulation
                                • Company, brands and innovation
                                  • Leading providers
                                    • Figure 3: Estimated market shares of the top five providers of new individual income protection, based on volume sales, 2013
                                  • Product innovation
                                    • Brand reinforcement
                                      • Distribution trends
                                        • Figure 4: Distribution of new income protection premiums, by sector and channel, 2014
                                      • The consumer
                                        • Penetration of income protection and related products
                                          • Figure 5: Ownership of long-term and short-term protection products, by total sample, mortgage holders and those in work, November 2014
                                        • Significant financial commitments
                                          • Figure 6: Current financial commitments and obligations, November 2014
                                        • Long-term income protection gives owners peace of mind
                                          • Figure 7: Financial capability if unable to work for six months or more, November 2014
                                        • 37% of non-insured consumers feel they could cover living costs from savings
                                          • Figure 8: Contingency financial options if unable to work for six months or more (top eight only), November 2014
                                        • Reasons for not having insurance protection
                                          • Figure 9: Reasons for not having income/mortgage protection (top five only), November 2014
                                        • Attitudes toward income protection
                                          • Figure 10: Extent of agreement with statements about to protection insurance, November 2014
                                        • What we think
                                        • Issues and Insights

                                            • Educating mortgage borrowers will help improve the market’s fortunes
                                              • The facts
                                                • The implications
                                                  • Trade body promotes the idea of group income protection to reduce the sickness absence bill
                                                    • The facts
                                                      • The implications
                                                        • Welfare reform creates a fresh opportunity to remind people of the benefit of having income protection
                                                          • The facts
                                                            • The implications
                                                            • Trend Application

                                                              • Trend: Prove it
                                                                • Trend: Survival Skills
                                                                  • Trend: Why Buy?
                                                                  • Market Drivers

                                                                    • Key points
                                                                      • A growing workforce should help drive demand for income protection
                                                                        • Figure 11: Annual level and rate of employment and unemployment – UK (seasonally adjusted), 2005-14
                                                                      • Number of house-purchase loans up by a quarter in 2014
                                                                        • Figure 12: Volume of house purchase loans, by type of borrower, 2006-14
                                                                      • There’s a huge income protection gap in the UK
                                                                        • Figure 13: Ownership of long-term and short-term protection products, by total sample, mortgage holders and those in work, November 2014
                                                                      • Welfare reform creates new opportunities for insurers
                                                                        • Around a third of employees would only get Statutory Sick Pay from their employer if they were absent for more than three days due to illness
                                                                          • Assessing the need for income protection
                                                                            • ABI proposes further workplace reforms that centre on group income protection
                                                                              • Only 9% of individual income protection claims are rejected…
                                                                                • Figure 14: Summary of protection claims paid and declined, by product type, 2013
                                                                              • …with around half of these being due to not satisfying policy definitions
                                                                                • Figure 15: Proportional distribution of declined claims, by reason and product type, 2013
                                                                            • Regulation Round-up

                                                                              • Key points
                                                                                • Recent and forthcoming regulation affecting the protection insurance industry
                                                                                  • Industry initiatives
                                                                                  • Market SWOT Analysis

                                                                                      • Figure 16: Income protection market – strengths, weaknesses, opportunities and threats, 2015
                                                                                  • Who’s Innovating?

                                                                                    • Key points
                                                                                      • Summary of recent activity
                                                                                      • Market Size and Forecast

                                                                                        • Key points
                                                                                          • Over the past two years, sales of income protection have declined by nearly half
                                                                                            • Figure 17: New individual (long-term) income protection sales and average premium, 2009-14
                                                                                          • Group premiums are three times the value of individual premiums
                                                                                            • Figure 18: Volume and value of new group (long-term) income protection sales, 2009-14
                                                                                          • Business in force
                                                                                            • Long-term versus short-term income protection
                                                                                              • Figure 19: Premium income related to new and in-force long-term income protection business and short-term ASU business, 2009-13
                                                                                            • Market forecast: Real premium growth will remain a challenge in the short term
                                                                                              • Figure 20: Forecast of new individual (long-term) income protection premiums – Fan chart, 2009-19
                                                                                              • Figure 21: Forecast of new individual (long-term) income protection premiums, at current and constant prices, 2009-19
                                                                                            • Forecast methodology
                                                                                              • Fan chart explanation
                                                                                              • Market Share

                                                                                                • Key points
                                                                                                  • Friends Life sold the most individual policies in 2013
                                                                                                    • Figure 22: Estimated market shares of the top five providers of new individual income protection, based on volume sales, 2013
                                                                                                  • Unum is the market leader in the group sector
                                                                                                  • Companies and Products

                                                                                                      • Friends Life
                                                                                                        • 2013 ranking
                                                                                                          • 2013 claims paid
                                                                                                            • Description
                                                                                                              • Protection product range
                                                                                                                • Distribution
                                                                                                                  • Recent financial performance
                                                                                                                    • Figure 23: Key financial data for Friends Life’s UK division, full year 2012-13 and half year 2013-14
                                                                                                                  • Recent activity
                                                                                                                    • LV=
                                                                                                                      • 2013 ranking
                                                                                                                        • 2013 claims paid
                                                                                                                          • Description
                                                                                                                            • Protection product range
                                                                                                                              • Distribution
                                                                                                                                • Recent financial performance
                                                                                                                                  • Figure 24: Key financial data for LV=’s Life business, 2012-13
                                                                                                                                • Recent activity
                                                                                                                                  • Legal & General
                                                                                                                                    • 2013 ranking
                                                                                                                                      • 2013 claims paid
                                                                                                                                        • Description
                                                                                                                                          • Protection product range
                                                                                                                                            • Distribution
                                                                                                                                              • Recent financial performance
                                                                                                                                                • Figure 25: Key financial data for Legal & General Assurance Society, full year 2012-13 and interim 3Q 2013-14
                                                                                                                                              • Recent activity
                                                                                                                                              • Brand Communication and Promotion

                                                                                                                                                • Key points
                                                                                                                                                  • Limited above-the-line adspend on income protection products
                                                                                                                                                    • Figure 26: Total advertising expenditure on protection products, by product category, 2010-14
                                                                                                                                                  • Insurers experimenting with digital channels
                                                                                                                                                    • Aviva uses radio to highlight the need for family protection
                                                                                                                                                      • Figure 27: Top three advertisers of income protection products, 2010-12
                                                                                                                                                  • Channels to Market

                                                                                                                                                    • Key points
                                                                                                                                                      • The vast majority of protection business is sold with advice
                                                                                                                                                        • Restricted advisers grew their share of individual income protection in 2014…
                                                                                                                                                          • Figure 28: Distribution of new individual (long-term) income protection premiums, by channel, 2013-14
                                                                                                                                                        • …but play no part in the group sector
                                                                                                                                                        • Product Ownership

                                                                                                                                                          • Key points
                                                                                                                                                            • Survey background
                                                                                                                                                              • Protection products continue to record low penetration rates
                                                                                                                                                                • Figure 29: Ownership of long-term and short-term protection products, by total sample, parents, mortgage holders and those in work, November 2014
                                                                                                                                                              • More have short-term than long-term cover
                                                                                                                                                                • Significant product crossover
                                                                                                                                                                  • Figure 30: Ownership of protection products – Cross-analysis, November 2014
                                                                                                                                                                • Take-up is highest among the 25-44s, but thereafter starts to decline
                                                                                                                                                                • Personal Financial Commitments

                                                                                                                                                                  • Key points
                                                                                                                                                                    • Most people have at least one financial commitment to take care of
                                                                                                                                                                        • Figure 31: Current financial commitments and obligations, by total sample, parents, mortgage holders and those in work, November 2014
                                                                                                                                                                      • Many are encumbered with multiple responsibilities
                                                                                                                                                                        • Figure 32: Current financial commitments and obligations, by top three commitments, November 2014
                                                                                                                                                                      • There’s considerable scope to grow the income protection market
                                                                                                                                                                        • Figure 33: Current financial commitments and obligations, by ownership of protection products, November 2014
                                                                                                                                                                    • Financial Fortitude

                                                                                                                                                                      • Key points
                                                                                                                                                                        • Only 17% would be able to maintain their current standard of living if they couldn’t work for six months or more
                                                                                                                                                                          • Figure 34: Financial capability if unable to work for six months or more, November 2014
                                                                                                                                                                        • Those who have long-term income protection are much more confident in their predictions
                                                                                                                                                                          • Figure 35: Financial capability if unable to work for six months or more by ownership of short or long-term term income protection, November 2014
                                                                                                                                                                        • 11% of the non-insured have no idea how they would fare
                                                                                                                                                                          • Those with unsecured debts are in a particularly vulnerable position
                                                                                                                                                                            • Figure 36: Financial capability if unable to work for six months or more by top three financial commitments, November 2014
                                                                                                                                                                        • Non-policyholders’ Contingency Plans

                                                                                                                                                                          • Key points
                                                                                                                                                                            • Most people would draw on their savings if they were unable to work for a long spell
                                                                                                                                                                                • Figure 37: Contingency financial options if unable to work for six months or more, by parents and mortgage holders, November 2014
                                                                                                                                                                              • Relying on savings is unrealistic for most households
                                                                                                                                                                                • Figure 38: Level of personal savings, by working households and the non-insured who would rely on savings in the event of being unable to work, November 2014
                                                                                                                                                                            • Reasons for Not Having Cover

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Cost is the number one objection to taking out income protection
                                                                                                                                                                                    • Figure 39: Reasons for not having income/mortgage protection, by total sample, parents and mortgage holders, November 2014
                                                                                                                                                                                  • A lack of trust is still holding back the market
                                                                                                                                                                                  • Attitudes toward Protection Insurance

                                                                                                                                                                                    • Key points
                                                                                                                                                                                      • Many people recognise there is an even greater need for insurance as a result of welfare changes
                                                                                                                                                                                          • Figure 40: Extent of agreement with statements about to protection insurance, November 2014
                                                                                                                                                                                        • A recognition that State support will have to be reduced
                                                                                                                                                                                          • Two thirds of parents agree that it’s worth considering anything that financially protects their family
                                                                                                                                                                                            • Figure 41: Agreement with statements about protection insurance, by total sample, parents, mortgage holders and those in work, November 2014
                                                                                                                                                                                        • Appendix – Market Size and Forecast

                                                                                                                                                                                          • Best- and worst-case scenarios
                                                                                                                                                                                            • Figure 42: Forecast of new individual income protection premiums – Best- and worst-case scenarios, at current prices, 2014-19
                                                                                                                                                                                          • Forecast methodology
                                                                                                                                                                                            • Fan chart explanation

                                                                                                                                                                                            Companies Covered

                                                                                                                                                                                            To learn more about the companies covered in this report please contact us.

                                                                                                                                                                                            Income Protection - UK - February 2015

                                                                                                                                                                                            US $2,583.33 (Excl.Tax)