Not so simple group risk products

The Sergeant Review of Simple Financial Products is wrong to push Simple Income Replacement into the “too difficult” box says Katharine Moxham, spokesperson, Group Risk Development

The Interim Report of the Sergeant Review of Simple Financial Products has put forward proposals for the first three Simple Financial Products – an easy access savings account, a 30 day notice savings account and life cover.

But a Simple Income Replacement product remains a work in progress, despite the fact that the Interim Report recognises that the majority of the targeted group would benefit from income protection. This is disappointing. After all, basic financial planning theory dictates that the primary building block for financial resilience is protecting income.

The interim report recognises that more work is needed here and the consultation includes some specifics on a Simple Income Replacement product, with a view to including it in the Simple Product suite as soon as possible. The Simple Income Replacement product proposed is a short-term pay-out product to ensure affordability, with a choice of different deferred and pay-out periods.

Whilst the industry might advocate more comprehensive cover which would pay out up until State Pension Age, products which pay for a shorter period are now commonly offered by employers as an alternative – 26 per cent of all lives covered under employer-sponsored group income protection arrangements are covered for a benefit pay-out period of between one and five years.

But if the Simple Income Replacement product design is adopted as proposed, extreme care must be taken to ensure that consumers are left in absolutely no doubt that this is a product that only pays for a limited period of time and that this is a means of achieving a period of financial breathing space.

The interim report recognises there is a risk that insured Simple Income Replacement benefits may replace benefits which would otherwise be provided by the State and that there will be people on low incomes for whom State benefits would represent better value than the Simple Income Replacement product.

The Interim Report suggests that one solution to this issue could be to disregard any pay-out from a Simple Income Replacement product when making an assessment for means-tested State benefit but perhaps it would be more sensible to put forward Simple Income Replacement as a means of lifting people out of State provision for a limited period of time, alongside a simple message stating:“This policy is not likely to be suitable for you if you earn less than £xxxx.”

The proposed Simple Income Replacement product design makes no mention of the definition of disability upon which qualification for benefit payment will be assessed. This is a significant omission from the proposed Simple Income Replacement product design and a work-stream specifically to consider this is therefore vital. The aim of the work-stream should be to arrive at a definition of disability that meets the needs of the target group with regards to cost and certainty of outcome yet maintains the incentive for rehabilitation and supports those with severe longer-term conditions.

It is possible to come up with an income replacement product that is sufficiently simple to qualify as a Simple Product although the market will need to be brave enough to re-think the target market need and proposition rather than creating a cut down version of a current income protection policy.

Additionally, achieving effective early co-ordination between policyholder, treating physicians, employers and income replacement providers is vital since the optimum time for achieving effective interventions for rehabilitation back into the workplace is during the first few weeks of absence – especially for mental health/stress related conditions and musculoskeletal injuries.

There is an important role for employers to play in providing access to simple products and the group risk market has a significant potential role to play in supporting this.

We would encourage the Review team to press on with all speed to reverse the potential omission of income replacement from the initial Simple Products suite and to form a work-stream to specifically consider the definition of disability to apply under the proposed Simple Income Replacement product. If income is not protected, any Simple Savings and/or life cover products purchased by a consumer are likely to lapse in the event of a loss of income through illness, accident or disability.