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Jan 2022

Is income protection the missing piece in the protection jigsaw puzzle?

Source: Asia Insurance Review | Dec 2021

David WrightPacific Life Re’s Mr David Wright explains why income protection could help to offer more consumers complete protection, and how it can be deployed successfully.
 
 
Suggesting that income protection (IP) is an essential piece to complete one’s protection needs would leave many insurers in Asia questioning the need for this type of coverage. For a start, what could be claimed for that isn’t already covered under a typical critical illness (CI) plan? To add on, how can insurers overcome distribution challenges when the product structure itself can be complex?
 
Likewise, reinsurers are hesitant to actively promote IP in potential new markets given the continued challenges associated with the poor claims experience outside of Asia. This is in addition to the corresponding effort versus reward in supporting traditional reinsurance functions.
 
Furthermore, the introduction of CareShield Life by the Singapore government in 2020 has increased consumer awareness of needs associated with disability protection. CareShield Life is a long-term care product for severe disability that pays a monthly benefit where the insured is unable to perform activities of daily living. Claims are more common during one’s elderly years. However, it is in this gap that we recognise that there is an opportunity to position IP as occupational based disability protection during one’s working years in order to complete the protection jigsaw puzzle.
 
This article will seek to help readers understand why IP is the missing piece towards achieving complete protection for developed markets in Asia like Singapore, including some design considerations.
 
Why income protection?
To answer why IP, we need to first examine the existing protection products that can provide financial security when an individual suffers from a medical condition that results in a loss of income due to their inability to work in their profession.
 
CI is the closest example where the product provides a lump sum in the event the insured is diagnosed or has surgery for defined serious medical conditions. Funds can be used to substitute loss of income from the time off work during the recovery period, often temporarily. Coverage continues to expand with new and enhanced designs that are largely for competitive purposes as the majority of claims continue to relate to cancer, heart attack and stroke.
 
The challenge with CI in providing an adequate solution for the loss of income when the insured is unable to work in their usual profession relates to limitations with defined coverage and insufficient pay-outs.
 
1. Limitations with defined coverage
It is impossible to define every possible medical condition that may impact the insured’s ability to perform their occupational duties on either a short- or long-term basis. In the last few years, it has been observed that insurers have introduced new ‘catch-all’ coverage in CI plans that typically provide payment for a combination of surgery to a defined major organ and admission to the Intensive Care Unit of a hospital for a set minimum number of days.
 
While the above may offer additional coverage from existing CI features, it is a far cry from being a ‘catch-all’ for all medical conditions that cause occupational disability. For example, the increasing spotlight on mental health since the pandemic would fail to meet the above ‘catch-all’ CI definition.
 
IP is the only product in the marketplace that provides true ‘catch-all’ coverage as benefits are payable for any sickness or injury, whether physical or mental, that prevents the insured from performing their usual occupational duties.
 
2. Insufficient payouts
Most people are generally underinsured for the long-term impacts that can be associated with a serious medical condition – even in developed CI markets like Singapore, in which average sum assured is less than $100,000. The main reason is cost where CI is expensive and buying higher CI coverage is simply not the answer as it merely provides increased protection for a defined set of illnesses. IP can effectively address this protection gap at a much more affordable cost, providing higher value even for those in a position to buy higher CI coverage.
 
In summary, the standard CI product addresses financial needs as a result of a defined major medical condition. This includes, but is not limited to, out-of-pocket medical and daily living expenses during the recovery period. However, CI products fall short when it comes to undefined illnesses which results in the inability to return to work. Funds will run out well before most people recover, and this is where IP products aim to plug that protection gap.
 
For individuals without IP coverage in these circumstances, the financial consequences for their family and retirement planning can be catastrophic.
 
 
How IP works
The intention of IP is simple – to replace the insured’s income in the event of a sickness or injury which prevents them from performing their occupational duties.
 
The key feature for IP products is ‘total disability’ which pays a monthly benefit when the insured is unable to perform their occupational duties. This refers to the main tasks performed by the insured at the time of the disability.
 
IP products provide flexibility where plans can be customised based on an individual’s personal needs and budget.
 
Customers can insure up to a maximum of 75% of their income under indemnity style contracts that are presently available in Singapore. The insured benefit is based on their income at the time of application with proof of income required at claims time to fulfil policy conditions.
 
Various other benefits are offered by IP including partial disability, rehabilitation expenses, and death, to name a few.
 
Of these, ‘partial disability’ is a common feature that provides payment where the insured has returned to work in a limited capacity. In this scenario, usually a pro-rata style payment is made based on the percentage of loss of income that is aimed to encourage individuals to return to work as early as possible.
 
Making IP successful in a market like Singapore
For IP to be successful, a fresher approach to the proposition design is required to increase confidence levels in distribution teams to initiate protection discussions with clients.
 
The key principle that will inspire confidence within distribution teams to introduce IP into the protection conversation is a simpler design that is aligned to consumer buying behaviours to support market penetration. To be successful, support with increased education and sales tools highlighting the importance of IP as part of a comprehensive protection plan for consumers is vital.
 
This must be balanced to create value for customers within an appropriate risk management framework utilising learnings from overseas markets to understand claims experience drivers.
 
Based on insights from Singapore portfolios, this includes:
  • Defining a targeted customer segment 
  • Simplifying the purchase journey from the customer perspective
  • Options for shorter-term benefit payment periods with coverage to age 65
  • Simplifying benefit design for ease of understanding and increased certainty for the amount paid at claim time
 
Over time, as more insights are gathered, products will continue to evolve to meet the customer’s current and future needs.
 
CI will continue to be amongst the first living benefit product that distribution advisors will recommend to their clients. It is thus reasonable to expect that IP sales will not take off overnight with steady growth over time. This will require significant investment of time and planning beyond advisors to educate the public on the importance of IP coverage alongside existing protection solutions. After all, wouldn’t one want to protect their most important financial asset – the ability to earn an income? A 
 
Mr David Wright is director, business development and marketing with Pacific Life Re.
 

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