This post recounts the first section of discussion from our April Protection Forum and focuses on how sick pay and deferrment periods can be made more flexible for clients. In our feedback from this section, one adviser wrote that “I thought the sick pay discussion was particularly useful and helped us with another project we are looking at“!

92%

of attendees found the session useful to their practice

Matthew Chapman:

I think it’s really, really important because I believe the deferred periods that we’ve probably got in place in situ at the minute are probably linked to maybe more traditional sick pay entitlements, and I don’t think they allow a huge amount of flexibility.

I’ll give you a prime example. I’m literally looking at cover right now for two clients, one has 6 weeks full, 6 weeks, half, and another has 18 weeks full, 18 weeks half. And they’re actually fluctuating sick pay entitlements based on the length of term the client’s been with that employer. And I think we’ve got to think about how we can adapt. I mean, that’s an employed situation. But then you’ve also got varying sort of sick pay needs for individuals that may be a self-employed. It’s a bit easier from a self-employed point of view, because it’s really a calculation of how long you think the individual can cope independently without any financial support.

But when you’ve got either fluctuating sick pay entitlements or sick pay entitlements that don’t really match the traditional score set, i.e. one week, four weeks, eight weeks, 26 weeks, 13 weeks, 52, the usual, then I think you have a bit of an issue because these clients here, I can choose to either potentially look at a policy that’s going to kick in before they actually need it to, at which point they can have deductions made and they’re paying for cover they essentially can’t use, or we’re gonna have to look at, you know, leaving them exposed potentially for a period of time where they’re not going to get any income support and have to rely on each other.

So I think we need to find ways of offering more flexibility around that. Also fluctuating sick pay entitlements. So I know obviously we’ve got things for NHS workers, where they’re going through that sort of stepped entitlement, again, linked to length of service. But we need to be thinking about people where they have either changing sick pay entitlement through their length of service as well that maybe doesn’t actually match what the NHS or public sector get.

And also my other concern as well is around those that have discretionary sick pay, because discretionary is one of the hardest things to overcome when you’re an adviser, because you’re dealing with clients who are saying, “but if you look at my employment contracts, I’ve got maybe up to six months discretionary pay.” And you’re trying to say to the client, “yeah, but the reality is that discretion is the discretion of your employer. We don’t know whether that’s going to actually come true or not at the end.”

And then there’s this debate, isn’t there? Around do we cover them? Do we not cover them? How is that going to look, how is the insurer going to behave? So I’d really like to throw out the floor to the providers more than anyone about how they think we could potentially overcome that issue.

Alan Knowles:

It was actually just in support of what Matt just said. The six week one is one that we come across quite a lot. And it is that decision of whether you want to underinsure or over-insure for that period of two weeks. I mean, usually you would go for a four week deferment and you would over-insure the client and just explain that they can’t claim on that policy for two weeks. That’s arguably the better way.

But, I don’t know whether there are options or availability to tell these more. You know, the eight and four week deferments have been around for such a long time now. Should we potentially be looking at a few more alternatives in there as well? I guess the price difference probably wouldn’t be huge, but for a 4 and an 8 week, there is a reasonable price difference with a lot so maybe something sitting at six weeks as an example might just present something that suits some customers.

Peter Hamilton:

But just a quick reflection on a couple of points there. I think in principle, there’s no reason why we couldn’t do that. The only question would have been historically, the extent to which there’s a demand for it and that kind of tension between simplicity and understandability and the adding of more and more choice within this.

So choice can be a good thing, but equally it can start to just complicate things for people. So there’s an example there of six weeks leave, I have no idea, candidly, just how many customers might fall into that group. So with anything as insurers, we’re always looking to say, “well, how much of an issue is it? What problem are we trying to solve here? Does it affect many people? And how important is it compared with the other things that we might do to improve the products that we’ve got?”

So I guess the sense I’ve got here is, you know, I’m hearing six weeks quite now, but now do we want one, two, three, four, five, six, seven, eight, nine, ten, whatever it is? Because all of that is possible. It’s all going to be priced. And the more you do it that the more complexity you build in. So, I’m kind of throwing it back, I guess, to say how much of an issue is this? And is it just one or two extra deferred periods we want or are we trying to say we want to get down to 52 different deferred periods in a year, all of which could be intricately woven into someone’s sick pay, but may create perhaps an illusion of real dictating when as I think Matt pointed out, in some cases, the sick pay is actually discretionary in part as well to have. I think that is harder to link into.

So I think we could offer more deferred period. Some people may offer more than we do, but there’s no doubt that there’s been a degree of continuity over the ones that said it’s not to that we’re against that change from our point of view, just trying to understand how much of a difference it will make to how many people.

Alan Knowles:

I think that’s the case with so many things, isn’t it? There’s so many things we could do. And I really appreciate everything you said there Peter as well and agree. For me, and obviously I’m not speaking for everyone here, but the six week one, anything between a 4 and a 13 week, there probably is a bigger price impact there and for us as advisers and for insurers as well I do wonder, is there room for a customer to complain that we’re charging them a price for a four week deferment when really they’re not eligible until six weeks?

So actually, we’re overcharging a customer for something that they can never actually claim on. And a 4 versus a 6 week, that could be a reasonable price difference for certainly the composite insurers where we’re looking at fixed premiums, I think between a 13, a 26 and a 52 week at there’s less difference. Between a 6 and a 12 month deferment, the price difference is often quite negligible. So that argument probably gets much less as you get further along. Honestly, I don’t know the answer to whether it should be a sliding scale and offered at every week. I genuinely don’t know, I feel that’s a little bit over the top, but I do wonder whether we should definitely have maybe a little bit more than what we do.

Natalie Turner:

I got into protection a few years ago and I’m with St James’s Place, so I almost have to quiver in my boots every time I try and put anything through their compliance and business assurance team. So I’m very, very aware of not over-insuring but not under-insuring. And sometimes you tie yourself up in knots and end up strangling yourself with your own hands.

But this whole idea about whether we go for four weeks or eight weeks, especially if the sick pay is the length of six weeks. But the question I’ve just put in the chat was, I know with car insurance if you sell the car, your insurance won’t pay out if that car got stolen. But for life insurance or mortgage protection, if you pay your mortgage off, that’s still valid. And if you die, your mortgage protection is still paid out or critical illness, etc. So it’s not linked to the original reason why you got it. So why is it so bad for Income Protection to maybe have two weeks where you got both, or am I missing something massive? Is it the end of the world if the client is paying for it and they’re still getting an extra two weeks sick pay, but they’ve paid for it for, say, a policy with LV= or Aviva to kick in after four weeks, why is that so bad? I don’t get why it’s such a crime.

Peter Hamilton:

I think that’s a fair comment. Essentially and historically, Income Protection has been premised on the idea that we want to encourage people to go back to work. And I think if you looked at Australia specifically, collectively insurers there lost a huge amount of money because the benefit structures were such that many, many people found themselves better off staying off because there was literally no incentive financially to go back to work, however much we might think work is a good thing to be doing.

The financial incentive there was such that people were materially better off by being sick and you don’t want that. There’s a separate question as to whether if we’re talking about one or two weeks either way, we could find some accommodation on deferred periods  that eases the challenge that we’re facing here, and that might be one for us to reflect on. Within that you’ve got to have clarity over the claims process to understand when your sick pay started and stopped. But the broader principle that says, “we want to take into account income that you’ve got because we want it to make sense for you to go back to work financially as well as from every other kind of positive attribute associated with work as well” is sensible. So I think it’s it is a good question, but that would be the rationale as to why that motivation to return to work has been there in the first place from the insurance perspective.

Lee Thomas:

You just want greater flexibility within these products. A client asked me a couple of weeks ago, her sick pay, full sick pay entitlements of her employer goes to something like four weeks in her first year of employment, up to about I think 24 weeks once she’s been there for five years. And every year it improves and you just want a product that you can vary flexibly.

So it’s the same with salaries as well. I’ve got clients who come in and their income fluctuates quite a bit depending on bonus payments or just how their pay is structured. And just to have a policy that doesn’t need constant re-underwritings, just you could just adapt that policy very simply as the employment, sick pay salaries, etc vary, because you just want it to be simple. I know that in a way makes it more complex, but it’s far more complex from the client’s perspective if you’re constantly having to resubmit new applications on a regular basis because things are slightly changing.

Paul Reed:

Echoing Matt really just for a bit of simplicity, is the dovetailing that many insurers do for the NHS or teachers, local government, what they do, the 12 month deferred and then there’s the wraparound cover, depending on length of service or how that works. In general, having a generic wraparound approach for every person I appreciate will be a logistical nightmare for insurers, reinsurers and well for everyone that side of the equation. From a customer and adviser point of view, it would certainly give simplicity if you had, even if it was a three month wraparounds or a six month wraparound.

But the inevitable concerns, problems, will be from an insurance perspective how you make that uniform approach for anybody. But from a customer’s perspective in line with what Lee was saying, there it gives a nice bit of flexibility that as their benefits do change, if they’re set as a six month wrap around that, you dovetail in with their six weeks full/ six weeks half or whatever it is, then the customer knows that regardless of what sick pay they’ve got, they’re not going to be at a detriment for any period of that time. Albeit the counterargument could be that you say, “well, for that flexibility and for that privilege of having the wrap around, it’s going to cost you a little bit more.” So which side of the coin do you want to play it really? Its a tricky balance I appreciate from both sides.

Harish Patel:

Looking at the deferred period, we normally sit down with clients to make sure that they’ve got an emergency fund to fall back on to meet short term issues and can this be used as part of the conversation when you discuss the deferred periods. So there is an overlap to fill the shortfall with what we get paid after six weeks and you do an eight week one, the two week gap they can use the emergency fund for the gap, rather than going down the route of a four week deferred period, which is A) more expensive and B) they can’t claim for the first two weeks.

Sean McCarthy:

Just a quick couple of points. First one, I think it’s interesting that obviously all the people engaged in this forum clearly demonstrate a kind of interest in IP and protection generally. But I think there is a danger that we made the product too complex. When we start to tinker with things like, you know, sliding deferred periods and things like that for people that are coming into it and part of our agenda ought to be about trying to encourage more and more advisers to write protection. And just a word of caution around what is a really good debate, don’t get me wrong, but let’s try and keep it simple sometimes rather than overcomplicate.

Second thing, of course, is that we only set this up outset. And it’s more of a challenge that I think, again, with this group of advisers, they probably are advisers that review their clients regularly. But we do need to be careful when we know over the 20, 30 year period that someone’s occupation, career, job, whatever, is likely to change a number of times and therefore their circumstances and their needs are changing alongside that. So just a couple of challenges and a couple of observations.