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Income Protection and Welfare Reform

Welfare Refrom coverThe ABI has published a paper - Welfare Reform for the 21st Century (pdf 142kB) - setting out the case for the protection insurance sector, government, employer bodies and other stakeholders to work together to increase use of income protection insurance through the workplace.

About the report

The report shares the findings of research carried out by the Centre for Economic and Social Inclusion on income safety nets for working households in the UK. In particular this work focuses on the impact on households of a sudden loss of income when an earner finds themselves unable to work for more than a few weeks due to a serious illness or injury.

The ABI is concerned that so many households are exposed to this risk, get very little income support from the State, but are not using income protection insurance to provide a much needed safety net. Income protection insurance is the most under-used insurance relative to need. Each year one million people have to stop work for more than four weeks due to illness or injury, and quarter of a million workers leave employment due to ill health.

Research conducted by the Centre for Economic and Social Inclusion shows that 10.8 million working households would see their income fall by more than one third if the main earner has to stop work due to ill health. That is 60% of UK working households. Two thirds of this group – 6.6. million working families – would see their income fall by more than half. These figures take into account money these households would get from the State, and highlight the dramatic fall in income households face without income protection insurance.

Less than 1.2 million people have bought individual income protection insurance. Around 2 million more people are covered by group income protection insurance provided by their employer. This insurance provides replacement income when the person covered is unable to work. But providers of income protection insurance also offer rehabilitation and other return to work support services. These services help people recover and return to work faster than would otherwise the case, benefiting the individual, their employer, the State (in terms of reduced Welfare benefits, and increased income tax and national insurance revenues), as well reducing the burden on the NHS.

Why is reform needed? 

Greater use of income protection insurance would contribute to easing the pressures on the welfare budget.

While reforms have already been made to the UK welfare system to try to manage the costs to taxpayers and the economy, it is widely accepted that further reform is urgently needed to ensure the welfare system is made economically viable for the future. Greater use of income protection insurance would contribute to easing the pressures on the welfare budget. It would also give those households covered a real safety net that meets their needs and reflects their contribution.

Welfare policy needs to abandon the flawed assumption that people who are entitled to little support from the state will realise this and put in place their own safety net. This assumption does not reflect reality. Just as is the case in persuading people to save for retirement, there are powerful psychological and behavioural forces that inhibit people acting to use income protection insurance to put in place a safety net.

People are also not told clearly by government how little state support they would be entitled to. Parliament has already recognised the power and importance of workplace solutions in overcoming psychological and behavioural barriers, legislating to create workplace pensions auto enrolment.

It is clear that an effective solution to the income safety net problem must involve the workplace and a role for all employers. Countries such as the Netherlands and Australia have already gone down this route  and we can learn from their innovative approaches and experiences.

The ABI's role

The ABI has published this paper to lead, inform and promote debate on the lack of working household income safety nets –  to build recognition of the problem and the need for innovative workplace based solutions to address it. The insurance industry already plays a significant role in helping people cope with income shocks, but could help so many more.

The ABI wants to work with others to build an effective solution that protects households against loss of employment income due to unexpected ill health.

The ABI is also supporting the 7 families campaign.

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