The income protection gap is defined as
the reduction in household income as a consequence of the death or incapacitation of an adult wage earner on whom that household relies, taking all public and private sources of replacement income into account.1
Loss of household income due to illness, disability, or premature death can be devastating. Under-insurance for unplanned interruptions in income is an important research topic as it manifests the inherent behavioural biases individuals can face when it comes to choosing insurance policies that protect their household income. At the same time, with governments around the world cutting back on social protection programmes, there is growing interest in the potential of employer- and household-sponsored schemes to this gap.
This project accordingly seeks to understand the specific macro- and micro-level drivers of under-protection. By considering equally underlying demographic and macroeconomic trends, the role of government and employers, and the behaviours associated with household financial decision-making, our research aims to derive fresh insights for behavioural economics and social protection policy alike.
Embracing the Income Protection Gaps Challenge: Options and Solutions Report
The ability to ensure financial security in the face of crises such as long-term illness or disability is crucial to our personal security lives and the future of our families. The opportunity that this brings for governments, employers, insurers and individuals to work together is critical and growing. Our report makes the following recommendations to solve these income protection gaps.
- For insurers: Develop basic insurance products to be introduced via employers under auto-enrollment (in legally approved local jurisdictions), with additional features available for individuals wishing to purchase them.
- For employers: Enroll the workforce in contribution-based income protection insurance schemes (with an opt-out clause) as part of their employment contracts. Provide employees with ongoing financial education and training, including the use of digital tools.
- For governments: regulate and certify (or trademark) approved IPG insurance products and use fiscal incentives to encourage compliance. Extend obligations to information technology (IT)-based platforms and agency workers.
- For the individuals: personal experience of IPGs is a bigger factor influencing demand than financial literacy. Cost perceptions pose a barrier - but most people believe income protection insurance costs are higher than is likely to be the case. The rise of the 'sharing' economy is putting more individuals at risk, and older workers are more likely to lack protection.
- For insurance distributors and intermediaries: agents, brokers, banks, employee benefits consultants and others have important functions, not just linking supply and demand but importantly advising and educating customers (whether employers or individuals) and feeding market and customer requirements back to insurers.
Employers have a central role to play in helping to make their employees more resilient to income loss. In this report we propose simple solutions, such as:
- Enrolling the workforce in contribution-based income protection insurance as part of their employment contract
- Provide employees with ongoing financial education and training to equip them with the practical knowledge and skills they need to make informed choices
- Offer health checks incentives to employees
- Promote healthy lifestyles in the work place by incentivizing healthy choices such as having regular health checks, exercising and eating well.