The income protection gap and why it's growing

David Swaden remembers being at an insurance conference when someone spoke about the high number of widows in America living below the poverty line because their husbands had died without adequate insurance. As a Senior Research Manager in Group Public Affairs for Zurich, he is used to hearing tough stories of peoples’ livelihoods, but he was shaken. “It is shocking and you could see the room react,” he says, “because it’s all about loss of income for a household. Regardless of gender, if you’re the primary home maker and that’s the role you’ve got, then it’s not easy to make the shift to becoming the main breadwinner.”

Lost earnings, depleted savings

Not many of us currently consider how we would handle the interruption of our income for a period of 20 or more years through disability and illness, or even the death of a partner, and the knock-on effect that has on our retirement income. For example, a recent Zurich survey of more than 6,000 people in Germany, Ireland, Italy, Spain, Switzerland and the UK, found that one in two respondents see their personal risk of becoming unable to work as less than 10 per cent. Yet in Western Europe, up to 25 per cent of the workforce could become unable to work during their lifetime.

I’d be very surprised if any government wasn’t thinking about this right now.

This imbalance in public perception has led to what Zurich calls the Income Protection Gap: a widening chasm between the money being set aside in the event of disability and illness and what is actually needed. For a whole variety of reasons it is a growing challenge for people and countries around the world. As we live longer we face the prospect of financing ourselves and protecting our family income into our 80s and 90s, at a time when pension provisions are being cut back by employers and governments, and jobs themselves are becoming less secure.

Employers see workforces getting older and more prone to illness and the responsibilities of caring for elderly relatives. There’s also wider recognition of the problems of mental health and stress. The financial crisis gave governments a wake up call (if they needed one) to confront their large future liabilities in areas such as pensions and rising public health spending to cover the needs of ageing populations and the more expensive cutting-edge medical treatments now available.

“I’d be very surprised if any government wasn’t thinking about this right now,” says Swaden. “For developed countries, current settlements are unsustainable. And growing countries need to think about how they’re going to secure their economic development; it’s an important part of locking in the growth they are seeing.”

Interconnected risks

There is still a low awareness of income protection, perhaps because it is such a complex issue, entwined with so many modern trends, risks and regional or cultural variations. The same recent survey by Zurich of six countries in Western Europe found that just one in three Europeans knows about income protection possibilities.

We have a responsibility and an important role to play in helping society mitigate the risks associated with the income protection gap. Raising awareness is a vital first step.

There are also different interpretations of it – most insurers define income protection around disability while Zurich increasingly wants to look at the income protection of the whole household so that, in the case of families, it also covers death. Zurich hopes its new research project with Oxford University’s Smith School of Enterprise and the Environment will help to highlight the challenges of the Income Protection Gap and lead discussion about it.

Kristof Terryn, CEO Global Life at Zurich, says: “We believe that as a global insurer, we have a responsibility and an important role to play in helping society mitigate the risks associated with the income protection gap.

“Raising awareness is a vital first step. Only when people understand the risk can they take measures to protect themselves and their loved ones from the financial impacts of becoming unable to work.”

For Noel Whiteside, Professor of Comparative Public Policy at Warwick University, who is conducting the research, it is a chance to take a global look at the challenge. She has divided the world into four groups based on the types of state support they provide and their emphasis on either collective or individual provision.

I suspect what might happen is that a great deal of interest will be shown in the creation of public-private partnerships, some sort of state-sponsored scheme that says to employers you must insure your workers against disability.

One group is the English-speaking countries that have been influenced by British ideas, including the UK, US, Australia and Ireland. Another is continental Europe framed around Bismarckian welfare, including Italy, Germany, Sweden, Switzerland and Poland. Latin America is another group that has a tradition of state social welfare in countries such as Mexico, Chile, Argentina, Uruguay and Brazil. And then there are emerging Asian countries such as India, Singapore, Hong Kong and Malaysia, which differ widely but promote personal savings under national provident funds as a means to underwrite domestic security.

A worldwide Gap

“The Income Protection Gap is worse in English-speaking countries because they tend to means test benefits,” says Whiteside. “So if you’re wealthy, you won’t get much, if anything. While in earnings-related systems like those in continental Europe, in the past the richer you were, the more you got. But the Gap varies around the world. In many developing countries, extended families offer the only resources available – which means the problem of lost income is less alleviated than spread should disability strike the wage-earner.”

There’s no doubt that the Income Protection Gap is a real problem and solutions are needed. Whiteside thinks that much of the burden will inevitably fall on the private sector: “Personally, I suspect what might happen is that a great deal of interest will be shown in the creation of public-private partnerships, some sort of state-sponsored scheme that says to employers you must insure your workers against disability. That will allow coverage to spread, making employers act, to relieve the national budget.”

Key takeaways

• The Income Protection Gap is the imbalance between public and private coverage against the interruption of income through disability, or death in the case of families, and the need for these solutions.
• As we live longer we face the prospect of financing ourselves and protecting family income into our 80s and 90s.
• Post-financial crisis, governments are thinking hard about their financial liabilities, particularly in terms of sustainability regarding pensions and benefits.
• Employers are seeing a changing workforce as populations age, and more illnesses such as mental health problems are recognized, with corresponding increases in disability rates.
• Zurich has responded to these challenges by commissioning research into the Income Protection Gap around the world; pledging to raise awareness, improve understanding and explore potential solutions.

Disclaimer: Views expressed on this page and in the reports are not necessarily those of the Zurich Insurance Group, which accepts no responsibility for them.