How Insurers, Employers Can Help Close Income Gap in U.S.: Zurich Insurance Research

Public/private partnerships between governments, companies and insurers can help ease income gaps that burden millions of Americans, according to new research from Zurich Insurance Group and the University of Oxford.

Financial education is one key to securing personal financial security, the study recommends. Other solutions include finding a balance between responsibilities assumed by governments, employers, insurers, other financial institutions like intermediaries and individuals in protecting household income.

The study highlights the growing risk of income protection gaps (IPGs) and recommends solutions to a problem that the study says if not addressed could impoverish millions of Americans.

Income protection gap is defined as the reduction in household income caused by the death or incapacitation of an adult wage earner on whom the household relies, taking all public and private sources of replacement income into account.

IPGs are caused by several factors including an aging population; reduced funding for government social programs; inadequate savings and insurance protection for individuals and families; and rising disability levels.

The study, “Embracing the income protection gaps challenge: options and solutions,” outlines practical recommendations and gives insights into how governments, employers, insurers, intermediaries and individuals can work together to close IPGs.

Urgent Need

There is an urgent need for solutions, the study concludes. As life expectancy increases, extending one’s working lifetime can provide financial rewards. Yet more years working also puts individuals at increased risk of becoming disabled during their careers. Chronic sickness, injuries or other conditions can prevent or impair a wage earner’s capability. With government resources constrained, and a growing number of people working part-time and temporary jobs, people are increasingly at risk.

“In one of the most striking social and political trends of 2016-17, we are witnessing something of a backlash against the decades-long shift of financial risks onto the individual. As longevity increases and state-sponsored social safety nets are stretched nearly to the breaking point, individuals have few guarantees of lifelong financial certainty without significant personal initiative and long-term planning,” the report states.

The researchers conclude that an IPG could seriously deplete household budgets, savings and retirement accounts. The burden of guaranteeing long-term financial security is too great for many individuals to bear.

“The income protection gap is not just a problem for individuals and families, but also for employers, government and society as a whole,” said John Miskel, head of Corporate Life & Pensions, Zurich North America. “It will take a multi-stakeholder approach to close the gap.”

The decline of government welfare creates opportunities for governments, employers and private insurers to form partnerships to extend social protection, using fiscal incentives to attract new customers, according to the report. For example, governments could do more to incentivize employers to safeguard the incomes of their disabled employees. Governments could also certify approved IPG insurance products and use fiscal incentives to encourage compliance.

Key recommendations for insurers and employers include:

For insurers:

• Target messaging and engagement with appropriate framing (e.g., link consequences of people’s financial decisions to others in their household).
• Continue supporting scenario-building apps.
• Develop programs that insure pension income against the long-term risk of contributions lost due to disability, premature death and progressive retirement.
• Include extended mental health cover in group insurance policies when certain parameters of treatment are met.
• Develop group insurance packages that create income protection insurance as an ‘add-on’ to private pension schemes.
• Encourage employers to auto-enroll (with opt-out option) workers into IPG insurance.

For employers:

• Design effective financial education programs with employees to make available ongoing financial advice that combines instruction with practice and engagement.
• Design methods to better inform employees about what benefits are available to them and how income protection insurance fits into the package (whether from the state, employer or otherwise).
• As official pensionable age is postponed, create flexible retirement options for older workers with impaired lives that involve part-time work and an alternative income.
• Create contributory employee assistance plans for employee support when confronting family, legal or financial crisis outside work (prevent presenteeism) – or as a source of benefit corresponding to predefined health-related need.
• Consider auto-enrollment of employees into an IPG protection plan.
• Create and maintain a core set of benefits for all employees, promoting equity and preventing social dumping, based on salary scales in each country.

The research report gives global recommendations for closing the IPGs and provides insights and solutions for 12 countries – Australia, Brazil, Germany, Hong Kong, Italy, Malaysia, Mexico, Spain, Switzerland, UAE, the United States and the United Kingdom.

This is the final of three reports on IPGs by Zurich and the Smith School of Enterprise and the Environment at the University of Oxford.

The first report, published in 2015, revealed that a growing number of Americans have little or no income protection, leaving millions at risk of slipping into poverty.

The second report, published in 2016, highlighted the results of a survey of 1,000 Americans to measure the extent of the problem. Among the survey findings: An estimated two-thirds of Americans do not have enough savings to cover expenses for six months if they become ill or disabled and are unable to work, and more than one in four would deplete their savings in less than a month.

Source: Zurich/Oxford study, “Embracing the income protection gaps challenge: options and solutions

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