In sickness and in health: an insurance proposal

Long term sickness is costing the country large sums of money in terms of benefits. With more cuts to public expenditure on the cards post election, the current situation may be unsustainable. John Letizia argues that the government should be doing more to encourage people to investigate the benefits of income protection insurance which would reduce the vulnerability of individuals and business and cut the benefits bill simultaneously.

Photo credit: Bloody Marty

For over four decades, academics, policy-makers, employers and employees alike have, somewhat, struggled to understand the reasons for the UK’s low productivity levels and the high sickness absence levels.

Although successive governments have introduced measures to address these two issues, there is still a long way to go.

As we approach the general election, there are encouraging signs that all the main parties are seriously thinking about medium to long-term policies that would improve the situation as well as giving, quite rightly, much more prominence to health and wellbeing.

Cost of sickness

With 113 million working days lost to sick leave in England alone, the current situation is not sustainable. The Chief Medical Officer for the Department of Health recently reported that ill health in the working age population cost the economy £13 billion in health-related sickness benefits and £9 billion to employers in terms of sick pay and associated costs.

Those off work for more than 6 months have only a 20 per cent chance of returning to work in the next 5 years. Two million people suffer from an illness they believe was caused or made worse by their current or past work.

Mental illness alone costs the UK economy about £70 billion, about 4.5 per cent of GDP, which is high compared to other developed countries, according to a study published by the OECD.

About half of those costs come from lost employment and reduced productivity and performance. People with mental health problems are less likely to remain in employment in the UK than in many other countries.

Impact on families

Sickness absence is much more than data and statistics – it is about the direct impact it has on individuals and their families. The 2013 Department of Health Chief Officer Report stated that if individuals are off work for six months they only have a one in five chance of getting back to work in the next five years.

Research published by the Institute for Social and Economic Research (ISER) shows that after leaving work for health reasons, on average 43 per cent of people’s household income came from benefits, which rose to 60 per cent for those in relatively low income households.

Furthermore, withdrawal from work for health reasons is associated with a 32 per cent probability of being in poverty and a 28 per cent probability of entering poverty.

These probabilities are three times and four times larger, respectively, than those associated with remaining in a job, and are smaller than those associated with becoming unemployed.

The case for income protection

As Government is increasingly looking to small and medium enterprises (SMEs) to drive the UK’s future economic growth, sickness absence currently represents a significant barrier for firms that could be easily tackled.

Government has shown that it is eager to help tackle the problem, with the introduction of the Fit for Work Service and the associated £500 tax relief, but there is a limit to what the state can do alone.

At Unum, we believe that an effective sustainable long-term strategy should include both state action and raise awareness of private solutions such as Group Income Protection, which can ease the cost of absence and help ensure businesses keep knowledgeable and experienced staff in work.

Currently, 11 per cent of the UK working population has Income Protection (IP) coverage, compared to 27 per cent in the USA.

Recent independent research published separately by Unum and the Association of British Insurers (ABI) found that IP leads to the Exchequer savings of around £120 million each year. If the UK had similar levels as the USA, IP would lead to Exchequer savings of around £300 million each year, so additional savings of £180 million a year.

To recognise these savings and incentivise greater take up of IP among SMEs, Unum has called on the government to introduce a temporary tax relief for employers who provide IP for all their staff.

There are three other key steps that government could take to make the UK workforce more resilient, reduce the impact of sickness absence and help more people to access private financial protection:

1. All relevant government-backed advice services should explain how to prepare in case people are unable to work because of ill health.

All relevant government advice services, such as the Money Advice Service, should include advice on how to prepare in advance of injury or ill health. This should include all sources of advice on: retirement planning, the Fit for Work Service, Age Positive, long-term physical and mental health conditions, welfare, healthy workplaces and being a good employer.

2. The government should carry out regular economic evaluations of sickness absence, how to minimise it and how to help people manage financially when ill.

There are pockets of research going on across government. For example, the Department of Health has announced a pilot linking up mental health and employment services. However, there needs to be a systematic programme of research and action.

To minimise sickness absence, it is vital that we have strong evidence about the effects of sickness absence and the best value solutions to help people return to work. Greater emphasis should be given to pro-active measures such as health and well-being.

3. Create an interdepartmental government study to explore whether auto-enrolment can be used to improve access to other financial products.

Between the election and 2018, as auto-enrolment beds in and minimum pension contributions step up to eight per cent, the incoming government should begin interdepartmental work to understand the costs and benefits of using the auto-enrolment model to mitigate other financial risks that people are overexposed to.

Further information

Unum is an insurance company specialising in providing disability and income protection insurance and also offers other insurance products including accident, critical illness and life insurance.