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Risk Nexus Income protection gaps: a rising global challenge
Contents
Foreword1
Executive summary 2
Section 1 – How is income protected and what is an income protection gap? 4
Section 2 – Why IPGs are set to increase as a challenge 8
Section 3 – Why should we care? The growing consequences of IPGs 13
Section 4 – Closing the gap: areas for action for governments and employers 18
Section 5 – IPGs by region 21
Acknowledgments 37
Cover: Roughly two-thirds of poverty among women
who lose their partner and more than one-third of
that among surviving men is due to under-
provisioning life protection, research suggests.
Income protection gaps: a rising global challenge
Foreword
Globally, we face a complex set of interconnected challenges.
For households and families, however, the main challenge
Protection provided for is fairly simple: how to put food on the table and meet
household income against immediate and long-term needs. For many, income through
premature death or disability regular employment provides the obvious solution. But what
is too often inadequate.”
if an unexpected event such as a disability or even premature
death occurs? Are households adequately protected?
Zurich Insurance Group and the Smith to formulate targeted and sustainable
School of Enterprise and Environment recommendations for a range of
at Oxford University (SSEE) have come decision-makers to help close income
together to study this issue. The evidence protection gaps. These recommendations
suggests that the protection provided will be for households, the public and
for household income against premature private sectors, and society as a whole.
death or disability is too often inadequate.
This publication summarizes the key
IPGs can have devastating consequences findings of a more extensive,
for households and far-reaching social academically-focused version that
and economic impacts for governments provides further context. The longer
and employers. These are of concern at report also includes full summaries of
the global scale, but occur at a local each of the 18 countries considered.
level, and have different consequences In addition, we have produced individual
depending on the nature of partnerships country fact sheets, providing at-a-glance
between governments, employers and information relating to national IPG
individuals. While IPGs are a significant challenges. These are available on request.
challenge in themselves, they are also
In time, we aim to stimulate the
closely linked to other pressing issues of
development of new ways of thinking
our time, such as how to deal with an
about IPGs and new insights about
aging population, the global retirement
how solutions to income protection
savings gap, and the continuing
gaps will influence individual decision-
challenges posed by the global financial
making, public policy initiatives, and
crisis. For these reasons, as a global insurer
organizational risk management.
and academic authority respectively,
We cannot succeed alone; collaboration
Zurich and SSEE have committed to
and dialogue will be needed across
a long-term project on the issue.
a broad range of stakeholders.
In this first report, we seek to raise
This report is designed to help stimulate
awareness and develop an understanding
much-needed discussions and
of the global challenge IPGs pose.
collaboration. We invite you to join
Following this, we will develop new
us in considering this important
insights into the causes and consequences
global challenge.
of IPGs. In turn, this research will help us
Income protection gaps: a rising global challenge 1
Executive summary
“Income protection gap – 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.”
Zurich Insurance Group/Oxford Smith School, 2015
Loss of earned income, due to death or In the developing world, government
disability, can be devastating. Therefore, schemes inherited from Europe seem
starting in the late 19th century, when set for similar difficulties. Average age
a family’s breadwinner no longer can is rising with growing prosperity, and
put food on the table, compensation numbers of casual, part-time, and
programs replace income lost. Today these temporary workers remain significant.
programs encompass public schemes, Government funds are focused more
private schemes and public-private on the impoverished and less on
partnerships. Unfortunately, these are middle-earning workers, threatening to
increasingly failing to protect incomes. leave a burgeoning middle class exposed.
This creates what we call Income
The impact of IPGs on households,
Protection Gaps (IPGs).
governments, and employers is
We found that a range of factors significant. Families risk falling into
contributing to the challenge posed by poverty. A U.S. study suggests two-thirds
IPGs. In the developed world, demand of impoverishment among surviving
for government support – the traditional women and more than one-third among
source of relief – is rapidly outpacing surviving men results from inadequate
supply. Disability levels are increasing to life insurance. Those with long-term
ever more challenging levels, due both disabilities face similar difficulties.
to an aging population and improved Benefits are harder to come by, and
medical diagnosis. Yet public budgets, returning to previous income levels
particularly after the global financial is far from guaranteed. On average,
crisis (GFC), have failed to keep pace. self-identified disabled persons in the
EU are 15 percent more likely to suffer
Western governments have cut back
poverty and/or social exclusion than
on protection largely by restricting
non-disabled.
access to benefits. To pick up the slack,
governments look to private schemes. IPGs can also devastate retirement.
But in general, their uptake has been With state support declining, families
insufficient to fill the gap, partly owing confronting IPGs are often forced to tap
to misperceptions of risk and the legacy their pension savings. Given the global
of mostly generous government pension-savings gap, rising longevity,
provisions. Meanwhile, an increasing plus the declining generosity of pensions
proportion of workers have little or no schemes, those affected by IPGs thus
income protection at all. Part-time and face a very real possibility of running out
contract workers, whose numbers are of money in their old age.
rising, are excluded from most public
income protection schemes, which are
aimed almost exclusively at full-timers.
2 Income protection gaps: a rising global challenge
Employers are not immune from the As such, a three-party approach is
negative impacts of IPGs. Growing preferred, allocating responsibilities
gaps mean employees are increasingly to each part of the system without
Employers have a unique vulnerable. For workers employed overburdening the others.
opportunity to be a central outside their home countries, public
Key approaches to consider include
player in solutions.” support is often highly problematic.
fostering global dialogue to raise
But perhaps the main concern for
awareness and spur action, tailored local
employers is how IPGs hit productivity.
approaches to reflect the diverse nature
Without adequate protection, and with
of IPGs, incentives through tax systems
job prospects much reduced for the
and a joint push to improve awareness
disabled, many workers will choose
among the general public.
to work through minor disabilities at
reduced capacity. This ‘presenteeism’ Though employers clearly have a role
will cost U.S. businesses more than to play in collaborative actions, they also
USD 150 billion per year. Left unchecked, have a unique opportunity to be a central
IPGs are likely to have a greater impact player in solutions. We encourage them
on productivity as workforces age. to also consider how income and life
protection benefits can be used to retain
IPGs will create a growing burden for
and attract talent in today’s ultra-
governments in the future if not addressed
competitive skills market, and how
adequately today. Most obvious is the
they might adapt working practices to
demand for support created by premature
counter IPGs in an aging workforce.
death or disability, the latter of which will
increase as populations age. In addition, Several attempts have been made to
labor market challenges faced by disabled measure IPGs on a global scale. We
workers will also reduce the volume and believe such estimates are useful but also
contributions of active workers who problematic. The purpose of this report
support social security funding. This is not to provide exact numbers on IPGs.
adds to a much wider sustainability We instead seek to identify the trends
problem for the many welfare systems that are aggravating the phenomenon,
which rely on those of working age and challenge the traditional coping
to sustain retirees. As explored for mechanisms that are in place. This report
households, the depletion of savings aims to raise awareness of IPGs’ threat
to fill IPGs, combined with increased to households and to the public and
longevity, means those effected will private sectors. It also challenges us to
again turn to the state for support in consider some broad areas for action
their later years. Added to all of this, that we hope will stimulate thinking and
the changing nature of the workforce debate, as well as providing insights for
threatens established welfare systems. our own work in the next phases of this
long-term project. Recognizing how
Even at this early stage, a number of
widely IPGs vary, this study examines
areas for action are apparent. At the
select countries across four geographic
center of these is a need for collaboration.
regions: continental Europe; the U.S.,
A global challenge such as IPGs is too big
UK, Ireland and Australia; Latin America,
for the public or private sectors to tackle
and South Asia.
alone. Governments and employers are
clearly important, but individuals should
also take some responsibility for ensuring
against gaps in income protection.
Income protection gaps: a rising global challenge 3Section 1:
How is income protected and what is an income protection gap?
Here today, gone tomorrow: income can be a fragile thing.
This is why society has developed systems to protect incomes
of those families hit by death or disability. By doing so,
these systems seek to prevent what we define as ‘income
protection gaps’ (IPGs).
In this report, we define income Continental European and Latin
protection gaps as the reduction in American state insurance schemes are
household income as a consequence ‘Bismarckian’ – a reference to former
of the death or incapacitation of an German Chancellor Otto von Bismarck,
adult wage earner on whom that who created this form of modern
household relies, taking all public welfare state [in the nineteenth century].
and private sources of replacement Insurance payouts are based on premiums
income into account. paid, which in turn are tied to the insured
person’s income level. By contrast,
This section outlines how income is
English speaking OECD countries like the
protected. It then details the purpose
UK and Ireland offer flat-rate benefits to
and focus of this report, which frames
all. In southeast Asia, provident funds
the subsequent sections.
give support in the event of disability
and make a lump-sum, tax-advantaged
1.1 How is income protected payout to survivors.
against death and disability?
In addition, many governments offer
Four types of protection provide a auxiliary payments to surviving or
replacement income to families that impaired families, to cover caregivers’
suffer incapacity or premature death: allowances, help with mobility and
state-sponsored social security; collective health treatments.
insurance; workers’ compensation
(sometimes in the form of employers’ Neither social insurance nor provident
liability) and voluntary savings. funds cover informal (in developing
countries, rural) part-time, temporary or
State-sponsored social security. casual workers, or the self-employed.
In most European, Latin American and This is particularly problematic in Latin
English-speaking OECD countries, the American and South Asian countries,
state insures residents against death and where informal work remains widespread.
disability. Those who don’t contribute to In OECD countries part-time and
this insurance can apply for means-tested temporary contract work is also growing.
social assistance. In much of southeast
Asia, the state requires residents to It is important to note the prevalence of
accrue personal savings schemes, pay as you go (PAYG) welfare systems in
known as provident funds, to perform much of English-speaking OECD
a similar role. countries, continental Europe and Latin
America. These systems require people
still working to fund those in retirement,
or in need of benefits.
4 Income protection gaps: a rising global challengeAs Figure 1 shows, cash benefits for social assistance when contributory
people with impaired lives are offered in benefits are time limited or too low for
nearly all countries. Of these, contributory subsistence. Originally designed in most
schemes cover workers who have paid cases to be financially self-sufficient, many
social insurance contributions. These contributory schemes are operating a
supplement universal disability pensions, deficit and this explains why governments
or are supplemented by means-tested are interested in containing claims.
Figure 1:National disability benefit programs (2012/13)
Information available for 183 countries (100%) Contributory
scheme and
non-contributory
Disability benefit schemes anchored in means-tested
national legislation providing periodic cash benefits scheme
168 countries 15 countries
92% 8%
of which
lump-sum benefits
Contributory
Contributory Contributory Contributory 11 countries
scheme only scheme and scheme and
81 countries non-contributory non-contributory
universal scheme means-tested
44% 20 countries scheme
54 countries
11%
30%
Non-contributory
non-contributory non-contributory
means-tested universal
scheme only scheme only
6 countries 7 countries
3% 4%
Source: ILO (2014):56
Collective agreements: Many employers Work-related impairments or
offer insurance for death and disability deaths: are commonly compensated
as part of occupational pension systems under laws that hold employers
that mainly provide retirement benefits. collectively or individually liable for
More are turning toward defined health and safety at work. Social or
contribution (DC individual accounts), commercial insurance covers the risk.
where a certain amount or percentage Payments may reflect lost earnings,
of money is set aside each year by a the degree of impairment, number
company and employee. This marks a of dependents or any combination
shift away from typically more generous, of these factors.
but less sustainable, defined benefit (DB
Work-related disability and death
final salary payments), where payouts
benefits tend to be more generously
are based on an employee’s final salary.
compensated than non-work-related
In Europe and Latin America, collective
ones. However, while these plans are
agreements are legally enforceable.
widespread, it is relatively rare that
Income protection gaps: a rising global challenge 5disability and illness are attributed to (the self-employed) and part-time,
work-related causes. In the U.S., less temporary or casual workers.
than 5 percent of disabling accidents
Global cover is illustrated in Figure 2.
and illnesses are work related. The other
It shows that mandatory social insurance
95 percent are not, meaning workers’
through workers’ compensation schemes
compensation doesn’t cover them.1
are prevalent across the four geographical
In addition, nearly all countries areas. Notable exceptions include the UK,
confine protection to those in formal where employers are instead required to
employment, excluding sub-contractors have employers’ liability insurance.
Figure 2:Employment injury protection regimes
Employer liability programs
80 Voluntary social insurance
andatory social insurance
M
% of labour force covered
(excluding employer liability
60 programmes)
40
20
0
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Total
Women
Africa North Sub Latin North Western Central Sub Middle World
Africa Saharan America America Europe and Saharan East
Africa and the Eastern Africa
Caribbean Europe
Source: ILO (2014):49
Voluntary savings: Most countries IPGs – how to measure?
offer tax incentives to encourage Put simply, IPGs arise when need for
personal savings that supplement state income outstrips supply as a result of
provisions. This is particularly important disability or (for survivors) premature
in developing countries where the state death of a wage-earner. More income
provision is very low, such as in Mexico is lost than can be replaced.
or India. But it is also coming to play an
Many have tried to estimate the size of
increasingly important role in providing
protection gaps. We know that there are
protection for the middle classes in the
considerable gaps in many countries. For
developed world, as states restrict access
instance, a study by Swiss Re estimates
to support.
that in 2012, only 44 percent of U.S.
Private protection products against income households carried life insurance, down
interruption also exist for individuals. from 62 percent in 1982. The resultant
life protection gap in the U.S. thus
reached a staggering USD 20 trillion,
equivalent to 135 percent of the
country’s GDP at the time.2
Council for Disability Awareness, Long-Term Disability
1
Claims Review, 2012
The mortality protection gap in the US, Zurich:
2
Swiss Reinsurance Company, http://media.swissre.com/
documents/Exp_Pub_mortality_protection_gap_US.pdf
6 Income protection gaps: a rising global challengeMeasuring disability gaps is more What are we trying to achieve with
problematic, though again, some this report?
attempts have been made. An example The purpose of this report is not to
All evidence suggests IPGs are is KPMG’s 2014 study of the disability place exact numbers on IPGs. Instead,
real, and a growing challenge.” protection gap in Australia. According to we seek to identify the trends which
its findings, while the employed person are aggravating the phenomenon,
typically requires insurance of 84 percent and challenge the traditional coping
of income until retirement age in the mechanisms in place. This study aims
event of disability, 35 percent of the to raise awareness of IPGs’ threat to
population held no disability coverage households and to the public and private
at all.3 Rice Warner’s ‘Underinsurance sectors. It also challenges us all to
in Australia Report 2012’ estimated consider some broad areas for action
the gap between cover held and cover that we hope will stimulate thinking
required to maintain current living and debate, as well offering insights
standards to be AUD 7,912 billion for from our work in the next phases of
total and permanent disability insurance.4 this long-term project.
These estimates have to be taken with a Because IPGs vary globally and even
pinch of salt. Disability gaps in particular by country, the report also contains
are hard to estimate. Differing definitions a section that provides geographical
of disability, subjective calculations of context. This section examines the
need, restrictions on inflows into social situation in a range of countries within
protection schemes and the exclusion of four broad geographical regions:
casual, temporary and part-time workers continental Europe, English-speaking
hamper calculations and comparisons OECD countries, Latin America, and
between countries. Nonetheless, all South Asia.
evidence suggests IPGs are real, and
a growing challenge.
IPGs arise when a wage-earner dies prematurely
http://www.fsc.org.au/downloads/file/ResearchReportsFile/
3
FSCKPMG_UnderinsuranceDI_ lowres.pdf
www.zurich.com.au/content/dam/australia/
4
life_insurance/zurich-australia-whitepaper_australians-
and-life-insurnace_misinformed-misinsured.pdf
Income protection gaps: a rising global challenge 7Section 2:
Why IPGs are set to increase as a challenge
IPGs are increasingly becoming a challenge. This is due to
a relatively simple yet unsustainable combination of factors:
Demand for protection from disability is increasing, driven
by an aging population and improved medical diagnoses.
But the level of income protection is lagging. In the developed
world, public budgets are constrained, while in the developing
world, budgets are being focused on other issues. Meanwhile,
a significant proportion of today’s changing workforce is
excluded from social welfare.
2.1 Disability rates are increasing respondents who described themselves as
disabled said their condition limited the
An estimated 386 million of the world’s hours they could work. The proportion
working-age population have some kind of such workers increased with age.
of disability.5 Of the adult population in
Europe, 25 percent aged 16 or older In emerging regions such as Latin America
are health impaired, meaning they face and southeast Asia, longevity rates are
sustained limitations in carrying out also rising. Since 1959, life expectancy
daily activities.6 In countries with a life at birth in India has nearly doubled, and
expectancy over 70 (about two-thirds the average Latin American lifespan has
of all countries), individuals spend increased by 15 years since 1970. This
about 12 percent of their life coping aging trend is expected to create the
with disabilities.7 same disability problem in those regions8
as in developed countries.
These statistics, already significant, are
set to increase considerably, due largely Disability claims also rise as older workers
to two trends. use them to bridge their declining
capacity to work, prior to eventual
An aging population retirement. This is seen especially in
Longer lifetimes are a great social countries that have raised state pension
achievement, but an older society means ages. There is also some evidence that
an older workforce, which means higher employers are unwilling to hire older
rates of disability. workers with a disability despite wage
This is a clear problem in developed subsidies, funds to adapt the workplace
regions such as those in continental to accommodate disabled workers, and
Europe and English-speaking OECD similar incentives.9
countries, where de-industrialization has In time the rising proportion of retirees
left behind unskilled workers now in their to workers will restrict public funding
50s and 60s with physical problems from for income protection. Social care costs
their jobs. will rise with an older demographic,
The EU Labor Force Survey (2011) found diverting funds elsewhere, while PAYG
that 48 percent of those reporting a welfare systems will experience a
ibid
5
longstanding health problem were reduction in overall funds, as they are
http://www.oecd.org/cfe/leed/background-report-
6
aged 55-64, and only 12 percent were dependent on workers’ contributions.
people-disabilities.pdf
http://www.un.org/disabilities/convention/facts.shtml
7
aged 15-24. Overall, 11 percent of
World Bank (2014) Working for a World Free from
8
Poverty http://data.worldbank.org/indicator/SP.DYN.
LE00.IN
Clayton, S. et al. (2011) Effectiveness of return-to-work
9
interventions for disabled people: a review of government
initiatives focused on changing the behavior of employers.
European Journal of Public Health, 22, 3:434-9
8 Income protection gaps: a rising global challengeAccording to the UN: “by 2050, seven OECD member-states has risen from
Asian countries, 24 European countries, 15.4 percent of GDP in 1980 to
and four countries of Latin America 21.6 percent at the end of 2014.14
Governments are making less and the Caribbean are expected to
Governments, particularly in the
money available, non-full-time have below two workers per retiree,
developed world, have reacted – not so
workers are generally not covered, underscoring the fiscal and political
much by cutting benefit rates to the
pressures that the health care systems as
and private insurance uptake is disabled, however. Instead they have
well as the old-age and social protection
inadequate to fill the void.” restricted the number of new claimants.
systems of many countries are likely to
The scope of work-incapacity benefits
face in the not-too-distant future.”10
has been redefined and reduced. In Italy,
Better diagnoses and the basis for calculating new claims has
understanding of disabilities changed. In the UK, Sweden, Switzerland,
Improved education and better public Germany and the Netherlands, stricter
understanding of health have contributed access, time-limited benefits and regular
to rising rates of reported disability. claimant reassessments have contained
In particular, mental health claims have numbers of new claimants following the
increased. These now form the leading global financial crisis.15 Australia has also
cause of disability for 20- to 34-year-olds recently restricted access to disability
(70 percent of claims according to one benefits. In the U.S., the Americans with
OECD study).11 Mental illness can also Disabilities Act Amendment Act (ADAAA)
lead to premature death due to suicide. requires employers to make reasonable
accommodations so that the ‘disabled’
As a disability, mental health can become
can return to work.
a vicious circle. People with mental
health problems are less likely find work Budget tightening has also affected
than other disability claimants.12 And premature death benefits. Widow(er)s
becoming or remaining unemployed in Chile and the UK do not receive state
can, by itself, worsen mental health help if under 45 years of age, and
problems.13 Meanwhile, deregulating the benefits are earnings-tested and/or time
labor market may create opportunities limited in Germany, the UK, Ireland,
for disabled people capable of part-time Poland, and the U.S. In Sweden they
or temporary work, but job insecurity were recently abolished.
imposes psychological burdens, and so
A relatively low proportion of disabled
the cycle continues.
people receive state benefits (see Figure 3).
In OECD countries, only 25 percent of
2.2 Levels of available funding those who identify themselves as disabled
are declining receive state benefits. Proportions are very
Governments are making less money small in Greece and Spain, where the
available, non-full-time workers are 2008 financial crisis was most severe.
generally not covered, and private The comparatively low incidence of
insurance uptake is inadequate to fill reported disability in those countries
the void. probably reflects the number of
United Nations Department of Economic and Social
10
Affairs/Population Division 7 World Population Prospects:
‘discouraged claimants,’ including a
The 2015 Revision, Key Findings and Advance Tables Governments are curtailing support significant number of disabled unable
– http://esa.un.org/unpd/wpp/Publications/Files/ The combination of rising disability to access even small benefits, and fear
Key_Findings_WPP_2015.pdf
rates, along with increased pressure to losing their job if they admit to any
OECD, (2010) Sickness, Disability and Work: Breaking
11
the Barriers Paris, OECD: 62-3 ‘balance the books’ that accelerated impairment. As discussed later in this
OECD (2007): 100
12
following the 2008 global financial report, this phenomenon can significantly
TUC, (2005) Annual Report.
13
crisis has hit governments hard. affect productivity.
(OECD – https://stats.oecd.org/Index.aspx?DataSetCode=
14
Public social expenditure among
SOCX_AGG)
Burkhauser et al. (2014) ‘ Disability benefit growth
15
and disability reform Journal of Labor Policy, 3 (4).
Also OECD (2014), Society at a Glance 2014: OECD
Social Indicators, OECD Paris. http://dx.doi.org/10.1787/
soc_glance-2014-en
Income protection gaps: a rising global challenge 9Figure 3:Proportion of disabled relative to those receiving state benefits
30
Persons with disabilities (aged 16-64)
% of the population aged 16-24
Recipients of disability benefits (aged 16-64)
75
20
10
0
MT GR BU IT SW LT SP CZ UK LU PL RO BG EU FR HU ES LV AT PT NL DK DE SK FI SL
Source: ILO (2014):57
In developing regions such as Latin Lifelong full-time jobs are becoming less
America and South Asia, economic common in OECD countries. In 2014,
expansion has increased the number of one in five adults between the ages of
middle class within the population as 25-54 in Italy, Australia, Germany, the
a whole. However, high rates of poverty UK and Ireland worked part-time: in
preoccupy governments in these Poland one in four (and in Chile, one
countries, meaning protection for middle in three) had temporary job status.16
class citizens has failed to keep pace with
Proportions are higher among younger
their expanding numbers. In Brazil, for
groups. Informal employment is
example, where inequality remains high,
particularly prominent in Latin America
support is focused on the rural poor, who,
– notably Mexico – and South Asia.
without contributing to the welfare
According to the ILO, informal
system, enjoy the same benefits as urban
employment in Latin America and the
workers. Pensions for Brazil’s rural poor
Caribbean was nearly 50 percent in
also increased by 50 percent between
2011, and even higher for the young.
2003-2010. In Malaysia and India, policy
Six in 10 people aged 15-24 have an
and funding focus on primary education,
informal job. The ILO estimates that,
diet and providing shelter for those below
even if the region’s rate of economic
the poverty line who need it most.
growth continues at the strong pace
seen in the past decade, it will still take
2.2.1 Changing employment up to 55 years to halve the rates of
opportunities are leaving a growing workers in informal jobs.17
number of households exposed In the developed world, changes in the
The growth of informal, part-time or workforce have taken place in part due
temporary work is a key factor increasing to labor market deregulation, which has
IPGs. Such jobs are not covered by state aimed to increase employment levels.
protection schemes. New information technology systems
are also encouraging self-employment,
allowing people to work from home and
receive project-based payments.
OECD statistical database: http://stats.oecd.org/
16
index.aspx
http://www.ilo.org/americas/publicaciones/
17
WCMS_213162/lang--en/index.htm
10 Income protection gaps: a rising global challengeThose returning to
work with disabilities often
face poor prospects
As more young people work in atypical The Association of British Insurers says
situations, their employment is no fewer than 1.2 million people – or
longer covered by social insurance 4 percent of the 31 million people in work
programs and these workers are not in that country – have bought individual
paying contributions required to sustain income protection insurance. Only
PAYG schemes. 2 million more people – 6.5 percent –
are covered by group income protection
The increased mobility of the workforce
insurance through their employer.18
also causes problems for income support.
In multinational companies, employees Even in Australia, which has long been
frequently may move to different considered a model for income protection
workplaces around the world. But, with insurance, 45 percent of employees are
the exception of English-speaking nations, underinsured by USD 728 a month in
income protection for disabled people terms of income protection, and half are
and bereaved families is commonly underinsured by more than USD 72,000
dependent on minimum payments to for life cover.19 While some 83 percent of
national and/or private pension systems, Australians say they have supplementary
with benefit levels reflecting previous insurance to cover their car, only
contributions. Underpayment to schemes 31 percent insure their ability to earn
and problems transferring pensions, an income.
particularly across continents, threatens
There are a number of reasons for this.
to leave international workers in
First, slower economic growth is making
complicated and vulnerable situations.
it harder for workers in many developed
countries to protect themselves. Real
2.2.2 Persistent underinsurance wages over the past decade have been
Given rising demand and governments’ largely flat in developed economies
reduced ability to fund income protection and have even fallen in some, notably
schemes, increased demand and uptake the UK.20
of private solutions in order to fill the
void might be expected. But as shown
in Section 1, no such trend is seen in
insurance industry sales.
https://www.abi.org.uk/Insurance-and-savings/
18
Topics-and-issues/Welfare-reform
http://www.lifewise.org.au/facts-research
19
ILO Global Wage Report 2014/15 http://www.ilo.org/
20
wcmsp5/groups/public/---dgreports/---dcomm/---publ/
documents/publication/wcms_324678.pdf
http://www.demos.co.uk/files/Control_Shift.pdf?
21
1363023121
Income protection gaps: a rising global challenge 11Another significant reason is that people the state in areas such as public health,
also have high expectations regarding the community security and even long-term
state’s role as a provider, particularly in financial planning.
Europe. In 2013, Zurich and the UK think
Building on this, in a 2015 study Zurich
tank Demos conducted a joint project
surveyed 6,000 Europeans in six countries
which highlighted this.21 In Anglo-Saxon
on their perceptions of income
countries such as the UK and the U.S.,
interruption risk and coverage options
responsibility for risk shifted during
(see case study).
previous decades from the individual to
Case study – Mind the gap22
Zurich’s Mind the Gap survey showed that two in three Europeans expect the
state to provide financial support to those who are unable to work. In Italy and
Spain, expectations placed on the state are even higher, with four out of five
expecting their government to be the main provider of assistance. In some
countries such as Switzerland, only 54 percent of respondents say that they
would rely on the state. Intriguingly, while respondents in Switzerland, the UK
and Germany were generally confident in their government’s ability to deliver
on its social obligations, trust in state social welfare programs was much lower
in Ireland. In Spain, 83 percent believed the state should be the main source
of support for disability, but only 7 percent believe the government can deliver
a comfortable and secure lifestyle.
Seven in 10 respondents believe that they would get less than 75 percent of
their last household income if they became work disabled. Two in five thought
they would get less than half. Six in 10 (58 percent) said that they would need
the equivalent or more than their income to maintain their current lifestyle.
This curious discrepancy between confidence in the state and knowledge of its
limits probably lies in misperceptions of the likelihood of income interruption,
something that the survey also highlighted. Half of the total respondents
believed their personal risk of losing their ability to work is less than 10 percent.
In reality, up to one in four Europeans may become unable to work for some
period in their working lives.
The survey also supports other key insights within this report: for example,
a link between the global financial crisis and increasing mental health issues,
with many respondents saying that debt, fear of getting ill and stress levels
had increased as a result of the economic downturn.
The impact of behavioral biases on the scope of this report. However, it will
income protection choices and likely become a focus area going forward as
levers which could influence these is an we continue to investigate IPGs.
area ripe for investigation, but beyond
For more information about the protection gap survey,
22
see http://knowledge.zurich.com/protection-gap/
finding-solutions-to-the-protection-gap/
12 Income protection gaps: a rising global challengeSection 3:
Why should we care? The growing consequences of IPGs
Inability to protect the incomes of the disabled or dependents
following the death of the main income provider is not a
pleasant prospect. It recalls the days when most disabled and
dependents of the deceased had to eke out a living on the
fringes of society, existing on a pittance and charity.
If the situation described in Section 2 gap has increased by 10 percent on
continues unchecked, however, it average per year since 2003, we can
suggests risking poverty for those only expect it to increase.25 This gap may
unfortunate enough to experience IPGs. be influenced by the higher levels of
state support seen in some parts of the
IPGs obviously harm households. That in
region. However, as has been noted,
itself could be enough to induce those
these arrangements may soon face
in the public and private sectors to act.
pressures similar to those affecting
But IPGs’ impact goes much deeper.
systems in the developed world.
This Section describes gaps in income
protection that have far-reaching To a limited extent, survivors are entitled
fundamental consequences for both to public support – in many countries,
the public and private sector. however, this support is only available to
those whose partners have contributed
3.1 The impact of IPGs to schemes through formal, full-time
on households employment. In some countries, survivors
who are still young receive no state
The ways an IPG can weigh on assistance, while survivors in general
households are numerous, and may vary may receive earnings- or means-tested
in severity. We outline some of the key benefits, which are time limited.
issues here that are worth highlighting. Moreover, benefit levels themselves
Death of the main wage earner vary considerably.
Roughly two-thirds of poverty among Many survivors thus have no choice to
women who lose their partner, and more avert poverty other than to take on extra
than one-third of that among surviving employment. In developed countries,
men is due to under-provisioning life gender may be largely irrelevant if one
protection, according to a 2001 study or the other partner dies, particularly
based in the U.S.23 One-third of given the propensity for professionals
households drop into a lower income to marry professionals. Indeed, in Hong
quintile after an unexpected adult Kong and Singapore, as in Europe and
death in the UK, and 20 percent fall Australasia, there are currently more
into poverty.24 female graduates than male graduates.
In Latin America, households are also at However, especially in some countries,
risk from the financial effects of premature cultural differences, lower educational
death. In 2013, for the average working attainment and lower rates of labor
person with dependents, the region’s market participation among women
life insurance gap was estimated at pose a problem for female survivors
Bernheim, B.D., Carman, L.G., Gokhale,, J. and
23 USD 60,628. Given that this protection of a deceased male breadwinner.
Kotlikoff, L.J. (2001) The Mismatch between Life
Insurance Holdings and Financial Vulnerabilities:
Evidence from the Survey of Consumer Finances,
NBER Working Paper No. 8544, Cambridge, MA
Cordon, A., Hirst, M., Nice, K. (2008) Financial
24
Implications of the Death of a Partner Working Paper
no. ESRC 2288 12.08: 153-5 http://www.york.ac.uk/
inst/spru/research/pdf/Bereavement.pdf
http://www.swissre.com/media/news_releases/
25
nr_20130924_mortality_protection_gap_latam.html
Income protection gaps: a rising global challenge 13Disability can also ‘disable’ income support alone as their income safety
An accident or illness may net.27 The average monthly benefit
in the U.S. is USD 1,256 for men and
cause not only physical, but also
Employment rates for the disabled USD 993 for women.28 Other countries
financial problems hit particularly hard by the global financial
and non-disabled in Europe are
disparate, with a marked drop for Eligibility problems crisis have made ‘emergency benefit
Particularly in emerging economies, cuts.’ In Spain, for example, if a person is
even moderate disabilities.”
qualifying for state benefits is a no longer able to work in any profession
challenge, with large proportions of at all (absolute permanent disability),
uncovered informal and part-time the monthly benefit is only EUR 1,071.29
workers. Despite expanding cover, only The long-term financial risks
37 percent of workers are currently of disability
covered for non-work-related incapacity Those returning to work with lasting
in Mexico and only 10 percent in some physical or mental disabilities often face
South Asian countries, such as India. poor prospects. A full recovery to
In the developed world, it is becoming pre-disability work capability and income
tougher to qualify for acceptance into is far from certain, while pressures on
disability registers. In Germany, for government spending make it unlikely
example, 50 percent of applications are state support can make up the shortfall.
rejected, while 65 percent of Americans’ Assuming a job can be found, wage
initial SSDI claim applications were denied levels suggest a lingering income gap
in 2012.26 of varying degree for disabled workers.
Lower benefit rates Poor health and difficult labor market
In some countries, such as English- conditions (employers also may stigmatize
speaking OECD members, disability mental disabilities) can put disabled
benefits are relatively low. More than workers at a disadvantage.30 Those who
60 percent of working families in the return to work often find employment
UK would see their income drop in temporary, part-time and generally
substantially if they relied on state lower-paid and less secure jobs.31
U.S. Social Security Administration, Disabled Worker
26
Beneficiary Data, December 2012
(https://www.abi.org.uk/~/media/Files/Documents/
27
Publications/Public/2014/Protection/Welfare%20
Reform%20for%20the%2021st%20Century.pdf)
http://www.disabilitycanhappen.org/chances_disability/
28
disability_stats.asp
https://www.zurich.com/_/media/dbe/corporate/docs/
29
whitepapers/income-protection-gap-brochure-2015.
pdf?la=en
Lindsay, C. and Houston, D. (eds.) (2013), Disability
30
Benefits, Welfare Reform and Employment Policy,
Basingstoke, Palgrave Macmillan: Introduction.
OECD (2010): 60
31
These figures are from 2007
32
http://www.ideanet.org/cir/uploads/File/
33
IDRM_Americas_2004.pdf Most countries offer tax incentives to encourage personal saving
http://www.un.org/disabilities/default.asp?id=18
34
OECD (2010): 60
35
OECD:2007,100
36
14 Income protection gaps: a rising global challengeEven before the global financial crisis,32 in India, only about 100,000 have
the UK and Australia provided disabled succeeded in obtaining employment
with an income 70 percent of the non- in industry.34 Meanwhile, recessions in
disabled equivalent, made worse by 1994 and 2008 reduced the employment
high living costs in these countries. chances of disabled men by 19 percent
In some areas the gap is lower: in and by 12 percent for disabled women;
Switzerland and Norway it was the men’s financial circumstances
90 percent and in Poland, 80 percent. declined by more than 50 percent
during those years.35
But a 2004 U.S. survey found that only
35 percent of working-age persons with Employment rates for the disabled and
disabilities were working, compared with non-disabled in Europe are disparate
78 percent of those without disabilities. (see Figure 4), with a marked drop for
Two-thirds of unemployed respondents even moderate disabilities. Those in
with disabilities said they would like to poor mental health have the hardest
work but could not find jobs.33 Of the time finding work.36
some 70 million persons with disabilities
Figure 4:Employment rate by degree of disability: Europe (age 20-64), 2011
100
Severe
Moderate
80 Non-disabled
60
%
40
20
0
HR EL MT ES IT HU LV SI BG PL LT SK RO EU CZ BE FR LU AT PT FI CY EE DK DE UK NL SE
Source: Academic Network of European Disability Experts (ANED) (2014): 33
IPGs arising from disability may therefore themselves as disabled are on average
be long and severe, especially as 15 percent more likely to face poverty
household costs may in fact rise due and/or social exclusion compared with
expenses related to the need for the non-disabled.37 In Australia,
caregivers. The net result is likely to 20 percent of mortgage defaults in
be a significant drop in living standards. 2010 were due to illness or an accident
In the EU, people who identify affecting a member of the household.38
Income protection gaps: a rising global challenge 15Figure 5:Poverty and social exclusion gaps between persons with and without disability
25
20
15
%
10
5
0
SI SK DK IT SE RO FI LU CY FR NL CZ MT PL EU PT ES EL AT DE BG LV EE LT UK HR HU BE
Gap: percentage of persons with disabilities – percentage of persons without disabilities; Age 16-64, 2011
Source: ANED (2014): 187: N.B. Switzerland and Ireland not included
IPGs and funding for longer lives may provide a short-term solution.
The ‘savings gap’ between retirement However, with savings already stretched,
funds and actual requirement is well the extra burden caused by covering the
documented. It has become a key topic impact of disability or premature death
for discussion as pension arrangements could mean those affected run out of
become more sustainable (hence the money later in life.
increasing prevalence of DC-type
pensions), and consequentially less 3.2 The consequences
generous, while expected lifespans for employers
continue to increase. EU savers eligible
for retirement between 2011 and Employers will feel the burden of IPGs
2015 have an absolute pension gap through reduced employee productivity.
of EUR 1.9 trillion (USD 2.4 trillion), For example, a lack of adequate
according to a study.39 In the U.S., protection and poor job prospects will
baby boomers (born 1948–1964) and induce employees not to disclose
Generation Xers (born 1965–1974) lack disabilities. Instead, they will continue
USD 4.3 trillion to replace employment working at reduced capacity. This type of
income, according to the Employee ‘presenteeism’ is widespread. One study
Benefit Research Institute.40 Similarly, estimates the annual cost to US business
Latin America has long been known for at more than USD 150 billion per year.41
relatively low household savings rates. In the UK, the cost of ‘presenteeism’
where mental health problems are
To make up the shortfall caused by an involved has been estimated at GBP
IPG, people increasingly turn to personal 15.1 billion per year.42 A recent OECD
Aviva, Tackling the Savings gap: Engagement and
39
Empowerement, 2012 savings. As state support grows study describes in detail the toll on
VanDerhei, 2012, p. 3
40 increasingly hard to come by and people’s productivity taken by people who work
https://hbr.org/2004/10/presenteeism-at-work-but-
41 propensity to buy private protection while suffering emotional or physical
out-of-it
remains low, personal reserves appear an health problems: 69 percent of those
http://www.health-matters.co.uk/news/
42
the-cost-of-presenteeism---bupa-report obvious next step. This type of funding who work with even moderate health
OECD 2015, Fit Mind, Fit Job, From evidence to practice
43
in Mental Health and Work
http://www.ncbi.nlm.nih.gov/pubmed/15076658
44
http://www.papworthtrust.org.uk/sites/default/files/
45
UK%20Disability%20facts%20and%20figures%20
report%202014.pdf
http://www.cipd.co.uk/research/absence-management-
46
survey.aspx
https://www.gov.uk/government/publications/
47
jobs-and-skills-in-2030
16 Income protection gaps: a rising global challengeproblems report accomplishing less than 3.3 The consequences
they would have liked, compared to just for government
26 percent with no health problems.43
The growing problems IPGs Another study finds that the costs Governments, as well as their citizens
associated with lost productivity due to and employees, have a fundamental
present, and the increasing
impaired capacity to work are higher interest in productivity and growth.
impact these have on households, This is particularly crucial in the
than medical costs of treatment.44
governments and employers, low-growth environment affecting many
make clear that there is an Risks will increase as the workforce ages, countries. High rates of productivity
urgent need for action.” given that older workers are more likely growth are the product of a skilled and
to suffer disabilities. These include acute adaptive workforce and long-term
medical conditions and chronic back pain investment in productive capacity.
– some of the leading causes of long-term Income protection gaps threaten growth
disability.45 If IPGs are left unchecked, and productivity through the type of
the result will be rising productivity that ‘presenteeism’ just described. IPGs also
hits employers.46 As soon as 2020, contribute to increased welfare costs,
companies could have four generations which divert public resources away from
working alongside each other, by which long-term investments.
time the largest age group will be in
their mid-50s rather than their 40s.47 IPGs place increasing burdens on
government welfare schemes in a
Apart from demographics, a number number of ways:
of other factors will contribute to an
aging workforce. These include higher • Demand for benefits due to death
mandatory retirement ages and reduced or disability, with disabilities likely to
retirement funds from increasingly increase as populations age.
prevalent DC, as opposed to DB pensions. • Declining contributions as disabled
Recent research has also suggested that workers [earning less, or forced to
working longer may even have benefits, drop out of the workforce] reduce the
for example, helping to keep an older number of workers contributing, and
population mentally active to stave off the amounts, particularly a problem
cognitive decline.48 for many PAYG welfare systems.
Multinational companies with an • Depletion of savings to fill IPGs, and
international workforce are especially increased longevity, means those
vulnerable to the impact of IPGs. facing IPGs will again turn to the state
Virtually all countries require minimum for support in their old age.
contributions – often over a period of
years – to qualify for benefits. This means The growing problems IPGs present,
internationally-mobile workers can be and the increasing impact these have on
penalized by a lack of contribution in households, governments and employers,
their country of residence. Meanwhile, make clear that there is an urgent need
accessing state protection from their for action. The next section explores
home welfare systems can also be areas for action for the public and
complicated, particularly for those private sector to address this challenge.
working across continents.
Rohwedder, Susann and Robert J. Willis. 2010.
48
“Mental Retirement.” Journal of Economic Perspectives.
24:119-138
Income protection gaps: a rising global challenge 17Section 4:
Closing the gap: areas for action for governments and employers
There are no short-term fixes for the problems outlined in this
report. Before suggesting solutions, IPGs need to be assessed,
and factors creating them need to be examined. Only then
can we suggest the most effective and sustainable solutions.
Even at this early stage, there are already • Use tax incentives to encourage
a number of areas where action can be people to protect incomes – In the
taken to start to address the issues. likely absence of increased public
funding, governments can use tax
A collaborative approach incentives to encourage employers
and/or third-party providers, both
As this report points out, IPGs pose for-profit and not-for-profit, to address
a challenge that neither the public nor any gaps. Private providers offer a
private sector can address alone. variety of models: These providers
Collaboration is needed. Governments may include traditional insurers and
and employers are clearly important. also non-profit affinity groups, which
But individuals, too, should take pool coverage for employees not
responsibility for protecting themselves covered by workplace plans and
against the risks of such gaps in income. rely on commercial vendors on a
This calls for an approach involving fee-for-service basis.
three parties.
Zurich has led recent calls in the UK to
Based on the findings of this report, provide incentives for income protection
we believe focusing on these areas through the tax system. In 2014, Zurich
will offer the best outcomes for a stated that an annual GBP 50 tax
collaborative approach: rebate, available for two years, should
• Increase global dialogue – IPGs are be offered to those who buy cover
becoming a truly global challenge. privately. The rebate should also be
Stakeholders should use global given to employers who offer the cover
platforms such as the World Economic to staff. The cost to UK government
Forum to highlight the issue and of introducing this would be GBP 300
encourage action. Discussions must million. However, if coverage grew
take IPGs in their full context into from the roughly 2 million people
account, including the connection covered by group income protection
such gaps have with other global (8.5 percent of working-age taxpayers)
challenges, such as aging demographics to around 8.6 million people covered,
and private households’ savings gap. taxpayer savings would total around
GBP 725 million: GBP 370 million due
• Solutions must be tailored to to a reduction in welfare payments,
regions and countries – IPGs present and GBP 355 million resulting from
a global challenge but also vary widely higher income tax and National
by region and even by country. Income Insurance contributions.49
protection systems are diverse and
often based on very different principles.
Local IPGs require local solutions, there
is no ‘one- size-fits-all’ solution. While
action at a global level is valuable,
collaborations will need to also take
place on the regional and country levels.
http://www.zurich.co.uk/internet/life/
49
sitecollectiondocuments/news/income%20
protection%20report.pdf
18 Income protection gaps: a rising global challengeIncreased workforce
mobility causes problems
for income support
Government incentives reduce the increases, neither governments,
price of income protection policies, employers (who rely on older workers
and they signal to individuals and for valuable skills and experience) nor
employers that this is a good thing to individuals can afford to allow the status
do. In itself, this encourages people to quo to continue. To address IPGs, it is
have this coverage, and combats the vital that labor markets and welfare
mistaken idea that the risk of disability systems provide greater flexibility that
is low and can be safely ignored. will allow people to work longer.
• Working together to raise
awareness – Greater individual Considerations for employers
awareness of IPG risks and an increased Employers clearly have a role to play in
appetite for responsibility would likely collaborative solutions. However, with
go a long way toward addressing the governments struggling to fill the void
challenge; it would increase demand and behavioral bias continuing to
for workplace and individual solutions. dissuade individuals from seeking this
Governments could raise public type of insurance from the private sector,
awareness about the costs and businesses also have a clear opportunity
consequences of inadequate income to play a central role in finding solutions.
protection insurance, provide Employers therefore should consider the
information, and provide model systems following additional points that have
of assessment and decision-making a bearing on IPGs:
tailored to individual circumstances.
Equally, governments can outsource • Protecting income to retain and
these types of programs to the private attract talent – Disability and death
sector, subject to tests of quality, coverage protects employers. These
which might include a duty of care, are also attractive benefits in today’s
disclosure of conflicts of interest, and highly-competitive skills market and
transparency as regards costs and tell a positive story in the increasingly
benefits of competing products. important area of social value.
• Encourage flexibility in labor As a first step, employers should raise
markets and welfare systems awareness and demand among
– Inflexible labor markets contribute leaders by highlighting the costs of
to IPGs. In previous decades, a trend productivity loss related to IPGs, such
toward early retirement placed greater as ‘presenteeism,’ potentially with
burdens on welfare systems, while internal research in larger companies.
older workers with disabilities found This process should also include a review
employment hard to find. As longevity of current income protection offerings.
Income protection gaps: a rising global challenge 19You can also read
