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Challenges posed by the ageing EU population for the financial sector - Economic and monetary challenges

Future security requires protection now

By Mijer Hanno - Chief Executive Officer Corporate Life & Pensions, Zurich Insurance Company Ltd.


Increasing longevity impacts insurers and their customers in many ways. One often neglected, but important example is the effect of longevity on Income Protection (IP) gaps. IP Gaps are how we refer to the increasing discrepancy between household cover and need for protection against disability or premature death.
As State pension ages increase in many countries and the average age of the workforce grows, disability rates rise: in the EU, 48 percent of those reporting a longstanding health problem were aged 55-64, only 12 percent were aged 15-24. Disability claims have also traditionally risen as older workers use benefit loopholes as a bridge to retirement given declining working capacity.

At the same time, traditional State support is receding, whilst underinsurance persists due to misperceptions over risk and Government provision. In a 2015 Zurich survey, half of respondents believed the risk of losing their ability to work was less than 10% – the actual risk is 25%.

Income protection gaps can have severe consequences for families and households. One-third of households drop into a lower income quintile after an unexpected adult death in the UK, and 20 percent fall into poverty. Meanwhile, in the EU, people who identify themselves as disabled are around 15 percent more likely to face poverty and/or social exclusion compared with the non-disabled. Those able to work again may still face difficulties – work for the disabled can be sporadic, insecure and low-paid. In the UK, disabled people make an income of 70 percent of the non-disabled equivalent.

IP Gaps also compound pension gaps as affected households increasingly turn to personal savings and downgrade pension contributions. EU savers eligible for retirement between 2011 and 2015 already had an absolute pension gap of EUR 1.9 trillion. Funding longer retirements is a sizeable task, a significant interruption to income may make this impossible.

But the consequences of income protection gaps go far beyond affected households. They are a rising societal issue, with serious implications for public and private sectors alike. For employers, higher incidence of disability means absenteeism, or presenteeism – when workers with little protection continue at a lower capacity, hiding their condition for fear of losing employment. The annual cost of presenteeism and absenteeism runs into the hundreds of billions for EU businesses in lost productivity. For Governments, rising IP Gaps translates to higher welfare costs and less available for investment in productive capacity.

Addressing the longevity drivers of IP Gaps requires a collaborative approach between households, the public and private sectors at both a national and regional level. Using tax and welfare systems to incentivize income protection and encourage older workers to stay in the workforce will require tailored approaches by country. Actions such as raising awareness of IP Gap risks, encouraging greater flexibility in the workforce for older and disabled workers and promoting prevention and wellbeing programmes can be considered at an EU level. Wherever they are addressed, it is vital that Income Protection Gaps are considered as part of the wider response to rising longevity in Europe.