The solution to income protection gaps could be an app

With its potential to profoundly reshape traditional industries, disruptive technology is justifiably popular among investors, but the reception is considerably more wary among the disrupted—workers who have traded greater flexibility for diminished security.

The sharing economy is rich in opportunities, but for many employees the long-established safeguards enjoyed by previous generations are about as familiar as flip phones. As longevity increases, employment uncertainty grows and job benefits decline, many workers find themselves straddling a perilous income protection gap—the amount of income lost due to disability or premature death of a breadwinner—just as the traditional government safety net shrinks also.

But a solution to this looming crisis may be found in the very technology that disrupted those old certainties: a private-public collaboration on a dynamic app that allows individuals to assess their financial health, accurately project their exposure to the income protection gap, and strategize for their future.

“The stakes are higher,” says David Swaden, Senior Public Affairs Manager, Group Public Affairs for Zurich Insurance Group. “If you think about what income protection literally is, you’re protecting income against disruption. What has changed is that the support available from governments in terms of disabilities schemes—and the support available from workplaces in terms of pensions—is becoming not less generous, but more restricted through fiscal imperatives.”

While younger, healthier workers consistently underestimate their need for income protection planning, older individuals who face greater exposure often treat it just as casually—either due to overly optimistic assessments of their own risk or a blasé assumption about available public programs. So how to transform often passive, “default option” employees into proactive planners for their own future?

The crux is personalization, experts say. Users must be able to see their own future and not be presented only with generic scenarios.

“Anonymous financial literacy, which is ‘one size fits all,’ doesn't really make a change,” says Paolo Marini, Director, Global Customer & Distribution Management, Corporate Life & Pensions for Zurich Insurance Group. “If it is distant and not personal, people really tend not to bother.”

Just how intimate can an app be? Income protection gap calculations can be based not just on an individual’s particular finances (savings, employer benefits, etc.) but also on their geographic location—accounting for public programs available in their jurisdiction, the trajectory of how those plans have altered over time and, crucially, how portable those public and private protections are should an individual move between states or countries.

A highly personalized risk assessment that illustrates the potential impact of income disruption is vital. Studies have shown that consumers are often cavalier about income protection gap risk and only become more aware after they’ve gone through a personal setback—much as an uninsured man is apt to rethink coverage when his house burns down.

“For most people, all of these things—whether old age, increasing disabilities or ill health—are so distant,” Marini says. “Anything that can shorten the perceived time span between the here and now and the time when all of these things might be needed is welcome. Shrink the distance between these events that most people tend to postpone or ignore.”

A risk calculator could significantly shrink that perceived distance by enabling users to recreate their financial portfolio then simulate best and worst-case scenarios in which their income is disrupted. That allows individuals to visualize their exposure while incorporating all the protections they can currently avail of from private and public sources.

“You can connect your primacy banking and savings accounts to the app and machine learning and artificial intelligence algorithms will see patterns and perform predictive analysis,” says Deepti Sharma, who has developed digital solutions for companies like American Express, Time Inc. and Feedzai.

The resulting evaluation will either be reassuring or sobering.

“People who work in the sharing economy are self-employed, so they don't have an employer to provide their workplace solution, and then they don't pay in, in a compulsory way, to government schemes,” Swaden explains. “People are caught in the middle and covered by neither of those safety nets.”

Yet the goal of this app isn’t to strike fear in the hearts of poor planners, but rather to raise awareness and signpost solutions tailored to their specific needs. That could include transparent primers on products to bridge the income protection gap (and the costs entailed) and even the creation of a social community through which users can seek advice, gain insight and share personal experience, what Sharma describes as the “human connection.”

“You can provide a chat service within the app that allows users to direct message others in the community to share stories and advice,” she adds.

That element is crucial, according to Swaden. “You need to humanize the situation. People respond more to emotion than they respond to cold statistics,” he says. “To get people to understand it, they need to understand what they would lose.”

Since nothing can more adversely impact one’s income than poor health, a wellness component is key to planning for healthy long-term finances. Risks associated with lifestyle choices can be managed like any other if we first grasp the future implications of those choices. Nudging users toward smarter lifestyle habits is just one example of how an app might incentivize decision-making and leverage AI to spur cost savings. “You can link the app with wellness platforms like Fitbit or Couch to 5K, or connect to your health insurance which can lower your premiums,” Sharma says. “In essence, your premiums are directly correlated to your well-being.”

Other incentives could include private-sector partnerships in which retail discounts are applied to an individual’s income protection plan, or "badges" or rewards are earned for reaching milestones or goals. The app experience is one of virtual reality, an innovative glimpse into your future finances, but with an opportunity to positively impact your prospects based on what you learn.

“You are younger, more enthusiastic when you start digging into these opportunities offered by the new economy, and you don't realize the dangers of the long term,” Marini cautions. “And the long term these days is very long, because people live much longer. Most of the benefits entitled to you by the state are now being postponed. It’s too late when they realize that there is a lack of a safety net later on.”

Sharma insists that the same generation who have embraced technology in their day-to-day lives will benefit from the same advances in times of income uncertainty.

“Technology is shaping society more rapidly than we expected,” she says. “Technologies will take jobs away, but studies have shown that technology does more benefit than harm. This app can educate and inform people and guide them in making informed decisions.”

Key Takeaways:

• Governments, employers and insurers should look to the disruptive technologies behind the sharing economy for solutions to the income protect gap.
• Personalization technology is essential to helping individuals understand the need for income protection because people relate better to income-protection challenges specifically tied to their own situations.
• A digital risk calculator could help people visualize their exposure to loss-of-income risk and see the protections they can currently avail through private and public sources.
• Risks associated with lifestyle choices can be managed like any other risk if we grasp the future implications of those choices.
• Incentives toward smarter financial decisions and lifestyle choice— aka “nudges” — can be effective tools for helping individuals acquire income protection.

Anything that can shorten the perceived time span between the here and now and the time when all of these things might be needed is welcome. Paolo Marini, Director, Global Customer & Distribution Management, Corporate Life & Pensions for Zurich Insurance Group