Is it time for a collective insurance scheme for the self-employed?

How do we improve the living standards of the self-employed?

Despite the fact that 1 in 7 people now work for themselves, this is a question that is seldom asked. Too often our attention is focused on how to support the business itself rather than the individuals behind the business. For example, we spend a great deal of time thinking about how to channel more finance to small businesses, and how to pare back corporation tax and regulatory burdens. But rarely do we consider how the self-employed can be better helped to access mortgages, pensions, housing and so on in their day-to-day lives.

This is a major gap in policy thinking and something the RSA plans to look at over the coming months as part of our Power of Small research project with Etsy. One of the most obvious issues that has come up time and again within our desk research and conversations with the self-employed is that of minimal insurance take-up. This includes things like public liability insurance (protection against lawsuits and malpractice complaints) but more importantly income protection insurance (cover against loss of income as a result of long-term health conditions).

Whereas many employees are entitled to such protection as part of their job, it is of course up to the self-employed to take out their own cover. Unfortunately there are no concrete figures that show the extent of life insurance take-up among the self-employed in particular, but we do know that only around 10 per cent of the overall population have purchased this type of protection. And given that the self-employed are half as likely to be contributing to a pension than typical employees, I think it is almost certain that they are less likely to be on an insurance scheme as well.

It’s worth stating the obvious as to why this matters. Ill health can strike at any moment, and those that are unprotected face severe financial hardship. According to figures from the Department for Work and Pensions, almost 1 million people were off sick for more than 4 weeks last year – and many of these will be suffering from physical and mental health conditions that require long, drawn-out treatment. Curiously, the latest data from the ONS shows that the self-employed are almost half as likely to be on long-term sick leave than the employed, which suggests that many are ill but continue to work because they have no protection to fall back on. For those thinking that the state will come to their rescue, remember that ESA benefit for people unable to work is only around £90 a week, and comes with tight eligibility criteria.

Assuming that we are right and there isn’t extensive take-up of income protection insurance among the self-employed, why is this the case? One reason is simply due to a lack of awareness that they need such protection – a problem that could be addressed through an intelligently directed marketing campaign. However, a more likely explanation is that the insurance premiums are just too expensive. The table below presents a handful of quotes I was given on a price comparison website when pretending to be a self-employed person looking for cover. In each case I stated that I earned £30k in revenue (pre-tax) and wanted £1,350 a month cover that would last at least 2 years. The deferral period – how long I would wait before being paid by the insurance company – is two months. The prices shown refer to the monthly payments that would need to be made.

These figures show that the price of cover for a 30 year old is around £30-40 a month, but this cost more or less doubles for someone who is 50. At these prices it is little wonder that life insurance remains an unattractive option for many people who work for themselves, particularly those without a predictable monthly wage packet.

So how do we make income protection insurance cheaper? One idea we've been pondering over – and something I think the Federation of Small Businesses are also considering – is to create a government-backed collective insurance scheme for the self-employed. The rational is that by bringing the self-employed together under one umbrella scheme, we could create a large enough pool of insurance recipients to bring down the average premium. At present there are multiple private insurance firms that each have a small group of clients, which means that no economies of scale can be achieved.

Like IPPR’s idea of an insurance scheme for the employees of small businesses, this system should be industry-led and serviced by private insurance companies, but overseen by business and employer groups like the FSB, BCC and trade unions who would coordinate take-up. The advantage of involving these groups is that they can raise awareness of the scheme among their members, as well as work with the insurance providers to ensure their products are straightforward, understandable and devoid of any ambiguous loopholes (think of the furore around PPI). The government would play more of a light-touch role, but could support the initiative through tax breaks and an upfront injection of capital.

If this sounds like a rather dry policy idea, that's because is it. But it's about time we thought more deeply about the meatier issues of pensions and insurance, rather than solely dwelling on finance, mentoring, skills and regulation.

The RSA and Etsy are exploring similar themes in a new project, The Power of Small.

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