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Group risk - standing tall or fading away?

Premium levels may be rising in the group risk market, but the number of schemes continues to fall. Emily Perryman investigates the reasons behind Swiss Re’s latest statistics

June 2008 Features

The latest report on the group risk market has been met with a somewhat mixed response from insurers and intermediaries. While there has been modest growth in premium levels, the market has been quick to point out that the number of schemes is falling and that more still needs to be done around scheme design and the communication of benefits.

On the surface, Swiss Re’s Group Watch 2008 report makes for positive reading. Annual market premiums across all three types of group risk business rose by 5.2% from £1.51bn in 2006 to £1.59bn in 2007. In-force market premiums for group death benefits saw a 5.5% rise, while in-force group income protection (GIP) premiums increased by 4.7% and group critical illness (CI) premiums by 7%.

But apart from these modest rises, there is little to be overly cheerful about. Indeed, Steve Browning, group protection product manager at Friends Provident, says that on his reading of the figures “it is very difficult to find any encouraging signs”. Group death benefits and GIP both saw a reduction in the number of schemes in force between 2006 and 2007, while the number of lives covered rose only very slightly.

INCOME PROTECTION

“With regards to GIP we are seeing a reducing number of schemes in the market and increasing competition on price,” says Browning. “I don’t think the figures are very encouraging because they show a falling penetration among employers of GIP benefits.”

Insurers have recognised that part of the reason why GIP is not more popular is that it does not always meet the needs of employers, particularly SMEs.

“Traditional GIP is not what employers who don’t currently provide the benefit are looking for,” says Glenn Laming, sales director for Legal & General’s group protection business. “The key for the industry is to ensure the way it is sold to employers is driving the fact that it is not just protecting people’s income; it is also a useful tool for the employer and the individual in early intervention and rehabilitation. We need to ensure employers understand its full value.”

Some go further and state that GIP needs a full revamp. They believe that it may not be enough to try and meet employers’ demands by cutting premiums and introducing limited payment periods.

“We probably wouldn’t come up with the same benefits if we started from scratch,” says Friends Provident’s Browning. “We need product innovation – not just tinkering around the edges.”

Another reason why the number of GIP schemes may have declined is the impact of age discrimination legislation. Some insurers suggest that the regulations have caused employers to decide that it is easier not to provide any benefits at all, rather than risk discriminating employees or taking on higher premiums.

“The age discrimination issue continues, but we are seeing it settling down,” says Jim O’Driscoll, group underwriting director at Canada Life. “Most employers have decided what they wish to do, but there are still instances where employees have been retained and the implications have not been thought through. Employers must have protocols within their business.”

WELFARE REFORM

Something that insurers and intermediaries are more positive about is the Welfare Reform Act, which is due to come into force in October 2008. Employers with existing GIP schemes will need to re-design them to take into account the government’s new incapacity benefit levels, which will give intermediaries the opportunity to review their clients’ benefits more generally.

“The big driver in the GIP market at the moment is the welfare reform changes,” says John Cowell, senior consultant at employee benefit consultants Mercer. “We first contacted our clients last year about the changes. The indirect impact of welfare reform is that fewer individuals will be entitled to incapacity benefits and those who are entitled will get a reduced amount. GIP schemes which integrate state benefits will need to recalculate their formula.”

Whether the Welfare Reform Act will encourage more employers to take out new GIP schemes remains to be seen, but there are strong signs that the government will expect employers to play more of a role in keeping people healthy and at work.

“The message we are giving intermediaries is that welfare reform is an opportunity to talk to employers who already have schemes and carry out a review,” says L&G’s Laming. “But it is also an opportunity to talk to employers who don’t have GIP. The government and Dame Carol Black are looking closely at the importance of employers providing services such as rehabilitation. The provision of GIP may be a way for employers to demonstrate that they are putting in place processes to help the government meet its objectives.”

DEATH BENEFITS

The number of in-force death benefits schemes is also declining, but it remains the area with the most positive sentiments. Swiss Re’s survey of 35 providers and intermediaries found that 29 expect the size of the market to increase and six expect it to decrease. Only one out of 14 providers predicted the market to fall, compared to five out of 16 intermediaries. Indeed, most put the fall down to mergers and acquisitions – which have resulted in schemes being absorbed into larger ones – rather than the product becoming less attractive.

“The group life market is the most active one in the group risk industry at the moment,” says Simon Bailey, head of marketing for employee benefits at AEGON Scottish Equitable. “The issues around A-Day are still filtering through – only 35% of our schemes have removed the earnings cap since April 2006.”

The earnings cap was the maximum level of salary that was allowed to be put into tax efficient schemes prior to A-Day, but these limits have now been removed. Group schemes must adopt the new rules by 2011, which means there is still an opportunity for intermediaries to review their clients’ existing arrangements and make the appropriate changes.

“There is limited evidence that clients will provide a bit more cover when the earnings cap is taken away,” Bailey adds. “New schemes, on the other hand, are generally where companies previously self-insured and are moving to the insured route.”

One of the challenges for the industry is to ensure it fully understands the new rules around scheme registration. Canada Life’s O’Driscoll says one of the reasons behind the slowdown in group life is that advisers, particularly those not experienced in the market, are finding scheme registration very cumbersome.

“Before A-Day, advisers would establish the scheme and then complete and send the form to HM Revenue & Customs (HMRC),” he says. “Now it is all done online, which means the registration must be completed upfront. Some people have been getting this wrong and HMRC has issued notices and penalties.”

The issue of technology is one that extends across all business areas in the group risk market, and it is particularly important for those dealing with SMEs.

“More use is being made of technology for delivering quotes up to a certain case size,” says Peter Fenner, communications consultant for BUPA Group Risk. “This makes it easier to deliver solutions to SMEs because doing business online makes it more viable. I hope this will open the market up.” In particular, technology is helping the group CI market by enabling smaller employers to offer flexible benefits packages. Swiss Re’s report shows that yet again the growth in group CI is driven by the growth in flexible benefit arrangements.

“Group CI is dependent on the success of flex and technology helps that side as well,” adds Fenner. “New systems make it more feasible for smaller companies to introduce flex – it used to be the preserve of larger companies.”

Insurers and intermediaries predict that future growth in the group CI market will almost solely be through flex, mainly because it is seen as a benefit that offers little value to the employer.

“There is very little evidence that employers want to provide CI on a standalone basis,” says L&G’s Laming. “In the group market CI comes to the fore when it is part of flex and the take-up rates are very high – individuals understand the concept because they are exposed to the product as part of mortgage applications. They can compare the product and see that the premiums are cost-effective and there is no underwriting at the outset. There is a trend for more employers to put flexible benefits schemes in place and if this continues the group CI market will also grow.”

However, there is still a long way to go before group CI has anywhere near the take-up rates of GIP and group life. In 2007 there were just 1,972 group CI schemes in force, compared with 41,622 death benefits schemes and 18,859 GIP schemes. One of the key challenges for the group CI industry is around the communication of the benefit.

COMMUNICATION

“Insurers’ core business is about selling products through intermediaries to employers, whereas group CI is about selling through flex to individuals,” explains Laming. “We need to think more proactively about marketing. Individuals are contributing to the scheme and they want to see what they are covered for.”

Like technology, the issue of communication is one that is prevalent throughout the group risk market. Swiss Re’s research found that respondents thought the industry could better promote the group risk message to employers, the government and to scheme members. But it warned that the industry must do more than simply talk about the issue.

“The low profile status which group risk has, even within the industry itself, often means that other issues usually attract more air time,” it said. “If we can only reach a consensus on exactly what needs to be done and then do it, some of the other problems we face could fall away, resulting in a bigger market.”

Some insurers believe that their increasing focus on health and wellness will help here, particularly in the GIP market. BUPA’s Fenner says health and wellbeing benefits make for more communication between insurers, employers and employees.

“In the past a lot of employees were not aware of the insurance behind the benefit until they claimed, but most do not claim,” he explains. “If there is a wellness programme that all employees can access it broadens out the appeal and adds value. Communication has always been a problem, but these services can help get the message across.”

Communicating the value of group risk benefits will become more important in light of the economic pressures faced by employers. Businesses are increasingly worried about their budgets and if the UK experiences a recession, employee benefits may be the first to go. This will be even more likely at the smaller end of the spectrum.

“Because of the small nature of an SME scheme, employers may not have had a claim and they may feel they can cut out benefits and take on the risk themselves,” says Friends Provident’s Browning. “SMEs have always been seen as the holy grail in the group market, but we haven’t yet come up with something that meets all their needs. An SME can’t keep someone on if they are long-term sick because they don’t have the resources. We have limited payment periods that in theory would help, but although we have seen an increase in quotations we haven’t seen a significant uptake of these products. There could be something missing from the product design, but I don’t know what. We need to go back to the basics and ask what SMEs’ requirements are.”

Whether it is product design, technology, communication or legislation, the year ahead looks to be a challenging but opportune one for insurers and intermediaries alike.