Reinsurance: Life’s a beach... only just

Despite tough times and extra risk, the outlook for the group protection landscape looks brighter, says Lee Lovett

Research conducted by Grid (and supported by market data) suggests that employers have tended to retain protection elements of their employee benefit packages during the recent recession – an approach to be commended in an environment where costs have been under the microscope.

Whether this is due to the relatively low cost of providing benefits such as group life and income protection (IP), or because employers recognise the value such benefits have in retaining or recruiting staff, or even that they recognise the financial security this provides is irrelevant as all the reasons are powerful ones in isolation. They are certainly powerful in combination.

Despite this relatively positive overview, the market – and insurers, in particular – has found the last two years of trading pretty tough. Intermediaries have been obliged to seek better deals for corporate clients and, in a bid to defend existing business, insurers have needed to compete aggressively on price. While some of the pricing improvements may be justified through better experience and administrative efficiencies, there is no doubt that insurers’ margins have been reduced over this period.

At the same time, the scope of cover offered by insurers has been extended in a number of ways. While each feature would not necessarily justify an increase in price in isolation, when looked at together, the insurers are no doubt exposing themselves to additional risk. Examples include:

• Unlimited forward underwriting – this approach has been adopted by most insurers for both group life & income protection and generally means that once a member has been medically underwritten, they will require no further underwriting for any subsequent increases in cover
• Free cover levels – these generally increase in line with earnings (or similar) over time. But increases in recent years have been much greater than the earnings increase. This cuts the amount of lives and benefit medically underwritten
• Catastrophe limits – for group life cover, all insurers include a maximum limit on claim liability in the event that some form of catastrophe occurs. Over the past couple of years, insurers have increased catastrophe limits on schemes without any obvious change in price. The additional risk is clearly quite small, but can you imagine a general insurance policy increasing the maximum payout but not changing the price?