Many providers believe that group income protection is due a revival. Yet the issue on which these hopes are pinned may be the market's undoing, says Peter Madigan Click here to download pdf
In a market hit by a slump in sales, group income protection (IP) appears to have weathered the storm better than most in the last twelve months. Although at the time of going to press there was no independent data available on precisely how the group IP market did in 2004, anecdotal evidence from various providers gives a muddy picture of how the sector performed.
Norwich Union found that the group income protection market remained static in 2004, yet despite this "we saw a 35% increase in new business, but very little of this new business came from outside the existing market," says Nick Homer, product manager for IP at Norwich Union Healthcare.
New blood
This assessment is shared by most of the major providers; a flat year for the market as a whole but a good year for individual providers. Feedback from providers shows that Friends Provident saw a steady year of compound growth, BUPA enjoyed substantial growth, Scottish Equitable saw new business increase by 55%, while UnumProvident "picked up lots of new business in 2004, although the amount of new business in the group income protection market has not grown," according to Dave Kay, group product marketing manager at UnumProvident.
The rebroking activity that kept advisers busy in a stagnant market has undoubtedly come from the withdrawal of Swiss Life and Sun Life of Canada from the IP market in 2003. The surge to snap up the thousands of policies left behind by the two companies meant that intermediaries operating in the sector shifted focus away from attracting new clients and onto rebroking. This has been cited as the story of 2004 and independent market data is widely expected to confirm a flat year.
Such a disappointing performance is easily attributed to the withdrawal of Swiss Life but the market was already in decline before the company exited the sector in late 2003 and indeed, the meagre growth of 2002 seems to indicate that something more long-term is affecting the market.
The poor economic environment of 2002 and 2003 could certainly have driven employers to cut back on their employee benefits spend. Yet as the stock markets started to rally in 2003, the group IP sector began to contract, shedding 155,000 insured lives. While providers did not detect further falls in subscribers in 2004, there remains a distinct possibility that the market may have contracted further. On the whole, however, providers are confident that 2004 was a good year.
"Insurers should be encouraged by the number of enquiries received during 2004 for schemes not previously insured. That trend has continued into the early part of 2005," says Colin Micklewright, manager of business development for group income protection at Canada Life.
If, as Micklewright claims, 2004 saw more customers looking to take out group IP for the first time, this would be a significant development in the history of the product. The current consensus from most major providers is that as little as 10-15% of all group IP business comes from clients getting cover for the first time. Until now, insurers seem to have been relatively satisfied with the market's overwhelming dependence on rebroking business from rival providers.
"While a piece of business may be new for one insurer, in most cases it is not new to the market and has simply come from another provider. This kind of business is good for insurers but bad news for the market as a whole," says Kay.
The current over-reliance on rebroking effectively means that providers are caught in a roundabout situation, renting business in the short-term rather than securing permanent subscribers. Most insurers appear to be sustaining themselves by losing existing business to rivals while in turn acquiring new customers from competitors. While this situation is good for intermediaries, providers are keen to attract new clients into the market.
"Intermediaries are working on market growth and we have some ideas on how to help them with their mainstream business," says Bob Cheesewright, group protection business developer at Friends Provident. While some intermediaries are looking to expand the group IP market, others believe advisers are being dissuaded from getting involved by the nature of the product itself.
"For those employers without income protection, and bearing in mind the legal constraints of having such a policy in place and removing staff from payroll, they naturally think: why would I want one?" says John Matthews, European partner, health and group practice at Mercer. In addition, intermediaries also reject providers' claims that IP is actually an employer benefit. "Group income protection simply does not manage absence. If an employer asks you to tell him how income protection specifically manages absence, the answer is: it doesn't," says Stuart Gray, managing director at Portus Consulting.
Despite such pessimism from advisers, providers believe that market forces will ultimately dictate how intermediaries go about their business. "All markets move in cycles and the group income protection market is no exception. Advisers will now have to start to focus on bringing new clients into the market because rebroking possibilities are becoming limited," says Simon Bailey, head of marketing at Scottish Equitable Employee Benefits.
An interesting division has emerged between providers and intermediaries. Insurers believe that intermediaries will be forced to turn to new clients to grow their business while advisers seem adamant that attempts to paint group IP as an employer benefit are pointless. Regardless of what either party believes, the fate of the product over the next 12 months appears to depend on legislative changes that have the potential to either reinvigorate or damage the market.
Friend or foe
"Recent announcements by the Government regarding proposed State benefits changes will reinforce the message made by a number of group income protection providers for some time already" says Micklewright. "This will keep disability related issues on the agenda. The future plans are to engage employers more in terms of return to work plans and rehabilitation."
While such developments may sound encouraging and lead providers to believe that Government intervention may lift the market, enthusiasm remains subdued. In the last two years, similar claims were made about the implementation of the final part of the Disability Discrimination Act (DDA). Providers widely predicted that when employers were forced to assess the accessibility of their premises for disabled people they would also re-examine their entire employee benefits package and therefore provide a boost for group IP.
"The DDA should raise awareness of the need for income protection but it is a reactive driver; employers will only take it out if they feel they have to," says Bailey. Advisers however have looked at the DDA as a warning about putting too much faith in the power of legislation to increase sales. "Why would the DDA boost income protection sales? I simply cannot see why it would," says Gray.
Similar predictions are now circulating about pensions simplification proposals that will take effect in April 2006. Most providers seem confident that asking employers to reassess their pension provision will give intermediaries an unprecedented opportunity to introduce IP to new clients. Advisers and some insurers however, remain sceptical.
"A number of employers will be spending their time thinking about pensions simplification. Income protection will not get much of their attention, in my view," says Matthews.
Bailey agrees: "I am a little concerned that IFAs may be too busy because of the pension changes to actually sell much income protection," while Cheesewright predicts "the turmoil of pensions change will distract from the real issues dealt with by the income protection market."
It appears the group IP sector is facing uncertain times over the coming year. Providers believe that 2005/06 should see good sales for group IP and a return to growth. This confidence comes despite the exhaustion of the old Swiss Life book and pension simplification, two developments that could deliver a blow to the market rather than the shot in the arm that some predict.
IFAs will have to try and get new clients to take out IP in an environment that looks geared toward pensions. Yet it is not only intermediaries who face a challenging time in the next year. Providers will have to play their part in redesigning the product for the demands of businesses today.
"A lack of insurance capacity is increasingly problematic and is stifling the ability to develop new design solutions for modern clients and poor administrative service is still hampering the management of cases on the books," says Jamie Winter, senior consultant for healthcare and risk at Watson Wyatt.
"If this market is going to grow genuinely, it will do so because the industry recognises that traditional group income protection designs are no longer appropriate and need to be adapted to current employer needs," he adds.
Yet such warnings from the adviser community appear to be falling on deaf ears. "The horizon is bright for the future of the group IP market and more intermediaries are moving to attract new clients toward group income protection," says Bailey. Micklewright goes even further by suggesting: "perhaps for the first time the prospects for genuine market growth are excellent. Sickness absence is high on the employer's agenda, insurers are well placed to provide meaningful solution-based products and services."
With providers and advisers unwittingly at odds with each other it is hardly surprising that the group IP market has stuttered. Unless a dialogue is established that effectively communicates what both parties require of the other, 2003 could be just the beginning of a more serious downturn. Figures for 2004 will be the best indicator of the direction in which the market is moving, but unless steps are taken to get intermediaries and insurers working together to address the problems facing the sector, the group IP market could soon find itself in serious trouble.
