The future is bright for group IP - as long as IFAs ensure employers realise it is an invaluable way of combating the effects of long-term absence, writes Johanna Gornitzki Click here to download pdf
It has been another uneventful year for the group income protection (IP) market. In 2004, the number of group IP schemes in place fell from 21,713 to 20,333, according to GE Insurance Solutions.
And while no official figures for last year have been released yet, observations by market commentators suggest sales have remained static over the past 12 months.
That said, many companies still saw their profit margins increase. However, this was mainly down to rebroking and not new sales, admits Dave Kay, commercial product manager at UnumProvident.
"Last year we had a good year but our success was mostly down to taking business from other providers," he says.
Judging by the few employers to have IP schemes in place – only 20,000 compared with 100,000 with occupational pension schemes – there should be plenty of space for this market to prosper. So what is hindering sales?
According to market commentators, the cost of providing group IP is still an issue. "The problem is employer funding and the fact that group IP is seen as a niche product and that is how it will remain," says Nick Homer, product manager for IP at Norwich Union.
Employment laws
This expense is likely to be further inflated after October, when new discrimination laws come into effect. While current employment legislation should work as an incentive for employers to take out group IP, the burden on them to ensure they are delivering these benefits without breaking any employment laws is, in effect, doing the opposite.
For example, at the present no employer is legally bound to provide IP to employees over the age of 65.
However, when the discrimination legalisation comes into effect they will no longer be able to do that. While a relatively small number of employees are likely to work beyond their retirement age this added cost could pose another threat to the group IP market. New employment laws therefore discourage employers rather than encourage them to take out the cover. "We have to make sure employers do not get penalised for doing the right thing," argues Homer.
However, cost is not the only factor hampering sales. The group IP market has also been somewhat overlooked due to the massive overhaul on the pension side of employee benefits.
"With pension simplification top of most advisers' and employers' agendas there is no room for them to focus on their group IP offerings.
Homer reveals: "The main obstacle is that focus is elsewhere at the moment. With the majority of people directly involved in the employee benefits arena looking at existing clients' pension packages, there is no room for focusing on anything else."
This could, however, turn out to be a positive thing for the sector. Colin Micklewright, Canada Life's manager of business development for group IP, believes the new pension rules will eventually drive a full review of the whole benefit package, but argues that it won't happen overnight. He says: "We feel that over time it will possibly increase the sales of group IP.
"However, we expect over the short term that advisers may well be far too occupied with dealing with the other implications of A-Day to look at this area of the market."
To boost sales in the meantime Stuart Gray, managing director of Portus Consulting, thinks the industry needs to show employers that group IP is an employer benefit as well as employee benefit.
"There is currently not a great demand from employers but that is partly because of the lack of education," he says.
Ideal solution
It is therefore up to the industry to promote the benefits employers could reap if offering group IP. One thing companies are desperate to combat is the burden of long-term employee sickness.
According to data from the Confederation of British Industry, long-term absence accounts for 33% of working days lost in the UK.
"This translates to a cost of £3.8bn each year – a cost that is forcing employers to search harder for solutions. IP experts think the product could be the ideal solution.
"A lot of employers haven't got the expertise in-house to deal with long-term sickness. What we do is help them to manage the cost of long-term absence.
"While there are no official statistics showing that group IP helps beat absence, we strongly believe that is the case. We wouldn't take on all those extra staff if we didn't think it was cost-effective," says Homer.
Micklewright is even more positive about the product's abilities to combat this malaise.
He believes group IP could not only cut the cost of absence but help manage it.
"This product is not simply about insuring against employee absence, but it also has the ability to help manage this absence and provide expertise that can facilitate a successful return to work where possible.
"The industry needs to actively work to deliver this message to a wider audience," he says.
Others are less optimistic, suggesting that while group IP could help combat employee absence it would only do so as part of a bigger corporate absence fighting proposition. "Group IP on its own will never decrease employee absence," says Gray.
A recent announcement made by the Government regarding proposed changes to Incapacity Benefits (IB) is also likely to increase employers' awareness of what group IP providers can offer.
Micklewright believes this will be good for sales. "This should have a positive impact upon sales as the message is clear that the Government wants to considerably reduce the number of people claiming state disability benefits.
"Those who feel they cannot rely on the state may wish to consider private provision, or better still get their employer to provide them with group IP," he says.
Disagreeing with him, Gray argues that changes to IB will not have the slightest impact on IP sales.
He says: "The state benefits and the benefits offered by employers target two completely different socio-economic groups. I therefore don't think it will make a difference."
Product development is crucial if the group IP sector is to attract new business. The industry seems to have taken this to heart and several new products are expected in the near future. Developments of budget options in particular are likely to be on the cards.
At the moment, the majority of group IP schemes come in a one-size-fits-all format, with most schemes paying out until policyholders go back to work or retire.
To help employers manage costs, Kay believes 'for life' group IP will be substituted by schemes paying out for a shorter period with a lump sum at the end.
"I think there will probably be an increase in short-term products. It could, for example, make more economical sense for an employer to provide group IP for five years.
"Looking ahead, it would not surprise me if we started to get products which start paying out after three months or even earlier and then cut it off after two years," he says.
With more offerings coming on to the market could there be a brighter future ahead for the group IP sector? Providers seem to think so.
"Going forward, the focus on group IP will return and I would be disappointed if we did not see a slight increase over the next 12 months," says Homer.
Advisers are however less optimistic. "To my mind the market has been pretty static over the past couple of years and nothing will change," says Gray.
Only time will tell who is right.
