Peter Carvill tries to understand why group critical illness appears to be underperforming and how advisers and providers are looking to change this Click here to download pdf (PDF, 2MB)
Usually, when a product manages to increase its number of lives covered and the premiums it brings in, we think this is a good thing, don't we? Yet, despite group critical illness (CI) doing this, the product can still be said to be underperforming.
On one hand, there are the statistics and research from the Association of British Insurers (ABI), and analysis published by Swiss Re in its Group Watch 2009 which show that the product's performance has been improving rapidly in comparison to earlier years.
That is in relation to itself. In comparison with group life and income protection (IP) products, group CI can be looked upon as under-achieving.
Firstly, according to Swiss Re: "Overall in 2008, in-force market premiums for group critical illness totalled £45,403,103; an increase of 22.0% compared with 2007. In-force benefits were reported as £17,198,165,87; an increase of 11.4% compared with 2007 (and) the number of lives covered was reported as 288,551; an increase of 9.2%."
The ABI also seconded the widening in the group CI market - its statistics show that the estimated number of members in the schemes increased exponentially from 2002 to 2005, dipping in 2006 before rising again by 2007. (109,000, 2002; 188,000, 2003; 232,000, 2004; 264,000, 2005; 215,000, 2006; 238,000, 2007).
But those figures, while impressive, do not demonstrate the performance of group CI in relation to group life and group IP, the big hitters of the group protection market, according to Vanessa Sallows, underwriting and benefits director for group protection at L&G: "The market's not too brilliant at the moment. It is incredibly small and ideally, although there was a substantial increase last year, it is still small in relation to the individual market and the other two large group products - both the death-in-service and IP. So I think work still needs to be done by the group providers."
Sallows' thoughts are echoed by Nick Homer, group risk development manager at Zurich: "We're not in the group CI market yet. Group life and IP make up the majority of that sector so our priorities are on that. Group IP is worth £45m in a £1.6bn market so there's a long way for it to go there in order to compete with other products in the same arena."
He continues: "Looking at the figures from Swiss Re, group CI enjoyed a very good year last year. It was still small numbers but there was a growth of 22% which is a good sign. The reality is it is not sold as a core staff benefit. Where it has a key role is in a flex-benefits arrangement. We're not in that territory but it's one we're looking to explore further. And, clearly, as we would consider the merits of moving into the flex market, CI is part of that consideration."
Flexible benefits are increasingly becoming the bedrock of group CI, according to Group Watch 2009, as increasing amounts of cover is being written through these schemes in comparison to death benefits or IP. Overall, the proportion of group CI schemes written on a flex basis is now gracing nearly half of all policies sold: "In-force CI premiums written on a flex basis at the end of 2008 were £21,520,825, amounting to 47.4% of total in-force group critical illness premiums."
Wojciech Dochan, head of commercial marketing at Unum says: "Again, the flex market has taken off like people thought it would a few years ago. But I think the products haven't stormed the marketplace - and they haven't. I think that for flex-benefits to work, there needs to be a lot of work from an employer to sell it into the business rather than just offering it as terms of employment. With flex-benefits, the employee has to choose so the employer has to give training or bring people into the workplace who can do that for them."
Homer says that he believes the product will become more popular, due to the merits of the product: "Flex-benefits have a number of advantages, one of which is that it enables you to offer a complete benefits package without having to fund one because people make their choices from a broad range. If people are tailoring benefit packages, they will value them more. It is also positive in that it enables, in the current climate, employers to manage their costs rather than supply core benefits. It's more about defining what you want to spend rather than what you want to supply. On the other side of the coin, it does weaken the benefits to the employer of the overall package because it does not offer a health and wellness package."
He adds: "Flexible benefits present a great opportunity for the industry going forwards. There's a lot of interest in introducing more employee choice. For me, group CI is hand in hand with that area of the market so I think it will continue to grow at a faster rate than the traditional core products of group IP and group life. In terms of headline growth, the future is relatively positive for group CI."
Group Watch 2009 predicts an optimistic year though, based on the move towards flex-benefits: "This optimism is reflected in this year's results, which we see as largely driven by more employers offering flexible-benefit packages including CI cover and, consequently, opening up access to a higher number of potential members."
Moreover, Swiss Re reports, "Voluntary CI schemes were seen by some as providing an alternative benefit to the more costly income protection."
Sallows disagrees with the notion that group CI should be implemented as a cheaper alternative to group IP, citing the margins between the two products: "They are separate benefits. And the problems we've encountered with CI when it's been utilised as a cheaper alternative is when claims are declined when people have gone for TPD rather than IP. If an IP policy was in place, those claims would have been paid or rehabilitation provided. It needs to be made clear to consumers that they are distinctly different products with different objectives and purposes."
Homer strikes a similar note when answering the same question: group CI, though cheaper, falls short of group IP because it does not have the same level of health and absence management.
In compiling Group Watch 2009, Swiss Re asked 42 respondents whether they were optimistic about the market over the next year. "The majority, expressed by respondents to last year's Group Watch," says the report, "was that group CI would grow in 2008 and 2009, with 25 people anticipating an increase and nine expecting a decrease."
This year, however, the results showed a more pessimistic view. The report commented further on: "As with group death benefits and IP, there is less optimism for 2009 and 2010. While, of the three products, group CI engenders the most optimism, only 14 respondents anticipate an increase, with 28 expecting the market to decrease."
Overall, says the report: "Growth in 2009 and beyond is expected to depend heavily on new business written via flexible benefits packages."
"Flex benefits are important; that's the way that the market is moving. I think that flex-benefits are the future," says Sallows.
"I'd like to see the market grow further," she adds, "but for the right reasons. I'd like people to use the product properly and to be full aware of the pre-existing and relevant conditions. Providers have to make literature clear and increase the clarity so everyone - employers and employees - is aware of when pre-existing conditions are pertinent and when claims are not likely to be paid. That's important."
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