Forthcoming legislation and a move towards flexible benefits means the group life market is gearing up for change. Angela Faherty reports Click here to download pdf
Over the last couple of years the group life assurance sector has struggled to gain any headway in terms of sales. As expected, the impact of global political factors such as the 2001 terrorist attacks on the US certainly took their toll, and coupled with changes in pension provision and the advent of a new regulatory regime in the UK, it is clear to see why the sector has struggled.
In contrast to sales in other areas of the protection market, group life has failed to make any remarkable progress. Sales have increased by a fraction of a margin and the market seems to be undergoing something of an upheaval.
In terms of total revenue premium, the sector grew from £749 million in 2002 to £754 million last year, a slight growth of 1%, according to recent figures from GE Frankona Re. While this growth is somewhat unremarkable, a number of issues have contributed to the lull in the market.
"Last year was a challenging year for the group life market and this is clearly reflected in the total premium revenue for the year. We are still not seeing any growth from new companies and there is the added pressure that the scale of salary is no longer there," says Jane Dale, director of group risk at Legal & General.
This marginal growth can also be seen in the total number of schemes in the market; 54,041 in 2003 compared to 54,019 the year before. However, despite this, Dale says that the large proportion of lives covered under group life schemes – 7,278,285 – shows that it is a fairly large chunk of the market and has grown by nearly 1.5 million since 2000.
Despite the lack of growth in the sector, it remains fairly competitive but it is unlikely to see any vast improvements any time soon.
"The market remains very competitive with costs per life actually reducing over recent years. However, growth has been limited over the past year and the outlook is for this trend to continue in the immediate future," says Paul Casey, media relationship specialist at GE Frankona Re.
Restrictions
Although sales remain steady, the market is undergoing a certain degree of change with the focus shifting towards flexible schemes as well as a widening of some plans and a number of group schemes being set up for lower paid staff.
"There are a number of reasons for the minimal growth in the market. There has been an increase in employers' National Insurance contributions, employer's liability costs continue to escalate and all these additional costs impact on the employee benefits market as firms look to cut back their spending," says Dave Kay, group product marketing manager at UnumProvident.
With the average premium per life standing at £104, it is clear to see why the group life market is considered one to watch in the future. The premiums are relatively low yet it provides an efficient way of protecting employees and providing them with an important level of cover.
In terms of where the market is headed, providers are concerned about the impact the Pensions Tax simplification legislation may have on the market when it comes into force in April 2006. Currently, there are restrictions in place on the level of benefits available to employees, such as four times' salary benefit, which enables insurers to cap the amount of money paid out in the event of a claim.
However, from April 2006, all these rules disappear and every employer with a group life scheme in place will need to review their offering and assess the level of cover they have in place. Particularly, as it may cause problems further down the line.
Flexible benefits
"From April 2006, it will be possible to get cover to a lifetime allowance of £1.5 million, irrespective of a person's salary. This may cause problems as somebody is going to have to pay for this potential increase, which means major changes for firms as it will effect the way things are set up within the company," says Kay.
The additional costs for employers means that there could be a trend towards flexible benefit schemes and it is here the greatest growth potential for group life sales lies. One of the ways the market is moving is towards providing greater variety on group life plans, such as one or two times' salary for younger employees and the option to trade up and get more cover when and where it is deemed necessary.
It is this trend towards flexible benefits that providers believe will open up the market and potentially lead to greater growth.
"There has been and will continue to be an increased demand for flexible benefits because of the changing landscape of the market. Group life cover has proved to be, and remains, a very important benefit and incorporating it into the scope of flexible benefits is vital for the future growth of the market," says Simon Bailey, head of marketing at Scottish Equitable Employee Benefits.
Dale agrees, explaining that insurers are looking at ways to adapt to the growing demand for flexible benefits and that this opens up greater opportunities for advisers.
"Most insurers recognise the increasing need for flexible benefits. The opportunity here for advisers is to help companies and insurers to set up these schemes. The design of these plans means that it opens up a range of benefits to a wider audience by extending the available benefits to staff throughout the company. Perhaps those who previously would not consider signing up to these benefits," says Dale.
Another major issue facing the sector follows in the wake of the 11 September 2001 terrorist attacks on the World Trade Centre in the US. The fallout from the disaster led to reduced capacity in the market and falling levels of available reinsurance capital. Such moves have caused a number of postcodes to be blacklisted whereby only a limited amount of cover is available.
Because of the nature of the UK market and the fact that cover on group life schemes can be up to four times the basic salary for all employees, the threat of another terrorist attack has made the industry shy away from putting all their eggs in one basket. This has led to scheme splitting where the risk is divided between a number of providers, so that should the worst happen, no one insurer will have to bear the full brunt of the payout.
"Scheme splitting allows intermediaries to place cover with a number of providers. This opens up the market to them by helping them to establish firm relationships with insurers and this trend is also growing. It is the way the market has to work in the future," says Bailey.
Market growth
There are a number of challenges facing the market at the moment, but the outlook is fairly positive. The shift towards flexible benefits provides greater opportunity for market growth as it opens up the availability of benefits to a wider selection of staff members within a company.
Advisers working in the group risk market can do well from the extension into this area as it provides the perfect opportunity to grow the market and their book of business.
While the reduced capacity in the market means that advisers have their work cut out for them in terms of placing the risk with insurers, it also provides the chance to develop sound business relationships with key market players.
The introduction of the Pensions Tax simplification legislation in April 2006 will undoubtedly present some challenges to insurers, reinsurers and advisers alike. However, despite these obstacles, the market still holds untapped potential for advisers looking to expand their business and benefit from the shifting market dynamics.
