To ensure the group IP market consolidates its position, intermediaries must wean themselves off re-broking and focus on generating new business. Peter Madigan reports
The employee benefits market is notoriously competitive. Protection products have to compete against company cars, extra holidays and a raft of other perks for a cut of an employer's staff benefits budget.
In this race however, group income protection (IP) appears to be losing the fight for a seat at the table. According to Laing & Buisson, 2003 saw the first ever annual decrease in the number of lives insured under group IP with 8.6% of subscribers dropping out of the market, which translates as 155,000 lives. Despite this disproportionately large fall in subscribers, the number of IP schemes in force fell by just 0.75%, a drop that is typical of the minor fluctuations in scheme numbers that the market sees every year.
Clearly something happened in 2003 to create this discrepancy, and while identifying what was behind the drop is important, perhaps of more significance is assessing whether these disappointing figures were a one-off. Was 2003 an anomaly or was it the first sign that UK employers are starting to turn their backs on IP?
"2003 was an unusual year and interpretation of these figures is complicated by the withdrawal of Swiss Life and Sun Life of Canada from the group IP market," says Bob Cheesewright, group protection business developer at Friends Provident. "Intermediaries perhaps took their eye off growing new business to review the insurance of clients formally insured with these companies."
Confusingly, the majority of providers and intermediaries found 2003 to be a very good year for 'new' business even though the market as a whole contracted. "You have to remember that a lot of the new business that providers sign each year isn't actually new at all. It is simply re-broked business that was already within the market," says Dave Kay, group product marketing manager at UnumProvident. "2003 saw providers move in to scoop up the business left behind by Swiss Life. This means lots of new business is good news for providers but bad news for the market because these customers aren't actually new at all."
The suggestion that a market preoccupied with the scramble for Swiss Life's old business is a plausible explanation for the odd figures of 2003 but even the most generous estimates suggest that just 10-15% of the group IP market comes from brand new business in an average year.
Obligations
It is small wonder the market has seen five years of negligible growth if 90% of all market energies are spent on re-broking. Of course providers would like to see more new business written but many feel that the destiny of IP lies in the hands of the adviser.
"The market is controlled by the intermediaries and they have to make employers more aware of their obligations," says Nick Homer, product manager for income protection at Norwich Union Healthcare. "The most proactive advisers are really focusing on the absence management aspect of income protection and the fact that it is a tool as well as an employee perk."
Advisers however, have reacted with cynicism to the suggestions that selling IP is that easy. "Why would an employer want to take out income protection as an absence management tool when it patently does not manage absence?" asks Stuart Gray, managing director at Portus Consulting. "Income protection is an employee perk that has no role in managing absence. It simply pays an income. On its own it doesn't get people back to work. If you bolt on occupational health and rehabilitation services then it can, but why bolt it on to IP when you could get these services for a fraction of the cost as a standalone benefit?" he continues.
Gray makes a contentious but arguably, good point. What specifically does IP do to manage absence? As a standalone product it simply pays an income, and although having the cover in place may attract and retain staff, to claim that absence is shortened with IP in place seems an unquantifiable statement.
With under 10% of all group IP business representing new clients entering the IP market for the first time, surely advisers should be putting a greater emphasis on attracting new business. "It is far more profitable for an adviser to take existing business from other intermediaries than spend an inordinate amount of time explaining the benefits of income protection to a new client only for them to decide against taking it out anyway," says Gray.
Rebroking may be the most profitable course of action for advisers but more than one provider has commented that thinking like this is short-sighted. "Allowing re-broking activity to account for 85% of all market activity is not a healthy habit to get into," says Cheesewright.
It certainly appears that this reliance on re-broking has led the group IP market to grind to a halt. Yet perhaps a bigger problem appears to be a breakdown in communication between insurers and advisers; intermediaries seem sceptical about the sales possibilities of the product while providers maintain that there are a number of techniques IFAs can use to ensure a policy is bought.
"As an employee benefit, income protection is great, but very few businesses, and public companies in particular, will allow £250,000 to be taken directly off the bottom line each and every year just as a staff perk," says Gray.
Providers argue that far from being a perk it is simply a matter of illustrating the benefit to employers in the right way. "If an employer asks why they should take out income protection over private medical insurance, the simple fact is that employees have an alternative for PMI in the NHS. There is no state alternative to income protection," says Homer.
More imaginative sales techniques can only make so much of a difference however. Unlike individual IP which is heavily related to the housing market, group IP is relatively free of any such dependency. But this does not mean that external factors cannot emerge to lift the market.
Disadvantaged
"A possible boost for the market on the horizon is the pension simplification legislation that is due in April 2006" suggests Kay. "Employers will have to reassess their pension provision and while they're doing so, they may have to re-examine their entire employee benefits structure." This may well be the case, but will an employer who is looking to improve his benefits package choose IP over other benefits such as PMI? IP is disadvantaged by being a relatively obscure product. PMI on the other hand is a high-visibility benefit that sees around 20-30% of employees claiming every year. By contrast, IP schemes average around two or three claims per 1,000 a year.
Providers are also optimistic about the influence of the Disability Discrimination Act (DDA), the final part of which became law in October 2004. "Intermediaries are certainly talking to employers about their increased obligations under the DDA, but it is still too soon to tell how much of an impact it has actually had on the group IP market," says Kay.
Gray disagrees with this suggestion: "Why will the DDA give IP a boost? I can't see it driving employers to rush out and buy IP, no matter what obligation they may be told they have."
Insurers are also considering ways to kick-start the market from within through product innovation. "One avenue that could revitalize the market is by enhancing our offering to employers by providing an integrated management package," suggests Peter Fenner, communications manager at BUPA. "That package would include occupational health services to put the emphasis on wellness, private medical insurance to deal with short-term absence and income protection to deal with long-term absence."
Conversely, other providers suggest the answer may be found at the other end of the market, not in boosting the level of cover but in restricting it. "Intermediaries should be exploring the possibilities of budget income protection that keeps costs low by cutting the claims period," says Homer. "Some employers will be uncomfortable with buying cover that will only protect for a limited time, but any cover is better than no cover."
The problem of long-term absence is certainly on the rise. According to the National Office of Statistics there are 2.2 million adults in the UK who are classed as long-term sick. That figure rose by 10,000 in the last five years so the need for IP has never been greater.
Moves toward adding rehabilitation services to the group IP offering are a step in the right direction but a major rethink about the entire product is desperately needed. Such moves may make the product more relevant to more companies and entice employers in greater numbers. In our increasingly cost conscious and profit-driven society it is hard to imagine the product, in its current form at least, seeing any dramatic growth regardless of what insurers would like to believe.
COVER notes
• Adding rehabilitation services to the group IP offering is a step in the right direction but a major rethink about the entire product is deperately needed
• Under 10% of all group IP business represents new clients entering the IP market - an all-time low.
• A possible boost for the market on the horizon is the pension simplification legislation that is due in April 2006.
