While group insurance premiums serve up a £1.5bn portion of total UK premiums, the market is still not considered a great success. Ron Wheatcroft investigates where the benefits package is going wrong
The importance of group risk benefits is often underestimated, with too few people aware of the big part it plays in long-term benefit provision in the UK. Group Watch, published by Swiss Re in April 2007, shows that total market premiums amount to over £1.5bn. Despite this, group risk benefits have often been regarded as relatively minor, one consequence of this being that the impact on group risk schemes can sometimes be overlooked when Government policy and regulation are formulated.
A breakdown of the data shows that in-force group premiums at the end of 2006, split between the three product lines, are:
n Death benefits £863,379,305
n Income protection (IP) £612,067,121
n Critical illness (CI) £34,798,472
Premiums for death benefits increased by 5.7% and IP by 3%, compared with 2005. CI cover premiums grew by 23.4% from a very modest base. Flexible benefits, included within the in-force figures are gaining in popularity across all lines, albeit slowly.
Group death benefits, measured by sums assured, represent close to 40% of all life cover held in the UK. Doubtless this would be news to many, even in the life sector.
While there has been so much focus on how individual IP can be made more appealing, group IP schemes already provide well over 60% of all IP benefits.
Meanwhile, although the figures are modest compared with death benefits and IP, group CI continues to grow. This contrasts with individual policy sales, which continue to fall and where success or failure is closely linked to mortgage activity.
As well as obtaining in-force data, the leading product providers and intermediaries were asked for their views on the future direction of the market and on a number of key issues. Responses were received from a cross-section of the whole industry with all the major players included.
Overall, sentiment was generally positive towards group life and CI cover, with most respondents anticipating growth. This positive sentiment was, however, tinged with some concerns that, in practice, growth would be little more than in line with salary inflation. Few intermediaries expect to see many new group death benefit arrangements coming to the market with the possible exception of some SMEs, which may set up arrangements although a natural reluctance on the part of trustees to self-insure benefits could result in some increases.
Expectations of real growth were firmer for CI. Although a number of those who expect CI to grow think that increases will be modest, it is expected that, unlike other products, greater take up will come from genuine new schemes. The key driver in this is seen as growth in flexible benefit arrangements as employers redesign their benefit packages.
Some respondents challenged the relevance of CI cover, questioning the benefit to the employer of a payment which may delay an employee's return to work on recovery.
While attitudes towards these products were generally positive, sentiment towards IP overall was negative. Even some of those who think IP will grow expect this only to be in line with salary increases. Welfare reforms could lead to increased demand for rehabilitation services and IP business, but the research shows a need to convince employers better of the value of the product, particularly focusing more on the benefit to the employer rather than the cost.
Potential ways in which IP could expand include growth in limited benefit term (up to five years) IP and extending cover to industries where the "traditional" form of cover is not appropriate. There was some support among respondents for packages, which combine a core employer paid benefit with a voluntary top up arrangement funded by the member.
While concerns were expressed about product issues, the biggest threat facing the market in 2007 was seen as the impact of legislation with the uncertainty for employers arising from age discrimination in the workplace regulations dominating all other issues.
Although the regulations took effect in October 2006, the market remains uncertain about their consequences, despite an immense amount of activity and goodwill to find workable solutions. The extra cost of providing benefits for older lives has yet to be seen, particularly for IP products where market experience and data relating to people staying in the workplace beyond traditional retirement ages are understandably limited.
Employers are likely to have little appetite for arguing objective justification for their actions on schemes, either at an Employment Tribunal or through the Courts. The absence of Government-endorsed guidance may mean the potential risks facing an employer are simply too high to encourage new employer sponsored arrangements and may, indeed, lead to the closure of existing arrangements which could be replaced with other benefits whose provision has no potentially age-related issues.
There is an urgent need for the Government to respond to these concerns. For many low-to-middle earners, group risk schemes provide the only life or disability cover they have. Failure to address this issue, in practice, is likely to impact most scheme members on modest incomes, many of whom would otherwise be excluded from financial services products.
A trend indicated by the data is the growth in flexible benefit provision between 2005 and 2006, especially for CI where flexible benefits rose from 30% to 43% of the in-force. There was a generally positive response to the potential for flexible arrangements. This may involve employers giving a lower level of core cover and a greater emphasis on non-core benefits although a number of concerns remain outstanding regarding possible age discriminatory implications of pricing. Most respondents saw potential financial savings making flexible benefits attractive for employers and the opportunity to improve employee awareness as choices are made, based on personal circumstances.
Further development of IT platforms should allow delivery of flexible benefits to employers with smaller workforces, enabling the flexible benefits market to develop further.
In terms of the current market, a number of intermediaries pointed to some concerns. Common themes were a lack of innovation and new initiatives, with some seeing the fall in the number of active insurers leading to conservative attitudes, a perceived lessening of choice and significantly hampering benefit design. This was adding to the lack of capacity in the market and the difficulties in finding a solution to the "event limit issue" for arrangements in certain "hot spot" postcodes.
Further consolidation is also expected in the intermediary market. This may mean good news for those intermediaries which remain although some feel that a few "PMI-only" brokers who already have employer access could widen the scope of their services by moving in to group risk.
In the context of the Government's welfare agenda, there was a general view that more responsibility for welfare would be placed upon employers. Given employer reluctance to self-insure and the desire to remove risks from the balance sheet, most respondents thought that employee benefits should have a bright future. It is important that the group risk market remains proactive in the debate to ensure an outcome, which works well for all parties.
Most respondents saw the provision of sickness benefits as the area with the greatest potential opportunity although it was not expected that the Government would promote the need for self-provision in the same way it does for its pensions agenda.
Across all benefits, cost of provision was seen as a major concern, particularly for IP and the market is now increasingly seeing a number of alternative quotations being requested. Although contract of employment issues could mean that it takes time to implement change, this may not be anything more than a short-term delay to the inevitable.
To date, A-day has had a limited impact on group death benefits. Despite the growth in the market, product providers reported relatively low levels of new business, suggesting that schemes have remained with existing providers while employers consider their options for the longer term.
Throughout, respondents pointed to the need for greater clarity around the impact of age discrimination regulations. This continues to be a concern until there will be case law or tribunal decisions, and/or informed guidance from Government. In the meantime, the industry, therefore, faces the very real threat that employers could choose to withdraw benefits whose cost depends on age if the potential risks of providing them are seen as disproportionate. The greatest risk is that a workable solution only emerges when good quality existing schemes have already closed.
There are challenges facing both providers and intermediaries if group risk benefits are to flourish. Insurers have to recognise that employers have alternative benefit options that may, in the absence of proper promotion of group risk benefits, have greater employee appeal. The successful firms will be those that can provide solutions relevant to the needs of the employer and employee and effectively communicate them.
In many ways, the report reflects a market going through a period of unprecedented change as it works through the introduction of insurance conduct of business, other regulation, A-day and age discrimination regulations, a process that remains far from complete.
Ron Wheatcroft is technical manager at Swiss Re
n This article is based on a report published by Swiss Re, Group Watch May 2007
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