Less than half of the working population belong to a group protection scheme, meaning the industry can and must do more to tap into this huge market, says Graham Clark
The statistics make encouraging reading. Although there are millions of people already covered by group protection schemes, there are even more who are not. Of a total of just over 25 million in employment (excluding self-employed people), 7.9 million are in group life schemes, 1.7 million in group income protection (IP) schemes, and group critical illness cover is enjoyed by just over a quarter of a million people.
These, and similar figures, suggest group risk insurance could extend its reach to far more people than currently have it. So, if there is a huge market ready and waiting to be tapped, how can the industry take advantage of these opportunities, and what issues need to be considered?
Firstly, it should be made clear that some of those not currently covered are ruled out because of restrictions applied by providers in the interests of managing risk. For example, it is difficult to get group IP cover for some groups of people usually because of their occupations, including many manual occupations. There is generally not a problem getting group life cover for any group, although capacity in some locations is carefully managed and can be restricted because of the fear of catastrophes that were unconsidered before the 9/11 attacks.
In addition, other large groups of people can be ruled out because they work for a Government agency or a very large employer. This does not mean employees in those circumstances get no benefits - quite often, they are extremely generous - but, in these cases, the size of the workforce is so large that accurate assumptions can be made about how much employers will have to pay out in benefits from one year to the next.
When this is the case, employers often choose to 'self-insure'. However, there are cases where employers self-insure the risk they are comfortable with and insure those deemed more risky. This significantly reduces insurance premiums and therefore the expected profit loading passed to the insurer.
In the case of group IP, claims management services can also be provided on a stand-alone basis to help employers manage their self-insured risk. This sort of scenario provides an excellent opportunity for strategic employee benefits consultancy.
Another comes from the 2007 annual survey on reward management from the Chartered Institute of Personnel and Development, which highlighted "supporting business goals" as the main priority for reward strategies among employers surveyed. As such, intermediaries and providers need to work on demonstrating a return on investment when it comes to purchasing group protection products. This can most clearly be demonstrated in the area of group IP that meets the attraction, retention and motivation aspects of employee benefits provision as well as providing a return on investment through the value it offers in terms of returning people to work and managing sickness absence.
But what about the smaller end of the market? The size of a company has, historically, been an issue when it comes to writing group protection business and the vast majority of companies are within the small-to-medium enterprises (SME) category. From the point of view of providers, SMEs generate small premiums relative to the time and effort involved in providing cover. Generally, there is a much lower cost per member involved in running a large scheme than there is in a small one. When you combine this with the marketing costs of acquiring lots of small schemes, it is easy to see why the SME market has only had its surface scratched.
These problems have made it hard to tap the SME market and efforts have been focused to a large extent on the bigger employers. For providers and intermediaries alike, this has meant creating the sort of infrastructure that can service large groups. Consequently, the bulk of group risk insurance is written by a few specialist insurers, who receive the vast bulk of their business from a few specialist intermediaries, with both sets having been around for a fair while. On both sides of the fence, numbers have shrunk as businesses have been consolidated.
Technology is set to open up the opportunities offered by the SME market. As with many other industries, the use of the web and web-based systems offers the possibility of changing the group risk business model. For the first time, the industry should be able to offer its systems to clients without the need for them to have a system that is compatible with or solely dedicated to one firm. The vast majority of firms have internet access as an integral part of their own businesses, so, as long as systems are designed around this, all clients suddenly become accessible, irrespective of their physical location. In addition, much of the work that would be uneconomical for an insurer to do in respect of lots of small schemes suddenly becomes viable when intermediaries can do a lot of the data inputting and updating themselves.
Besides having the appropriate infrastructure, the other essential is specialist knowledge. Fortunately, the Chartered Insurance Institute is looking at introducing such a dedicated module within its overall syllabus. This is being done with the help of Group Risk Development, a body open - at a nominal fee - to all insurers and intermediaries involved in the group risk market, and an excellent forum for gaining knowledge and information about the market. In addition, providers are generally good at offering training and updates to their intermediary clients in a quest to grow the market together.
Regulation
It is the requirement to keep up with all the intricacies of the laws and regulations coming from the Government in the UK and from the EU that makes the case for robust independent advice so compelling. A recent example came in the shape of the Employment Equality (Age) Regulations 2006, which took effect in October last year. Many firms will be unaware of the impact of the new rules on their businesses, and getting some good advice now could prevent them from having to pay costly fines further down the line. Among many other things, one effect of the regulations has been to introduce a default retirement age of 65 (although this is being challenged), which means that companies whose group IP schemes had been set up to age 60 are having to look at extending them.
In recent years, most of the growth enjoyed by providers and intermediaries in the group risk market has been in the form of business won or taken over from other providers and intermediaries, rather than in expanding the market itself. Perhaps by responding to employers through a variation on funding options, an increased focus on reward strategy and robust and up-to-date advice as well as harnessing new technology for SMEs will open up a genuine opportunity for growth, which will see more people enjoying the benefits of group risk schemes.
Graham Clark is director of group risk at Bupa
