Julian Pipe considers the possibilities of providing higher levels of cover in group risk schemes, w...
Julian Pipe considers the possibilities of providing higher levels of cover in group risk schemes, without medical evidence
Group insurance schemes covering death or disability offer several advantages over their individual counterparts. Generally, the cover available will be cheaper for a start, but of more importance to the employers and other bodies setting them up, is the streamlined administration they offer.
A key contributor to such streamlining is the free cover limit. Like many terms used in our industry, 'free cover limit' is not particularly helpful to the uninitiated. Rather than meaning that insurers are prepared to give cover free of charge - and that misinterpretation has been made more than once - it refers to the maximum level of cover the insurer will give to each scheme member without requiring medical evidence.
Medical evidence
Some level of 'no questions asked' cover suits the insurer as well as the client; it would hardly be a practical proposition to obtain medical evidence for each one of what can be the thousands of members covered. If any members of the scheme have benefits in excess of the free cover limit, it will be because they are the highest paid members of the group. Typically, these people are directors and executives who cannot easily find the time to attend medical examinations or undergo tests. In many cases, they are also the same people who make the decisions surrounding the scheme, including which insurer to use - heightening the importance of the free cover limits in determining which insurer is used. Unfortunately, while free cover limits are a spectacular concession, they can still leave these top people with benefits that require underwriting.
It is not only a problem when the scheme first commences - although underwriters will normally allow some further increases without underwriting, the pay of executives often outstrips what can usually be allowed, with the result that further medicals or other investigations have to be undergone.
Customer demand and competitive pressures have combined to push up free cover levels, but there are limits to how far insurers can do this and still show a profit on the business. On the largest death in service schemes, claim values of up to around £1m can be paid out without any medical evidence having been obtained at any stage.
Claims of this size are not uncommon. Although the lump sum payment may be relatively modest - often due to the influence of the earnings cap - once any dependants' benefits provided are added in, it quickly adds up. Even employees whose earnings fall a long way short of the earnings cap (currently £90,600) can easily find the capital value of their benefits exceeding £1m.
It does not take too many of these claims to put a serious dent in an insurer's profitability and every time a free cover limit is raised, the opportunity to get some extra premium or even apply an exclusion to sub-standard lives is reduced. If raising free cover limits is an option with a limited future, what alternatives are there for reducing the inconvenience to the client that can accompany the gathering of medical evidence?
Although an individual with benefits over the free cover limit can also be applying, or have recently applied, for cover of their own and medical evidence from that application is available, this has to be regarded as a happy coincidence rather than a common occurence.
Regular health screenings
On the other hand, senior members of staff will often be required or recommended to attend regular health screenings and it may be that the results of these can be useful to the underwriter. Unfortunately, the information sought in a medical questionnaire issued by an underwriter and the information provided by health screening reports will not usually overlap completely; the different reports are designed for quite different purposes. Even so, the need to attend a further medical can sometimes be removed.
Almost invariably, the time lost to the busy executive in attending a medical has more to do with the time it takes to get to and from the chosen doctor's surgery. The timing of the appointment itself may mean that half a day in the office is lost. By arranging for the examination to be done by a doctor prepared to travel to the employee's workplace in office hours - or their home outside them - these problems can be avoided. There are doctors these days who make a living from providing just such a service. Some underwriters have relaxed their requirements to the extent that, up to set limits of cover, they will accept examinations carried out by nurses as opposed to fully qualified doctors.
Again, this solution does not work every time. Sometimes there will be no conveniently discreet venue for the examination, or the underwriter will be looking for more detailed tests, such as exercise ECGs, which require the use of non-portable equipment.
Pre-existing condition exclusions
Pre-existing condition exclusions, or PECEs, are quite common on private medical insurance and critical illness schemes, but are not at all on life or income protection policies. There are a few schemes where death from any but accidental causes is excluded for a set period from when the cover commences. More often they are useful during the underwriting process because they allow the full level of cover granted under the scheme to be delivered for death from any cause other than a pre-existing one.
PECEs came in for some criticism from the Office of Fair Trading in two recent reports on the health insurance industry. The feeling was that they were poorly understood by the people they affected. They certainly invoke a degree of uncertainty if a claim arises, since no payment will be made until the pre-existing condition has been ruled out as the cause, but they are surely better than just simple accidental cover while the underwriting process takes place.
Anti-selection
A number of members in a scheme have benefits within the free cover limits, but find themselves subject to medical evidence because membership of the scheme commenced later than it could have done. Free cover limits are granted on the basis that members cannot exercise 'anti-selection' against the underwriters - in effect, only join when the chances of them receiving benefits are increased.
If members do not join when first able to, then do so subsequently, underwriters will naturally suspect that there is an underlying reason for the belated interest in the cover and look for evidence to allay their concerns. Consequently, a limited time span for automatic scheme entry will be allowed. If the employer or potential scheme member is unaware either of what this time span is, or of its significance, and entry to the scheme is delayed, much inconvenience can result.
In reality there are seldom reasons for such delays. They come about simply through the need for cover having been overlooked. The danger of this happening has increased as more mergers and acquisitions occur and blocks of employees are transferred from one scheme to another; or should be - with all the activity surrounding mergers it is all too easy for the issue of maintaining or providing benefits to be overlooked.
Forward underwriting
If going along for an examination is inconvenient when first in receipt of cover over the free cover limit, it is even more so if it becomes a regular event. To avoid this problem occurring after every executive pay rise, underwriters usually allow so-called 'bars' to apply. Bars allow increases in benefits within certain limits for a specified number of years to be provided without the need for further medical evidence, provided the member was originally accepted without special terms being applied. The relative value to the member of this forward underwriting concession is governed by the generosity of the limits allowed.
Generally, although free cover limits offer the only means of providing cover instantly and without hassle, they have increased faster than improvements in mortality or morbidity would warrant. Since the scope for further increases is therefore limited, alternative means of delivering enough medical evidence to protect the underwriter's group portfolio have been, and are being, sought.
We have recently introduced 'advance underwriting', a development of forward underwriting which was developed as a result of feedback from a series of IFA seminars the group held. Providing an individual is accepted at ordinary rates, advance underwriting permits increases in the benefit of up to 15% each year for as long as that individual remains in the scheme. Although the original need for medical evidence is still there, the prospect of a lifetime free of future medicals holds much appeal to many senior people.
Other ways of reconciling the insurer's need for medical information with the individuals' reluctance to provide it are being worked on. If there is anyone out there with fresh solutions to this perennial problem, I am sure
the industry would be pleased to hear them.
Julian Pipe is chief underwriter at Swiss Life (UK)
