Weighing up the benefits

Affinity groups such as professional associations, trade unions and sports clubs are now widely regarded as a significant distribution channel for financial services products. This can include motor or household insurance, personal finance products, for example, credit cards, loans and pensions through stakeholder arrangements to protection benefits such as life assurance, critical illness (CI) cover and income protection.

In all circumstances, the primary concern of the affinity group arranging such facilities is to provide relevant, value-adding products or services to its members. Successful affinity marketing schemes are built upon the high level of trust that members will place on the group to secure a good deal. The affinity group will therefore look to forge partnerships with product providers who can offer quality products, high levels of service and pricing or underwriting advantages that the members could not secure as individuals. This will ensure the affinity group's own reputation is enhanced so it continually attracts new members and, most importantly, retains its existing members.

Individual versus group

Looking specifically at the major protection products such as life assurance, critical illness and income protection, there are already two distinct markets ' the individual protection market and the group protection market. The latter almost entirely made up of policies taken out by employers on behalf of their employees. But which of these is best suited to the affinity group market, if either?

In order to consider this further we have to look at the design of the current products and the table (see page 34) compares and contrasts the two at a basic level.

Providing protection to members of affinity groups undoubtedly lies somewhere in the middle of these two product offerings. Clearly, as an individual you would wish to retain the flexibility and continuity of individual contracts but, at the same time, there needs to be some incentive for the individual to purchase the cover through the affinity group, rather than independently. The biggest incentive must be the potential to benefit from cheaper group premium rates and favourable group underwriting terms.

The bigger picture

This all seems relatively straightforward, but if we take a step back and consider how group pricing and underwriting terms have evolved, we can see that offering current group terms to affinity groups is not something an insurer could reasonably do. Under conventional group protection insurance, the low premium rates and the ability to offer free cover levels to groups of employees can be justified on the basis that the employer pays the premium and prescribes the level of cover, often for all employees or certainly a well defined section of the workforce. To all intents and purposes, this makes the cover compulsory and completely non-selective. With an affinity group, the individual will have complete freedom of choice over whether or not they will join and the amount of cover they require. In addition, premium payments for cover secured through an affinity group will also be made from potentially thousands of individuals, rather than from one source, making the administration much more onerous and the running costs higher than for traditional group insurance.

For the purposes of providing products suitable for affinity groups which bridge the gap between group and individual cover, insurers do now offer voluntary group products. As the name suggests, voluntary means that the individual member can choose whether or not to join and also the level of cover to be insured, up to a specified maximum and therefore maintaining the flexibility of individual insurance. However, because the affinity group is likely to have secured enhanced terms by dealing in bulk, the individual will benefit from cheaper group rates and much shorter and simpler application forms, than those required when applying for individual cover.

Yet the decision of whether the affinity group should choose the group voluntary route or the individual route depends on a number of factors ' the key consideration probably being the degree of involvement of the affinity group itself. Do they want to be hands-on in terms of their approach to communicating, promoting and administering the arrangement or are they purely a marketing vehicle, simply adding their brand and little else?

Group voluntary schemes are rarely available to groups of less than 500 members and for the scheme to be cost effective and receive the benefit of enhanced group terms, the take-up rate needs to be at least 20%. In order to achieve this level of take-up, the affinity group needs to take an active role in communicating and promoting the scheme. If the affinity group is acting simply as a marketing vehicle with very little involvement, then the individual route may be the better option.

With regard to premium payments, one of the advantages of traditional group cover is the simplicity of the administration, which includes the fact that the employer's premiums are paid from one source. However, with affinity groups, each member is normally responsible for the payment of their own premium. To collect direct debit payments from each individual's bank account throughout the month becomes difficult and inevitably the savings normally associated with group arrangements are lost. As a result, the individual approach may be more appropriate in these circumstances.

Whether or not a group approach is appropriate will therefore depend on the degree of involvement of the affinity group in relation to premium collection and this probably depends on the type of affinity group involved. For example, where an affinity group can take responsibility for premium collection, perhaps through payroll deduction or subscriptions, the group voluntary approach will work well.

Affinity groups are a relatively new route for the distribution and sale of protection benefits and do show great potential for the future, provided the right marketing and product propositions are accurately identified. While it is quite tempting to offer the products currently available, through either the group or individual route, it is really quite clear that marketing through affinity groups is bringing the two together and blurring the distinction between them. It will be interesting to see how this market develops over the next 12 months.