Challenge of a lifetime

Group Life is often viewed as the simplest and cheapest product in the group risk range, and rightly so. After all, the event which triggers payment is cut and dried and does not involve any subjective judgement. But what is often undervalued, and misunderstood are the underwriting skills used to offer the best non-medical limits for as many of the potential scheme members as possible. And this is never put to the test more rigorously than when group life is offered as part of a flexible benefits scheme. The reason for this is the underwriter's pet hate ' selection.

Assessing risk

Selection is an issue never far from an underwriter's mind and they are always on the lookout for a risk that could 'load the dice' against the provider. Mention flexible benefits to any underwriter and the selection warning bell rings loud and clear. To understand why, it is necessary to appreciate the effect the key differences between a flexible benefits scheme and a traditional group protection scheme will have on the underwriting process.

In a traditional group scheme, benefit levels are clearly set across the membership and the underwriter can assess risk using tried and tested methods, so there is no scope for individuals to choose their own level of benefits. There is also a wide spread of risk across the whole membership and selection against the provider is minimised.

Contrast this with the newer flexible benefit type of scheme where one of the key criteria will be allowing the employees to choose the benefit mix that is right for them from the range of benefits on offer. Furthermore, where protection benefits are concerned, not only will the employees be able to choose which benefits they want, but also at what level. This is where 'selection' starts to raise its ugly head. The concern here is that individuals in poorer health will opt for higher benefits, while those who are healthier will feel less need of the protection and choose lower levels of cover.

At the time the underwriter is asked to assess the risk and quote terms, the only thing they know with any certainty is the number of employees involved and the range of benefits and benefit levels they will be able to pick from. And yet they are fully aware that if the terms offered are accepted, the provider will have to live with the consequence of those rates for at least a year.

In the UK, underwriting flexible benefits schemes is still in its infancy and underwriters will tend to err on the side of caution until their experience in assessing this type of risk grows. Advisers should not, however, assume that in exercising caution, underwriters will automatically seek medical evidence. The last thing the underwriter will want is to have to pick up medical evidence for each employee ' that is as much of a turn-off for the provider as for the adviser, not to mention the employer.

Underwriters can instead adopt a variety of measures to try to overcome any potential selection issues. For group life and group income protection (IP) cover, for example, they might insist on at least a core level of benefits, at the very least one times salary group life and one-third salary IP. This ensures a wider spread of risk across the membership than a free choice would probably provide. There might also be a limit on how often and by how much benefit levels can be increased.

One step at a time

It is not uncommon for employees to be able to change their benefit choice at the annual renewal date only. The underwriter may, however, allow additional flexibility by also allow- ing increases mid-year for lifestyle changes, recognising that significant events like marriage or the birth of a child will result in different protection needs for the employee concerned. As flexible benefits schemes are intended to allow employees to select benefits most suited to their needs, this is a valuable option for advisers to negotiate.

Another control tool in the underwriter's armoury is the ability to set limits on the level of increase allowed, without medical evidence, at each change opportunity and to insist on the employees being actively at work on the effective date of the change. These increases or 'steps' will be set having taken into account the difference between the minimum and maximum benefit levels agreed for the scheme. For group life, it is typically the difference between one times and four times salary lump sum. An increase from one step to the next will generally be acceptable and a two-step increase might be allowed for certain lifestyle changes. Increases of higher amounts are likely to be subject to medical evidence.

Each of the protection benefits offered under a flexible benefits scheme will need to be assessed slightly differently. For group critical illness (CI) cover, core benefits are not considered essential due to the operation of the pre-existing conditions exclusions common to this type of contract. Most group CI contracts will already provide a hedge against selection by excluding cover for any critical illness condition from which the employee has already suffered before the scheme was set up. A typical group CI contract will also exclude, for a fixed period, cover for any associated critical illness which arises from a condition from which the employee has already suffered. This fixed period tends to be the first two years' membership of the scheme.

Group CI cover is, however, still fairly new in the UK and while underwriters build up experience on this type of risk they will continue to set what they see as sensible maximum benefit limits. This is not surprising, given the advances in medical science which can result in someone collecting their CI benefit and being fit enough to return to work again in a relatively short space of time.

The right balance

But even where medical evidence is needed, good underwriting practices and services can help add value, especially where they are designed to minimise business disruption. The focus here is on minimising the time any employee or director needs to spend away from the workplace to attend a medical examination. Arrangements can be made to ensure any medical examination is organised at the most convenient time and place for the person involved and that all supporting paperwork is with the examining doctor in time for the appointment.

The service can also be extended to ensure any 'hand-holding' necessary to help encourage attendance, or to overcome an employee's anxiety in attending a medical is put in place. A further benefit includes maximising the value of that medical evidence by allowing automatic future increases up to an agreed level over a specific period of time. This type of forward or advanced underwriting is proving popular, allowing benefits to double in size over a five-year period ' in some cases without further underwriting.

Advisers need to be fully aware of the underwriting issues likely to arise and understand the services that are on offer. This is especially true in relation to any flexible benefits scheme they might be discussing. The adviser's role in designing, communicating and setting up a flexible benefits scheme is crucial and can influence the eventual underwriting requirements.

At the design stage, as well as addressing the client's corporate culture and human resource goals, they can take the underwriting issues into account. By balancing the amount of flexibility needed with controls on the frequency and amount of changes, advisers will not only minimise the medical evidence requirements, but also help smooth the employer's administration.

By introducing an element of employee choice in benefit selection, although many employees will need to be prompted to make a choice, some, given complete freedom, will choose and change frequently. How many employers will want or be able to handle daily, weekly, or even monthly changes?

The design of each flexible benefits scheme and the range of benefits covered differs from company to company. For this reason, the underwriting requirements will be specific to each scheme. Free cover limits can still operate in a flexible benefit environment and will be influenced by take-up rates. Advisers with good communication skills will boost take-up rates and that, coupled with a good scheme design, should mean requests for full medical checks will be minimal.

And for the selected few who do get the full medical treatment? They will receive valuable health checks (which could cost £500 or more privately) ' for no extra fee.

Sue Sneddon is employee benefits development manager at Scottish Equitable