The group life market is gearing up for a substantial boost in sales following the introduction of stakeholder earlier this year, writes Ben Marquand
Sales of group life insurance have been growing slowly over the last five years, but the introduction of stakeholder pensions in April this year is widely predicted to be the catalyst for a significant boost in the market. However, its effect will not be known for at least another six months.
According to GE Frankona Re, premium income rose by 7% to £649m in 2000, which was a comparable rise to reported increases in preceding years. However, this has been largely attributed to an increase in premium rates rather than an increase in the number of policies sold.
Paul Casey, marketing analyst at GE Frankona Re, says: 'The average premium rate increases over the last two years have been around 5-6%, but this is really just reflecting increases in peoples' salaries. We would expect this rate of increase to stay around the same level or even flatten out a bit over the next few years.'
According to GE Frankona Re, the total number of schemes in place rose slightly from 47,334 in 1999 to 47,681 last year. However, the number of schemes in place is expected to show significant growth over the next 12 months as employers who are currently in the process of setting up stakeholder schemes reassess their employee benefits package.
Due to this statutory requirement providers and IFAs have long been prepared to increase the amount of business conducted in this market, but should not be too disappointed if a greater level of demand is not immediately forthcoming.
David Almond, marketing manager, corporate growth, at Canada Life, says: 'There has not been much evidence of the expected growth in group life since the launch of stakeholder in April. The key problem is the deadline of 8 October for when these schemes must be in place. A huge number of employers have not yet organised their stakeholder plans, so speed is now of the essence. When advisers are setting up stakeholder plans they may be better off going back afterwards to discuss setting up a better protection package once the dust has settled. There will be an explosion in the market, but this will not happen until nearer the end of the year after they have complied with the legislation.'
John Ritchie, manager of partnering, employee benefits division, at Swiss Life, agrees, but says IFAs must still be prepared to discuss group life schemes when they are setting up the stakeholder schemes. He says: 'Overall it has not been a fantastic year for growth, but this year is a platform for next year. There has been a stimulus from stakeholder. It is making a significant number of companies think about reviewing their employee benefits schemes and there may well be a panic reaction around the October deadline. A large number of employers will want to be seen to offer group life on top of stakeholder.'
Providers have been waiting a long time for such a stimulus to the market and have been largely reliant on the churning of business from other providers to sell group life for a number of years. This explains the competitiveness and low pricing of group risk schemes, which are in danger of becoming a commoditised product.
Almond says: 'There is no sign at the moment that employers are going straight to providers and cutting out advisers, even though the concept of group life seems simple. The underlying fact is that it is a complex issue and there are so many employers who have still not got round to organising stakeholder, yet they are clearly not proactive and need advice.'
He adds: 'The group life market is particularly cut-throat at the moment. The five or six key players in the market are having to grapple with lower and lower costs. But due to their economies of scale they are the most likely to be able to make a profit out of the smaller end of the market in the coming months. A lot of the expected market is at the smaller end, but there is a tendency for these firms to be the last to go for group life.'
The case study in Table 2 shows that a company seeking four times salary for all staff would be able to arrange cover for around 0.25% of payroll, which is very similar to last year. Generali offers the lowest premium rate of £12,477.56, or 0.19% of payroll. The highest premium was quoted by Scottish Life at £38,556.48, 0.58% of payroll, but it should be noted that the policy includes a free cover limit of £600,000 per member.
The second case study, in Table 3, requires quotes for cover that will provide two times salary for all staff and there is a greater diversity in the annual premiums quoted. One of the most competitive rates is offered by Legal & General, with an annual premium of £845.97 which works out at 0.24% of payroll with a free cover limit of £220,000.
But, according to Ritchie, there is a real danger that low prices could damage the market. 'At the moment it is almost too cheap to market, which is why the sector is not growing as much as it could. There could be a time when there is not enough distribution margins for insurers to find it worthwhile marketing,' he says.
As price is likely to become even more important when the effects of stakeholder kick in, providers are aware of the need to make themselves stand out from their competitors. There are seemingly few differences between the policy options of individual providers and so they are looking at other ways to generate business.
Ritchie says: 'The market is becoming too price-driven. Prices cannot get much lower; but it is not a commodity product because service is too important. The access and help that providers can give to customers and intermediaries is going to be key in helping to differentiate between providers.'
One new provider to enter the market in the last year, the Professional Underwriters for Life and Special Expenses (PULSE) has taken a different stance to most of the other providers in the market. PULSE focuses on the niche areas of the market, which other providers cannot or will not usually accept.
David Elliot, director of PULSE, says: 'We principally offer group life cover to those with medical conditions who might not get insured under a group plan. We tend to find cover for those who cannot get into an approved scheme, a kind of supplementary product to the main group life plan. If an employee earns over the earnings cap, we can insure them for the difference between this, or do a special scheme for an individual with a medical condition. We can also do short-term cover, so if an employee needs a medical to get a job, but the insurer decides that they would prefer to wait for a year before putting them on risk we might be able to cover them. Our premiums reflect the medical conditions of the employee, but our experience shows that employers tend to pay the premium, because it is usually too expensive for them to self-insure.'
The coming months should prove to be a busy time for IFAs in the employee benefits market and providers will be making greater efforts to improve accessibility and service levels. IFAs must ensure they keep abreast of the latest developments so that sales can remain advice driven and not necessarily based on the cheapest price.
