It's in your hands

Employee benefits including group life cover, critical illness (CI) and income protection (IP) remain an underexploited market for IFAs. But if they are prepared to take the leap into the market, it can offer an effective means of expanding relationships with client companies, which could lead to a number of sales opportunities.

As a form of insurance, employee benefits serve two purposes for companies. In many industries that have difficulty retaining the right staff, such as IT specialists, they are a valuable employee retention tool. They are also a benefit that many companies do not realise they need. Employee benefits plans, especially the IP element, can be a major tool for employers seeking to manage absence costs.

Eugene McCormack, marketing director at UnumProvident, says: 'In our last round of academic research, the cost of absence to companies was between 4% and 16% of payroll. It is an overhead that businesses don't realise they are paying and they are self-insuring without having made a conscious decision to do so.'

UnumProvident estimates 11% of companies in the UK have some employee benefits in place, compared with 35% in the US.

A growing market

Despite this low figure, John Richie, head of distribution employee benefits at Swiss Life, says the UK market is set for more growth.

'Critical illness is not growing as fast as it was, but is still showing 25% to 35% compound growth. Income protection is a burgeoning market and has seen 17% to 18% market growth in the last three years. Life is a bit more stable but a big underlying trend is employers shaking off risk. The days when life and health used to be self-insured out of a big defined benefits fund that was in surplus are over, and to transfer that risk it is necessary to take out insurance,' he says.

When it comes to choosing an employee benefits package, it is important to remember it is added value, non-core services that companies use in controlling absence management.

Bob Bowskill, underwriting and affinities director at Sun Life Financial of Canada, says it is these benefits that advisers should consider when helping clients choose a provider.

'In truth there is little difference, in terms of the risk product itself, between providers. The competition between providers comes in the region of value-added services. For ourselves, as others, this is greatest in the area of income protection where we are working hard with employers to improve their rehabilitation and absence management systems,' he says.

Richie agrees there is little difference between the main product offerings: 'The reality is that the contracts from group risk insurers are relatively similar. Group life is generic because it has to be approved for tax reasons; income protection has not got that many product feature differentiates available for it and group critical illness is subject to the definitions from the Association of British Insurers' (ABI) Critical Illness Working Party,' he says.

Adding value

Providers therefore compete heavily on added value services, such as active claims management on IP. It is becoming increasingly common for serious IP providers to offer an active claims management service, utilising early intervention techniques to get employees back to work. In developing products insurers identify generic business needs, offered generally on a menu basis, to be used either on a standalone basis or as part of a package. The range of benefits required in an employee benefits product depends on the specific needs of the client.

However, flexibility is always important. Bowskill says: 'We compete effectively on price. In other words there is a benefits package presented to us and we quote a price for insuring it. We are not in a position to dictate what that package should be, it is for a client to decide what is appropriate for their individual circumstances ' for example, the level of benefits their particular employees expect.'

It would be fair to say that differentiators are there to create a glue between the insurer and the corporate client, in an effort to avoid the annual renewal auction. Often these differentiators can have a high perceived value to the client's employees.

Different options on employee benefit menus are affected by different market conditions. The life element, for example, being a fairly mature product, has little opportunity to innovate further. On a group basis providers try to minimise the number of people that have to be individually underwritten. If employees are underwritten, providers try to do so in a way that means they need not be bothered again for a number of years, as clients are often sensitive about medical underwriting.

Latest developments

One of the most recent developments in the group life market comes from Sun Life Financial of Canada, which has launched a product allowing group life cover for equity partners. Normally only the employed can join an employer-sponsored scheme ' equity partners are self-employed by definition and are therefore not eligible to join a tax-exempt approved life assurance scheme.

CI cover is currently being affected by the ABI's recent changes in standard definitions. The ABI has revised the industry's definition of CI cover, with changes to both the definition of heart attack (in the light of the new troponin tests) and prostate cancer (following increased screening and medical advances). Group CI providers have until March 2003 to upgrade definitions.

Sue Sneddon, employee benefits development manager at Scottish Equitable, says: 'There is a lot of research going on at the moment to see which type of critical illness is going to fit best in the group market. However in group contracts the policies are worded in order to allow a change of definition in the future, so the situation may not end up, as in the individual market, with a choice of new or old-style policies.'

Insurance providers have looked at the administration of employee benefit policies as a means of reducing paperwork and costs. One such method is the umbrella scheme, which attempts to bring the benefits of the larger simplified administration to smaller schemes. The principle is that if several small schemes are grouped together, the work involved is the same as that of a large scheme.

Bowskill explains: 'The umbrella could cover the whole of a particular IFA's book of small schemes. While each member company would have its own policy there would be one overall rate for the scheme. These schemes have no limit and can be as small or large as one wants to make them. The terms are tailored for each proposal.'

Umbrella schemes are one area of the market that can influence advisers' relationships with insurers. This is because it is in the management of these schemes where the market possibly shows the greatest variation. For example, Sun Life Financial of Canada tries to make expertise directly accessible to the adviser. It doesn't have any consultants IFAs have to go through. Advisers needing help access the person in the relevant team directly.

However, Scottish Equitable deals with IFAs on an account management basis, and has a team of specialised sales managers, each responsible for a specified number of IFAs. UnumProvident provides a step-by-step guide for those IFAs who are not familiar with the process. If the guide is followed the insurer can claim to be confident of giving an accurate quotation on the basis of that information, getting it right first time.

For Swiss Life, those intermediaries with key accounts or potential key accounts have a dedicated account manager offering one-to-one support for the IFA, plus dedicated back-office support. Smaller IFAs can call development consultants. Richie says: 'It is a less personalised service, but if you question whether it is appropriate and if it hits the target, we believe it does.'

Big gains

So advisers entering the employee benefits market will find a healthy demand for their services, and smaller IFAs in particular could reap great rewards.

Bowskill says: 'The impression that I have is that what customers are looking for is a personalised service. Clients like an IFA they know personally. The large national chains of IFAs are OK for the big schemes but the small to medium enterprises are looking for a more personal service, an area some of the smaller IFAs could be looking at.'

McCormack is confident that the market holds even more opportunity in the future. 'The employee benefits market is growing,' he says. 'It would grow even quicker with greater awareness of the issues by employers, and perhaps a bit of product innovation. It is an excellent market for IFAs to get into, especially as the products involved are not at the end of their life cycle, as is the case with endowments or pensions,' he says.

Paul Robertson is a staff writer