In the world of financial services the term affinity group is firing imaginations. Trade unions, football clubs, societies and supermarkets are all considered viable, and potentially lucrative, new distribution channels.
Already some allegiances have been forged by insurance companies and intermediaries; PPP healthcare runs a variety of schemes and Friends Provident provides a stakeholder style pension to the Amalgamated Engineering and Electrical Union.
And a recent report from the Association of British Insurers (ABI) predicts that there will be further growth in the importance of affiliation groups, with these becoming a significant distribution channel for many in the industry over the next few years.
Changing face of employee benefits
This change has come about partly because of the disintegration of what could be regarded as the oldest affinity group – the employees of a company. Now that job mobility is the norm, loyalty to one employer throughout working life is rare. And, with many financial services products designed to fit this bygone working pattern, insurance companies are looking for alternatives that truly fit the concept of lifelong commitment.
Increasing pressure is also being put on employers. Neil Redman, managing director of brokers Burke Ford Healthcare, believes that resources are being stretched. He points to new European legislation which makes part time employees eligible for company pensions as an example.
A further problem with relying on employers to provide group cover is that not all companies are sufficiently large. According to the ABI, more than 90% of businesses in the UK have less than 10 employees. This means that the economies of scale associated with group schemes can never be achieved.
This is where affinity groups could come into the equation. Because these groups can be very large, for example, a trade union or fans of a premier league football club, economies of scale are possible. This can lead to cheaper premiums and better, or more appropriate, benefits.
Similarly, for groups that have a lower than average risk profile there could be savings to reflect this. For example, it could be assumed that the members of a group such as SAGA may have a lower risk profile than members of a dangerous sports society, and their life assurance premiums could be adjusted to reflect this.
Even when the group could be classified as having above average risk, savings may still be possible. Because of the nature of the scheme, administration, distribution and marketing costs can be reduced, making the premiums cheaper than if the member has sought cover independently.
And there are advantages for the people selling products through an affinity scheme. Aidan Taylor, partnership manager at PPP Healthcare, explains: “Because you are building on a relationship which has already been built, this can increase product sales.”
Members of the affinity scheme have already “bought” into its values; buying an endorsed product is just one step on from this. This can make sales easier, but there is a condition – the product must have relevance to members of the group. Taylor describes the process of setting up a scheme: “We tend to start by sitting down in the marketing department of the affinity group and determining what they’re trying to achieve with the product. It is important to sell to people’s needs so we will often end up with a product which is far from standard.”
Insurance broker Burke Ford Healthcare has also found that identifying the needs of a group is the key to building a successful affinity scheme. It has been providing employees in further and higher education with healthcare products since 1979, and has subsequently built up a good understanding of the needs, and the claims patterns, of the sector.
/s Tailored package The first package it put together for the group was voluntary private medical insurance. This was tailored to fit the needs of the teaching profession.
For example, the policy has particularly good psychiatric cover to deal with the common problem of stress. It is a medical history disregarded policy, dependent on pooled risk to help contain premium rates. And although the PMI policy has been in existence for 20 years, the premiums have remained between 50% and 60% lower than if a member had sought cover independently.
This experience of the market and its claims history was important when it recently set up an income protection scheme for the affinity group. Redman explains: “The claims experience on the voluntary PMI product demonstrated to underwriters that concessions are possible.”
Burke Ford’s reason for offering this sector an income protection product was also based on experience – in this instance, experience of the needs of the group. When changes were made to the teachers’ pension scheme in September 1997, it radically changed the way teachers were treated when they became unable to work due to illness. Under the old rules, early retirement due to ill health was relatively common; now it is only possible if the person is permanently unable to teach due to an illness or injury. Suddenly, the profession had a need for income protection.
After assessing the suitability of many insurance companies’ policies, Burke Ford selected UNUM to provide income protection. For it, affinity schemes were a relatively new venture. Previously it had provided a badged income protection product for the Guild of Master Craftsmen, but had no experience in the area Burke Ford was proposing.
Subsequently it approached the proposal with the caution of an underwriter. Andrew Smith, press officer at UNUM, explains what convinced it to consider this venture. “Because Burke Ford was able to present us with history for this sector on the PMI side we were able to assess the risk for income protection.” Its assessment lead it to the conclusion that it could offer the affinity scheme premium rates on a class one occupational scale. This was a result of the claims experience Burke Ford could provide and the sickness benefits already available to the profession. Typically teachers fall into classes two or three, as most insurers have down-rated them in the last few years, so this higher rate enables them to access premium rates which can be as much as 50% lower.
The needs of the group are emphasised in the product literature; the introduction explains the changes in the rules for permanent incapacity standards and how income protection can provide a solution. Redman comments that this is such a major issue that there is probably not a lecturer in the land who doesn’t understand the implications of the change. This approach helps to gain trust from the sector, ultimately boosting sales.
UNUM assisted with the production of this accompanying literature and the press releases. Smith explains that UNUM was prepared to give whatever support was necessary but that the relationship formed was very much that of a partnership.
He is keen to be involved in other similar projects and believes that the market could become increasingly focused on these types of schemes. He comments: “In the future there is a possibility that we will work with other companies to create a multiple package for these groups. We don’t offer PMI, dental cover or pensions so we could look at these alliances.”
Handle with care
Setting up these schemes may seem easy – find a large group with a common link and you will have instant access to bulk sales. But, unfortunately this is not enough. Both Taylor and Redman agree that ensuring the product perfectly fits the needs of the group is essential for long term success.
A group such as the National Trust may seem an obvious choice for an affinity scheme. And, for products such as household or car insurance; economies of scale may justify enhanced rates. However, obtaining preferential rates for a health insurance product may not be so simple, as the risk of the group cannot be easily determined. Experience can overcome this and give insurers the confidence to take on the risk.
However, more affinity schemes in the future is a certainty. With budgets being squeezed, small employers will have to look outside to access affordable employee benefits. Trade unions and associations could hold the key.