The group risk market took a heavy hit in 2009, with in-force premiums falling by 7.7%, according to Swiss Re’s annual Group Watch report. The level of group income protection (GIP) premiums in force is now at its lowest level since 2004.
Premiums for death benefits fell for the first time in several years, by 5.1% compared to 2008, while GIP premiums fell by 12.5%. However, critical illness insurance (CI) premiums rose by 6.6% (smaller than the 22% increase seen in 2008).
While pressure on corporate payrolls during the recession seems to have constrained market growth, the value of benefits underwritten increased on all accounts (life, GIP and CI) as providers fought fiercely to maintain a competitive edge. There has been speculation that some pricing in 2009 was unrealistic and may need to be corrected this year. However, the authors of the Swiss Re report believe that they have identified positive signs that the market is operating more effectively.
“If we look back historically, intermediary views on product providers and administration would be almost unanimous in being very critical of the way life offices operated and there would be some views going the other way from providers to intermediaries,” said Ron Wheatcroft, technical manager at Swiss Re. “There was a joint agreement that it did not work very well but that has pretty much disappeared. There are still one or two comments and there should be a healthy tension in a £1.5bn market but generally it does seem to work much better.”
He cited ‘one and done’ underwriting as an example of how providers had simplified processes.
PRODUCT BREAK-DOWN
The number of in-force group death benefit schemes fell slightly in 2009 from 42,366 to 42,244 while the number of lives covered fell by 3.9%. Providers and intermediaries surveyed by Swiss Re were split on whether the market would increase or decrease in 2010. The report notes some concern that employers might close existing schemes, but cites modest savings, contractual liabilities and the competitive marketplace as constraining factors.
The number of lives covered under GIP schemes increased slightly, although the number of schemes fell from 18,619 to 17,796. Approximately 7.1% of schemes were written with a limited benefit period, up from 6.7% in 2008. A majority of those surveyed expect the market to fall still further, citing uncertainty around employment legislation and the difficulty for employers of justifying costs.
While CI premiums increased, the number of schemes in force and the number of lives covered both fell. Almost half of the total premiums held are accounted for by flexible benefit schemes, which both providers and intermediaries said they expected to grow steadily over the coming years.
THE ROAD AHEAD
Wheatcroft believes that the market will remain “competitive” this year, given the nature of the economic climate.
“There is a level at which rates cannot fall,” he said. “But it is difficult to see what that floor will be. We all worry about falling margins because those that become unrealistic lead to people leaving the market.”
A possible risk to the group risk market is the introduction of auto-enrolment for pensions, which could result in employers cutting back on benefits to meet extra pension costs (read more about this development on pages 35-36 of this month’s issue). However, respondents were positive about the progress made by trade body Group Risk Development (GRiD) in raising the profile of the industry.
Another issue on the horizon is the phasing out of the default retirement age (DRA). The report shows that large schemes are already moving over to limited terms and some of those surveyed predict that the percentage written on this basis could reach 50% by 2012. There are concerns in the market that without the DRA in place employees could take advantage of group income protection provision by receiving this benefit instead of their, potentially much less generous, pension.
“It does appear to be the large schemes moving over to a limited term,” said Wheatcroft. “In the background of the Budget it is very, very clear that opportunities are there for the private sector and that the government is looking to move away from provision so something like the default retirement age which has unintended consequences on group risk schemes really does need to be addressed.”
The role of the group risk market in transferring risk from the public to the private sector and in providing protection to lower-paid employees is substantial. Currently, group death benefits represent around 40% of all insured life cover held in the UK and GIP provides more than 70% of all long-term disability benefits. The Insurance Industry Working Group’s vision for 2020 estimates that an increase in the private sector’s share of protection provision of just five percentage points could save the public sector almost £17bn a year.
“Intermediaries need to keep stressing the benefits that group risk benefits bring,” concluded Wheatcroft. “There is still real value to be provided. It is easy to forget that and focus on cost rather than the very positive things that can be done. Workplace education ought to reinforce the benefits of group employee benefits. There is still bags of scope to grow the market.”