The group income protection market may at last be showing signs of recovery and IFAs could be the group to benefit most.
First established over 100 years ago, the group income protection market still struggles with its identity. Indeed, its many different names can confuse. Technically, it is written in a long term permanent health insurance fund and some insurers still market it underits generic name. Market leader UNUM prefers to call it long term disability, as do Generali and Legal & General. Other terms include earnings replacement cover (Guardian), Safeguard (Norwich Union) and group salary continuance (Zurich). Income protection is preferred by Friends Provident, Pioneer Friendly Society and Prime Health.
The Government is now looking to individuals to make their own income provision, or their employers to do so, for if they become long term ill or disabled.
This has not been lost on trade unions and other employee groups. Group income protection can be part of the package in negotiating benefits and provide extra protection in an age when the concept of a job for life is, for many, a relic from the past.
From this month, someone below retirement age on the highest rate of Incapacity Benefit would get just £64.70 a week, which is taxable.
In a survey conducted by UNUM last May, just 8% of people correctly identified Incapacity Benefit as the state benefit payable for long term illness. Most people are shocked when they find out just how low state benefits can be.
With a few exceptions, such as smaller companies, many employers are now expected to pay statutory sick pay when their employees are ill.These moves are part of their Government’s response to the enormous rise in the numbers claiming benefit. One in 10 people below the age of 45 now reports some long-standing illness or disability and, since 1980, the number of people claiming Incapacity Benefit has trebled to 1.75 million.
Absence can be costly for employers too. Pay & Workforce Research has recently published research on the NHS – the largest employer in the UK – which showed that the absence rate among nurses and midwives is 5.6%, costing a typical NHS trust almost £ 1.8 million a year. An employer may well find themselves paying a sick employee their salary and as well as funding a temporary replacement.
Legal & General for example reports that its option to add statutory sick pay cover to its Group Long Term Disability Income Plan is proving popular.
But generally employers have been slow to respond. One solution could be limited payment benefit plans. Current employment trends see more people on fixed term and temporary contracts and few now expect to remain with the same employer until retirement.
Under a limited payment benefit option, payment continues for a maximum of between one and five years rather than to retirement.With many employers moving towards defined contribution as opposed to defined benefit pension schemes, and with employees increasingly working to short term or temporary contracts,this type of plan fits the needs of the new more flexible employment packages.
For the employer, cost savings can be significant. Assistant vice president group insurance marketing at Sun Life of Canada, Dave Kay, estimates that a five year option could be up to a third cheaper than a plan that pays to age 65, with a two year plan saving perhaps 50% or more.
Insurers too, like this option. Many are paying claims for individuals in their 50s who, despite relatively minor conditions, will never work again. These people are not necessarily workshy. But would a highly stressed 55 year old teacher in an inner city school be keen to return to face a daily barrage of abuse or prefer to receive a high proportion of their previous income right up until retirement?
The trend, seen most strongly at the end of the `80s and beginning of the `90s, for there to be more claims and longer claims has led inevitably to significant premium rises. Limited payment benefit options are one way to reverse this trend and still provide a valuable benefit, especially as most claims last just two to three years.
Despite these savings, few employers will choose to reduce the cover they offer their employees. Many will look at a quote but still decide to keep their existing payment term. To do otherwise is clearly offering a worse deal for their employees and many firms are reluctant to do this unless there is a compelling reason to do so.
With increasingly flat organisational structures, some employers are looking to extend income protection to groups where cost has traditionally ruled them out. Market leader UNUM’s Essential Ability Cover is aimed at blue collar workers and combines limited payment with a simplified definition of disability.
Many group schemes are re-broked every two or three years, often at the beginning of the year, although few actually switch insurer, partly because definitions and exclusions vary between providers. While these are important, the market is still price sensitive, although confidence in the insurer’s claims paying philosophy is an increasing factor, according to Swiss Life marketing consultant Peter Fenner. For the IFA, commission rates are around 12% each year, although some negotiate lower rates or no commission and take a fee from the client instead.
Against this background of significant, if largely unrealised, potential, how should an IFA look to get into the market? The answer for many will be to look first at their existing client database. Companies with pension or group life schemes are an obvious start, but a more detailed search may also reveal individual clients who hold senior management or human resources positions.
Armed with a list of suitable prospects, a call to the IFA consultant of a preferred or panel insurer is likely to result in help with marketing ideas and materials.
The consultant can also advise on what information is needed for their company to quote. Few things are more frustrating than having to go back to ask a client for more information so time invested in mastering the administrative aspects up-front can reap dividends later.
Legal & General went a stage further last year when it introduced a series of marketing workshops for group income protection. These give IFAs the opportunity to learn, practice new skills and, not least, compare notes with fellow professionals.
Swiss Life reports a waiting list for its seminars on group risk products, which includes group income protection.
UNUM’s consultants run workshops, often on particular themes, such as the implications of the Disability Discrimination Act. UNUM’s marketing manager, Nick Lomas, believes understanding the law may give an opportunities to IFAs, especially as the Department of Education and Employment is now consulting with a view to extending the Act to companies employing less than 20 people.
The Act’s first provisions came into force from the end of 1996 and an employer may now find that a disabled employee cannot simply be dismissed because they can no longer cope with say the stairs in their office. So, as well as having to pay their salary, or a proportion of it, the employer may also have to pay for alterations to made to the working premises. The arbitration service ACAS reports that hundreds of cases of disability discrimination have been filed and, as these are resolved, so employers will become more aware of their obligations.
By swotting up on the Act – UNUM produces a guide – the IFA can draw the employer’s attention to their obligations. The key, as always, is to start by asking rather than telling.
An opener could be: “Have you heard of the Disability Discrimination Act?” Followed by: “What procedures have you introduced following its implementation?” Or: “What training and compliance procedures have you put in place?”
Guided by help from the major players in the market, the IFA is likely to find that they have considerably more expertise than the employer, especially in small to medium firms employing between two and 500 employees.
Research undertaken for Sun Life of Canada last year among smaller firms showed that awareness of income protection was low. Indeed, some thought it was another name for PMI or that they were covered under their keyperson life policies. Towers Perrin report that just 6% of employers plan to introduce changes to their sick pay schemes in the next two years.
While to some this indicates a flat market, to others it represents an opportunity. IFA Ted Yeates of Cheltenham-based Warwick Butchart believes the key is to be aware of the opportunities rather than to plan a massive campaign to target the product.
He believes too that in many situations group income protection is not likely to be the first need discussed with a new corporate client. Instead, it may dovetail with either an existing pension scheme or group life arrangement.
Lomas agrees, although he points out that both group life and disability can provide very attractive benefits for a cost of just 0.5-1% of payroll. Kay points to new companies being another source of new business, as they look to put in place employee benefits to attract the right quality of staff. Fenner adds that computer and hi-tech companies are prime targets.
Until recently, group income protection has been one of the less glamorous products in an IFA’s armoury. But changing employment patterns, reduced State help for individuals and the Disability Discrimination Act are all helping to make the product much more relevant to many more employers, staff and intermediaries.