It is tough out there for intermediaries selling group risk products and, with auto-enrolment lurking on the horizon, if anything, likely to get even tougher.
Back in June, a report by Mercer on benefit purchasing by SMEs painted a picture of a market holding up but under pressure.
The good news was that SMEs remained committed to offering group risk products and private medical insurance – in principle. The bad news was that, understandably in the economic climate, employers were demanding tweaks to cover in an effort to reduce premiums, to the extent that, as Mercer put it, in some cases the safety net being offered to employees was “fraying at the edges”.
Donna Biggs, principal at Mercer, says: “People are still coming into the GI [general insurance] market, but they are being smarter about how they create the benefit. So they are saying, perhaps, it will not be an open retirement date on an IP scheme but a deferred period payment one. They are thinking much more about what it will look like. It is about making sure it does the job but also that it stays within the budget.”
IMPACT ON INTERMEDIARIES
So, what does this trend mean for intermediaries and how is it changing the sorts of conversations they need to be having with clients, especially at the SME end of the market? Moreover, with auto-enrolment kicking off from October, which is widely expected to eat into the benefit budget many employers have to allocate, is this squeeze around group risk simply going to get worse?
In terms of the effect on intermediaries, Mercer’s Biggs concedes it stands to reason that, if benefits are reduced, premiums reduce and this can have a knock-on effect on an intermediary’s commission.
“Also, if there are fewer claims and as a result less administration and the intermediary is charging for administration that can be affected. The sort of things intermediaries can do include looking at whether to switch to a fee basis or fixed commission rather than a percentage,” she explains.
Declan White, group protection strategy and marketing manager at Friends Life says that his organisation is seeing some small schemes cancelling their cover, but it is “not a significant trend”.
“However, in a depressed economy and with auto-enrolment kicking in we may well see employers reassessing their benefits packages and their associated costs,” he adds.
“This is not just about SMEs, this is a trend we are seeing across the board,” agrees Nick Boyton, health and risk principal at Alexander Forbes. “Most of our clients are looking at ways to contain costs. So it is something very much at the forefront of employers’ minds and we are as a result having to take different approaches.”
“I am not seeing scenarios where employers are reducing the level of life cover provided; there is still an appetite to have competitive terms,” adds Chris Wall, senior group risk consultant at Lorica Employee Benefits.
“But IP clients are considering the pros and cons of moving from a paternalistic policy that, say, goes right up to retirement age, to one that perhaps pays for a limited period,” he says.
However, it would be simplistic to argue SME group risk is simply a retrenching, retracting market. There may be an appetite for more creative, nuanced solutions but there is still appetite there, contends Marco Forato, chief marketing officer of Unum UK.
Back in March, the insurer announced it was to stop selling income protection to individual consumers and focus solely on the employer/group market, with SMEs a key target.
Forato estimates more than half of its group income protection (GIP) sales in the first half of this year have been new to market, with more firms looking to extend cover down from senior management to a wider base of employees. He estimates as few as 2.5% of employers with between ten and 100 employees offer GIP, something that presents “a massive opportunity”.
“Large intermediaries tend to be focused on the larger end of the market because there is more money there. So we believe there are opportunities for new brokers to come into the group risk market. We, for example, see many IFAs talking to individual small business owners about personal products, so why don’t they also take the opportunity to have that conversation about their company’s needs?” he explains.
In general, if a client is looking to cut benefits the job of a good intermediary is to be persuading them to be making shallow cuts rather than pulling cover completely, stresses Boyton.
“The key thing is to recognise that something is better than nothing; that is the last resort. It needs to be communicated this is something beneficial for you and your employees. Risk benefits are relatively cost effective, especially if they are part of a whole benefits package. So it is about shifting mindsets, having conversations and being proactive,” he explains.
“Advisers need to be incredibly commercial when they go into the SME market if they want to make it work for them on a financial basis. The best way to do this is to ensure they work with a limited number of insurers and get to know their value proposition and ensure administration costs are kept to a minimum,” advises Paul Avis, sales and marketing director at Canada Life Group Insurance.
It could be, for example, an employer has been paying separately for an employee assistance programme or business support services and not realised they could save money by having it bundled within the policy.
“It is about drilling down into what they are looking for and creating a dialogue. It is about communicating and giving them options. Often they do not need to pull cover altogether because there are levels of cover available and they can still make good savings,” agrees Emma Grogan, group risk manager at Chase Templeton.
It is also important for intermediaries to be explaining clearly to employers the implications of changing their benefits package, for example on contracts of employment, staff retention and the ability to recruit quality staff, argues Friends Life’s White.
“Pulling cover altogether can have a detrimental effect on claims history. As long as you are doing a good job as an intermediary you should be looking to place the scheme with the most competitive insurer. Intermediaries need to be looking at scheme design rather than just letting it roll over, they need to be developing more tiered approaches,” adds Chase Templeton’s Grogan.
Ultimately, it needs to be about the intermediary taking more of a consultancy-based approach, explains Lorica’s Wall.
“So, if a client is thinking about removing a scheme completely it may be about explaining the options to them. They may not have realised that another option, say, is to limit the term, which would reduce the premium but keep you the benefit,” he says.
However, there is a further potential elephant in the room here: auto-enrolment.
As Rebekah Haymes, senior consultant at Towers Watson, sums it up: “There is a fear with auto-enrolment coming in that may mean money is diverted into pensions and that then risk benefits get pulled.”
“You may have a situation where employers are wanting to tweak certain benefits to release cashflow for whatever pension requirements are being forced upon them,” agrees Lorica’s Wall.
Research by Swiss Re in April, for example, identified auto-enrolment as one of the biggest forthcoming challenges for group risk.
At one level, of course, the staggered timetable for auto-enrolment does mean its effect on the SME group risk market will probably be limited in the short-term.
Indeed, intermediaries and providers argue auto-enrolment could even provide an opportunity in terms of the spotlight it will put on benefit spend and provision generally.
As Boyton puts it: “Auto-enrolment is an opportunity to engage with employees and communicate to them the value of what is being offered.”
“Auto-enrolment is an opportunity to look at all your benefits. It will raise the awareness of employees of what benefits they are getting from their employer,” agrees Towers Watson’s Haymes.
“Intermediaries will need to be a bit smarter and think about ways of being more creative with clients,” she adds.
- For the intermediary, consider switching to a fee basis or fixed commission rather than a percentage
- Be proactive in explaining the benefit of shallow cuts rather than pulling cover completely.
- Get to know insurers’ value proposition. Review and interrogate existing benefits to identify possible duplication or additional value.
- Explain to employers the wider implications of changing or reducing their benefits package; develop more of a consultancy approach.
Key trends according to Mercer
There is a trend towards mid to large SMEs increasing deferred periods to come into line with the industry standard of 26 weeks. Some 7% still pay sick pay for a full 52 weeks, against 63% plumping for 26 weeks. A significant minority – 20% – now have a 13-week deferred period.
On basic benefit cover, historically “offsetting state benefits” has been popular, with companies insuring 75% of salary, less state benefits.
The trend now is for companies simply to ensure an employee is paid a percentage of salary with no consideration given as to whether they are receiving additional state help.
While 67% of companies still choose the offset route, 32% now choose to offer a proportion of the basic salary. Of this group, most chose to cover employees for 50% of their basic salary.
Medical inflation has led to premiums increasing by 10% since 2010, encouraging many companies to add an excess to their policy. While many firms still maintained no excess, a £100 excess is becoming a favourite option upon renewal time, with 25% now choosing this option.
The most popular cover option remains four times annual salary. But there is a growing trend towards two times annual salary. However, more than 9% of employers – particularly in the professional sector – offer life cover of more than four times salary with a small minority (0.83%) offering ten times or more.