Most people in the health insurance industry would admit that income protection (IP) products have never exactly flown off the shelves. But, in the midst of a decidedly mixed set of results for the group risk market in 1999, group income protection (GIP) came out better than most in ERC Frankona’s latest annual survey.
Although the number of group schemes hardly changed during the year – an increase of just 146, from 20,555 up to 20,701 – the premium income from these rose by almost 18 per cent to £350m.
One of the main reasons for this, according to ERC Frankona marketing analyst Peter Fenner, is the low interest rate prevailing in the UK. He explains: “Insurance providers have to put aside enough money to pay claims for as long as they expect them to last, and the less interest these reserves earn, the more capital companies have to find in the first place, meaning higher premiums. Although interest rates have actually been rising again of late, they are, on the whole, lower than they were 10 years ago – which means the cost of providing an income-paying benefit goes up.”
He continues: “As a reinsurer, we have been trying to convince providers to bring their premiums into line with the current interest situation. Many are offering rates that we consider to be around five years out of date.”
Specialist GIP intermediary Stuart Gray, of Taylor’s Independent Financial Advisers, is less sure of such a close link between interest rates and insurance premiums. He even doubts whether GIP premiums have actually been rising as much as people think. “We have been told premiums are on the increase,” he says, “but I certainly haven’t seen a lot of evidence to back this up. The insurers’ argument is that they tried to come into the GIP market with aggressive prices but, faced with low gilt yields, had to push prices up to compensate for low returns and cover the long term cost of providing benefits. I’m not really convinced by this: gilt yields have actually gone up recently and there hasn’t been a corresponding drop in GIP rates.
“It seems to be a case of premiums being far quicker to rise than they are to fall.”
Another factor behind rising GIP premiums – and one on which most industry insiders agree – is the worsening claims experience created by the increasing number of stress-related psychological complaints in place of more traditional cardiovascular and musculo-skeletal problems. According to some GIP providers, the former type of condition now accounts for up to 80 per cent of new claims.
“The prevalence of `mental’ rather than `physical’ claims has meant the premium gap between white- and blue-collar workers has closed considerably,” explains Legal & General’s group risk marketing manager Rebecca Clark. “Traditionally, blue-collar workers faced higher IF premiums because of the physical nature of their work. But, with recent advances in computing and automated procedures, as well as improved health and safety, their situation has changed for the better. White-collar workers, on the other hand, now face higher premiums because of the escalating workplace stress problem.”
Psychological conditions are a potential minefield for insurers because they are very much subjective in nature and there are no objective tests to identify how much they can impinge on someone’s ability to work. Add to this the emotive `shirking’ aspect of workplace stress and it is easy to see why providers are loading premiums against this problem area.
According to Royal & SunAlliance head of the corporate IFA market, Peter Anderson, the difficulty with `stress’ conditions is that some of them aren’t necessarily the result of an underlying illness but rather of poor management in the workplace. “Many people diagnosed with stress are reacting to pressure at work rather than suffering from an actual illness,” he says. “So it stands to reason that if employers removed the cause of this pressure – by getting bosses to change their behaviour or giving people more training – they could go a long way to getting people back to work.
“Unlike someone with a illness, there is no reason for people to be off work with stress for long periods of time because employers should tackle the root cause of the problem as soon as possible. Stress-related absences certainly shouldn’t be going on for as long as six months, which is usually the amount of time before people would start receiving IF.”
With this in mind, Royal & SunAlliance – and many other GIP providers – are joining forces with employers to help them improve the way in which they deal with sickness absence. Anderson adds: “People with relatively minor complaints can often slip into taking months off work because their employer has poor processes in place. Short-term illnesses can get out of hand because employers don’t bother to monitor how well staff are recovering. And, obviously, the longer people are away, the longer they claim, which means the premiums have to go up. By doing something as simple as keeping in touch with people throughout their absence, companies can make big savings on their sick pay and IP expenses.”
Employers aren’t the only ones having to tighten up their management processes in the face of the changing IP market. Many GIP providers are currently working to improve the claims management side of their business. Permanent Insurance sales and marketing manager Rod Macdonald explains: “The industry is now far more proactive in helping to rehabilitate people, rather than just adopting the black and white `claim or not claim’ stance of old.”
Fenner is equally positive about this shift in insurers’ attitude towards claimants. He says: “As claims management improves, claims experience will improve. Insurers are now offering a far more rounded GIP service than in the past. Claims experts now get involved in cases at a far earlier stage – often in the first few months of illness, when people still see themselves as simply `off sick’ rather than as a `sick person’ – to get people back to work as soon as possible.”
So the future for GIP, at least in terms of involved parties’ attitudes, looks bright. But what of the present? Could the fact that premiums are rising mean that the bottom falls out of the market just as so many other aspects of the product are finally coming right?
Not according to GIP market leader UNUM’s marketing manager Nick Lomas, who is convinced the market is growing and is keen to give his view on ERC Frankona’s group risk survey. He says: “The results show only a handful of new GIP schemes for 1999, which some people might take to indicate a flat year. This overlooks all the company mergers that took place – which often meant that, while there was still only one scheme, the number of people covered under that scheme had considerably increased.”
He adds: “Despite the rising premiums, we are still confident that the GIP market will grow over the coming years because of the changing employment situation. Attractive employee benefits packages are far more important now than they were a few years ago, as the growth industries of the moment – dotcom, PR and media companies – are essentially people businesses that want good staff and want to keep them.”
Increasing public awareness of the lack of state provision for those unable to work should also stimulate the GIP market, according to Macdonald. “The economy is strong at the moment, and, when companies are profitable, they are most likely to spend money on things like IP,” he says. “As people come to realise how little incapacity benefit they would receive from the government, they are knocking on their employer’s door and asking them to give them adequate protection.”
While most insiders believe GIP premiums will level out over the next few years, they also predict that next year’s ERC Frankona group risk survey (for 2000) will show another increase in GIP premium income. As most schemes have guaranteed rates for two-year periods at a time, providers cannot just change them overnight, so this year’s results will probably show a further price bulge as various increases feed through.
“What is clear,” adds Anderson, “is that escalating premiums are in no one’s best interest: people don’t want to pay them and insurers don’t want the risk to get so high that they don’t stand a chance of making any profit. It is important to get the risk down to a manageable level, because IP, when it comes down to it, is about people’s lives. It is about the fact that people need income when they cannot work, and simply can’t rely on the government any more.”