Unlike its substantially larger sibling in the individual market, Group Critical Illness (GCI) has yet to achieve the explosive growth that has been the major health insurance sales story of recent years. But reinsurer ERC Frankona estimates that around 400 schemes have been written to date for annual premiums of around £3.3–3.5m. That is up from the 223 schemes and £2.3m annualised premiums recorded at the end of 1997. Just 33,000 people have GO cover, compared to over two million in the individual market. With the market growing at around 30% a year though, it could be worth £lOm by 2002 (see table overleaf).
The evidence is that the market is growing consistently – albeit from a small base – and now that claims are beginning to be paid, IFAs have a real opportunity to develop a new line of business. A major attraction is that a group plan can offer more cover for the same premium when compared to an individual plan.
Andrew Smith, press officer at UNUM, says that there are three main types of plan – employer-sponsored, voluntary schemes, and flexible (flex) benefits plans. Employer-sponsored schemes make up the bulk of business written, and are set up and paid for by employers, usually for a group of employees. Those employees could be blue-collar workers or high flyers where the cover is an executive perk Benefit is usually for a cash amount (often for blue collar workers) or for a multiple of salary (usually in executive schemes).
Depending on the scheme size and the ages of those covered, a rough guide is that a premium of £50 a year can provide for a benefit of £25,000 to be paid direct to the employee, should they suffer one of the critical illnesses covered.
Generally, insurers cover just the core critical conditions, although market leader Swiss Life offers a Plus version of its plan covering 28 different conditions. Pre-existing conditions are usually excluded.
As many schemes are set up to offer cover of one times annual income, it may be possible to avoid underwriting completely on some schemes. Peter Anderson of Royal & SunAlliance says that his company offers a free cover limit of £2,500 times the number of members covered, up to a limit of £150,000. That means that a 20-member scheme would require no underwriting at all provided each member had a sum assured of no more than £50,000.
But while some insurers report that the sponsored scheme market is quite flat, all agree that the fastest growing area is voluntary schemes. And although employers are nervous about taking on new open-ended financial commitments themselves, many are keen to offer new deals to their employees that offer good value for money. Though priced as an individual plan and subject to standard underwriting criteria, voluntary schemes offer attractive pricing relative to individual plans. Premiums are usually paid by deduction from salary.
“A small IFA who represents an affinity group is well placed to introduce this type of business to them and there is relatively little competition in the market,” according to Peter Fenner, marketing consultant for Swiss Life. His company often helps by providing customised literature at cost, PowerPoint presentations and roadshow support.
Average premiums per member are likely to be below £100 a year but the effort of setting up a scheme for, say, 100 employees should be a lot less than arranging a much smaller number of individual plans, so getting more involved in this market makes good business sense too.
The third market for group CI is flexible benefits. This much talked about concept enables employees to choose their own remuneration and benefit package from a menu of options. One employee might decide to maximise their pension package and do without a company car, while another might drive an executive car and have a big CI plan to protect their family and themselves.
Most of these ideas will be familiar to intermediaries. GCI suffered from being introduced as the recession of the early 1990s began to bite and since then insurers have done little to develop the market.
However this maybe about to change. Brian Rawle, marketing manager at Guardian Employee Benefits, forecasts innovation driving the market in the future. He believes that improved targeting and sharper marketing will be the tools used by insurers to develop the market.
At UNUM, however, Smith is concerned that the sector may already have entered a catch 22 situation. While admitting that innovation may be required to increase premium income, he points out that low premium income maybe one of the factors holding back greater innovation.
There may be a way out of the conundrum. “Claims will be the driver. After all, that’s why we are in business,” explains Fenner.
And indeed, that is just what happened in the run up to the greater development of the individual CI market. Until companies began to publicise their early claims in the late 1980s, individual CI was seen by many IFAs as a gimmicky or salesforce-driven product. But once it became clear how people spent their sum assured and how young they were, clients and their advisers began to appreciate that the plan could provide real help in situations where previously the financial services industry could offer little but sympathy.
Royal & SunAlliance’s Anderson believes that IFAs are well placed to sell what to many employers is a new employee benefit. His logic is that while the market is still small, GCI cover can differentiate an employer in today’s competitive job market. A suitable scheme can help to attract good quality staff, although he cautions that many employers are likely to look at cost comparisons with group life. As someone below age 65 is over two and a half times more likely to suffer a critical illness than to die before retirement, it pays to go armed with the necessary facts before making a presentation to an employer.
Many employers will look to cover a spouse and children as well as their employee. Royal & SunAlliance allows a spouse to be covered for up to 50% of the member’s sum assured and their children for up to 25%, both subject to a financial maximum. Anderson adds: “If a critical illness hits a spouse, it is likely to have the same effect as if it hit the employee.” As many companies already provide PMI cover for spouses and children, the step will be a logical one for many.
Some have seen GCI as a cheaper alternative to group income protection, especially for those in higher risk occupations. The two plans cover very different needs however and are not interchangeable. Nonetheless, a major attraction of CI is that premiums have been stable since the first individual CI plan was written by Lincoln back in 1985, whereas PMI and income protection costs are likely to continue increasing.
UNUM says much of its business is obtained on the back of its group disability schemes. A combination of say 50% of salary if ill or disabled for more than six months, coupled with a full year’s salary tax free if you suffer a critical illness, regardless of whether that stops you from working, is a powerful sales message.
An added benefit for smaller IFAs, according to Fenner, is that many of the big benefits consultancies have yet to major in on this particular market. For IFAs there is also the advantage that the product does not significantly differ from individual CI, a product most are very familiar with, and one with which they have almost a third of the market.
For the future, Peter Fenner says GCI is: “likely to carry on growing at quite a rapid pace”.
And the previously quoted year-on-year growth of around 30% could make GCI an attractive option for IFAs to raise with corporate and affinity group clients Andy Couchman is author of the book The Facts of Life & Health Insurance, published by Taxbriefs.