A marked reluctance on the part of companies to cancel group risk benefits during the economic downturn has certainly been welcome, although perhaps a little surprising. After all, these are the very same employers that have been quite prepared to lay off staff and to introduce salary freezes and pay cuts. Swiss Re reports that it is not expecting its Group Watch 2010 report to show any significant contraction in scheme numbers when it is published this April, its 2009 report having shown a 3.1% increase in in force group risk premiums to £1.64bn, compared to 2008.
The fact that many contracts of employment require employers to consult with the workforce before cancelling or significantly downgrading group risk benefits has undoubtedly contributed towards the splendid resilience. But it is not impossible that many employers might finally find themselves having to face the music this year if horror stories such as a double-dip recession and/or a hung parliament unfold.
Declan White, group risk marketing manager at Friends Provident, says: “We have seen some cancellations from companies going bust, and some did in fact cancel schemes last year even though they remained in business but this was certainly not a trend. Cancellations could increase in 2010 if we don’t see any upturn in the economy because a lot of employers are looking at cost and, although some companies have been trying to hold out, it will be interesting to see what happens if conditions worsen.”
Less forthright and honest providers than Friends Provident will be able to paint a slightly misleading picture from a new business perspective. A number of scheme reviews due this year were brought forward to 2009 to take advantage of the exceptionally keen rates on offer, and virtually all insurers have significantly benefited from AEGON’s departure from the market in June 2009. Its £90m group risk book is understood to have been dispersed fairly widely among the remaining players in the market.
AEGON’s insistence that its exit was down to the fact that it could get better returns from other markets where it had a bigger presence and should not be seen as any reflection on the group risk market certainly has a stereotyped ring to it. Nevertheless, it is given plausibility by the fact that the group risk field also experienced two new entrants during 2009.
Zurich Corporate Risk, which started quoting for new group life and income protection (IP) (but not critical illness cover) business in February 2009 and started actually writing new business two months later, has been making respectable progress. Aided by its existing strong commercial general insurance and corporate pension links and its significant international presence, it has written some big multinational schemes.
Nick Homer, group risk development manager at Zurich Corporate Risk, says: “At this point in time we are probably not exactly where we had planned to be but don’t forget that we made our plans before the credit crunch, so we feel that we are reasonably placed in the context of the current economic climate and that we have been well received in terms of both product and brand.
“Our focus is on offering a good service proposition rather than on being unduly innovative and we have met 97% of our internal service level agreements. We also highlighted that we were going to take a genuine approach to early intervention and we have provided some form of rehabilitation on 20% of claims notified to us, and in all cases we have begun within a month of receiving notification.”
Other group risk players inevitably report that they are not experiencing too much serious competition from Zurich but, tellingly, feedback from specialist intermediaries tells a different story. This new entrant is clearly already very much on their radar.
Stephen Ellis, head of group risk at national specialist intermediary Premier Choice Employee Benefits, says: “We have been bold enough to use Zurich for three schemes, including one major one with several hundred members. It has a very good service capability and has certainly delivered on what it said it would do.”
Chris Ford, director of group risk at national specialist intermediary Jelf Employee Benefits, says: “Legal & General, Aviva and probably also Canada Life are the main front runners on group life and Unum is trying to come back with more competitive rates, but Zurich is also making progress. It is doing particularly well in the capital, where it has the advantage of not having a book already so that it can provide higher catastrophe limits, although what often happens in practice is that the existing insurer matches it.”
Both insurers and intermediaries, on the other hand, commonly volunteer that they have not really come across Ellipse (Munich Re Group’s independently operated subsidiary) which entered the market in October 2009. This can be explained partly by the fact that the company has opted for a phased roll-out.
Ellipse did not wish to comment for this particular piece but its launch plans stated an intention of initially focusing only on group life cover through a limited number of employee benefit consultancies. Stage two will see the addition of group IP and group critical illness cover designed to integrate with benefit platforms, especially in the flexible benefits space. The final phase of the launch, currently scheduled for the second half of 2010, will see the introduction of web-based contracts available to all advisers.
Further competition also looks imminent as a result of existing group risk players seeking to address gaps in their product ranges. Aviva is to re-launch into the group critical illness cover market around now. Describing critical illness cover as “a crucial part of the integrated healthcare and wellbeing picture” it acknowledges that its failure to offer the product resulted in it missing out on a couple of schemes. Friends Provident, which has been out of the group life market since A-Day, is also currently investigating options to get back in “later this year”.
With mid-term broking becoming an increasingly common feature, the market remains so competitive that it seems unlikely that Ellipse will be able to demonstrate the type of blue water between its own rates and those of the rest of the market that it would probably like to. Indeed, premium rates are so low that one cannot help wondering whether a notable recent trend for insurers to incur more risk through higher free cover limits, higher overall maximum cover limits and the widespread introduction of “once and done” or “once only” underwriting might not in due course prove a little foolhardy.
Nevertheless, for the time being, the major reinsurers are showing no appetite for intervening. They are clearly working on the assumption that one insurer will soon lead the way by hardening rates – even if this does result in a temporary loss of business.
Lee Lovett, head of group reinsurance at Munich Re, says: “The main market issue is the increasing pressure on margins, and the group life and income protection markets are so competitive that they are currently both as bad as one another. The big insurers worked very hard to maintain market share but it has got to the stage when some of the pricing is unrealistic and I think that some correction this year is inevitable.
“No-one really knows how exposing to more risk while reducing rates will impact on fortunes, but it must place a question mark against future profitability. Free cover levels are now at least £1.25m and sometimes £1.5m or £1.75m on group life and often £120,000 or £130,000 on group IP, and insurers are more relaxed about catastrophe limits, which have risen from what was often £100m for a terrorist event to sometimes £150m to £200m. So greater risks could come back to haunt insurers but we haven’t altered our own rates yet to reflect the situation because we believe that we have priced sensibly enough from a reinsurance point of view.”
If premium increases do start becoming widespread this year, there could well be a shift back towards intermediaries providing a genuine consultancy service as opposed to being primarily engaged in rebroking exercises to achieve modest premium savings. The outcome of the government’s review of the default retirement age this year is also likely to prove increasingly important in this respect.
The nightmare scenario is that the default retirement age could be abolished altogether and that the group risk industry could fail to obtain a suitable exemption. If this happens it could result in a massive contraction of group risk business as employers may decide that they can only afford to insure employees up to a certain age and to self-insure the rest or may choose to cancel cover altogether. But, because a declining group risk industry would put more pressure on the State, it seems unlikely that this will be allowed to happen in the long term – even if the all-too-familiar government u-turn is required.
Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: “The key issue is to achieve a sensible exemption for group risk. It is not just group IP that stands to be affected as there are still issues unresolved around critical illness cover. If there is no retirement age or exemption it potentially opens the market to whole-of life critical illness cover and IP, which is very expensive.”
Glenn Laming, sales director for group protection at Legal & General, feels that the whole retirement age issue could prove the catalyst needed to finally invoke a trend in the direction of limited term IP – either with or without a capital option.
He says: “2009 was very much a year when intermediaries offered to rebroke group risk arrangements to achieve small savings for clients but in 2010 there could be a move back towards real scheme design and consultancy. The retirement age issue will result in a significant change in legislation which will make employers effect changes across many parts of their businesses, so they will have to consult with their workforces anyway.
“So intermediaries should be out there seeing opportunities for changes to group IP. Even if we do receive an exemption, if it comes in at the age of 68 or 70 there will still be major changes involved which will mean that there is a lot of consultancy work to do. I also believe there is still a huge opportunity for intermediaries working alongside employers where final salary schemes are removed or closed to new entrants. We have written some significant business in such cases and, whilst it has all been limited term, it hasn’t all been with off-the-shelf definitions as we have sometimes mirrored final salary scheme ill health early retirement definitions.”
Independent consultant John Gillman, who advises the Income Protection Task Force on group risk issues, says: “The limited benefit approach fits in all sorts of different ways. It fits in with legal requirements because employers under the Disability Discrimination Act (DDA) have obligations to make reasonable adjustments, and insurers’ rehabilitation services should cater for these. The capital option is a good thing in so far as so few companies have final salary pensions and it helps to fill the ill health early retirement gap. Possibly the size of the lump sum could become related in some way to the severity of the disability in a similar way to severity-based individual critical illness cover.”
Swiss Re, which reported in its Group Watch 2009 that only 6.7% of IP schemes are currently written on a limited term basis, expects the proportion to be higher when its Group Watch 2010 report is published this April. But Group Watch 2009 showed that, on average, survey respondents expected the proportion to reach only 22.25% by the end of 2013. So we could still have a long time to wait before limited term becomes the norm rather than the exception.
FINALLY OFF THE STARTING GRiD
Group risk providers and intermediaries have traditionally had few good words to say about industry body Group Risk Development (GRiD) which, plagued by a lack of any full-time personnel, did lamentably little in the past to raise the profile of group risk. But all this started to change during 2009 and commentators now commonly praise the rapid strides that GRiD has been making.
The fourth estate, which had become used to being passed from pillar to post when attempting to prize GRiD representatives away from their day jobs in attempts to obtain commentary, has certainly started to appreciate having access to a dedicated spokesperson in the form of the energetic Katharine Moxham. Press coverage has therefore markedly increased – from being virtually non-existent to totalling 56 cuttings since May 2009.
The introduction of the GRiD/Chartered Insurance Institute GR1 exam in July 2008 has represented a further notable triumph. 1,245 course books had been sold by the end of 2009, compared to only 250 originally anticipated, and the 989 people that had actually sat the exam by July 2009 was nearly ten times the expected number. They achieved a pass rate of 72.3%.
Katharine Moxham says: “The exam shows commitment from both providers and intermediaries as the industry has embraced the opportunity to gain formal qualifications. We operate in a regulated environment and this helps to demonstrate competence, and the course book is increasingly being seen as an industry reference manual.
“An initiative to raise industry service standards, which has been ongoing since October 2008, should also soon start to assume a higher profile. We are really hoping to achieve clarity and contract certainty, and a service charter has been drafted and is ready for debate. But, as always, the code will be strictly voluntary as we take great care to avoid being anti-competitive.”
Additionally, GRiD research undertaken during October 2009 – among 500 employers with up to 1,000 employees – has helped to shed valuable light on some of the main issues confronting group risk insurers and employers.
Lack of understanding emerged as the key barrier to providing group risk benefits, with 24% of respondents citing this as their reason for not investing in them. Low awareness and lack of response to regulatory change proved another major theme, with 36% having no idea what impact the Welfare Reform Act might have on their business, and a further 51% saying they had only a vague understanding.
“We are living in a period of intense regulatory change, with much of the government’s activity focused on the business space,” continues Moxham. “Despite the media interest in these issues, our survey suggests that businesses are poorly prepared to meet the changing regulatory demands and are potentially making themselves vulnerable as a result.
“Each of the issues highlighted by the research has major implications for businesses’ employee risk, health and wellbeing policies going forward. In many cases group risk benefits are ideally placed to support businesses in meeting these obligations, but this only works if awareness of the legislation – and of group risk benefits – increases. Clearly the job of communication has never been more important.”
OTHER MAIN FINDINGS FROM GRiD’S RESEARCH INCLUDE:
70% of employers have made no change to death in service provision following A-Day
59% have not decided on how they will deal with a death in service dependant’s pension provision following closure of their final salary scheme
75% of those closing a final salary scheme have made no provision for members who develop conditions that might lead to a prolonged period of sick leave – in fact, 25% admitted that they had completely overlooked this
68% hadn’t considered how the possibility of an extension to or removal of the default retirement age would affect their group income protection provision
25% were unaware that employees on sick leave can take any unused statutory holiday on return to work or receive payment in lieu if they leave the company
THE EAP RACE
Unum’s decision to include a “free” EAP in its group IP product with effect from January 2009 has sparked a trend among other major players to follow suit. Bupa introduced a similar facility in May 2009 and Canada Life in October 2009, while Legal & General had already offered an EAP at no extra cost on its group IP (and group life and critical illness cover) schemes since 1998 – although, unlike the other new versions, this charges extra if face-to-face counselling is required.
Zurich, Friends Provident and even Aviva – which expresses significant reservations about going down the “free” route – acknowledge that they could be following suit in due course.
Andrew Stephenson, group risk national sales manager at Aviva UK Health, says: “EAPs need a great amount of active promotion in order to enjoy a successful take-up and they can often seem less important when offered as a freebie, and therefore fail to get promoted sufficiently. Problems can also result from the fact that group IP quite often doesn’t cover the entire workforce. It may, for example, only cover pension scheme members.
“I would prefer to focus on achieving a keen premium rate on group IP on its own and do the EAP separately as a bolt-on so that the employer buys into its importance and promotes it sufficiently. But we are not ruling out going down the ‘free’ route and we are waiting to see what happens. If our current stance becomes a major stumbling block we will probably follow the crowd.”
Mike Blake, compliance director at national specialist intermediary PMI Health Group, expresses similar reservations about the “free” approach and reports that in a significant number of cases his clients have chosen to pay extra for a better quality standalone EAP with a specialist provider.
He says: “When all employees are not included in the IP scheme intermediaries either need to pay extra to extend the scheme’s EAP to cover everyone or not use it and pay for a better EAP. In some cases intermediaries are finding themselves analysing several free EAPs their client has available on IP, cash plan, private medical insurance and even employer’s liability insurance schemes. It can become a bit of a headache for employers as to which one to go with.”
EMPLOYER-FUNDED WELFARE – BUSINESSES SEND POLITICIANS A MESSAGE
GRiD (Group Risk Development) believes that there are a number of government incentives that could re-energise the market, writes David Sawers.
The trade body has carried out a survey of 500 UK businesses which suggests that more than a third (35%) are in favour of a state disability provision opt-out for employers with a group IP policy. Half of the respondents to the survey said that this would encourage them to look into providing group IP benefits for employees.
The research also highlights the value of group risk benefits to the nation’s workforce. A total of 45% of the sample said they offered employees financial support over and above statutory sick pay and 22% had a group IP policy in place. GRiD spokeswoman Katharine Moxham says that employers are beginning to “baulk” at handing over responsibility for important funding decisions – like sick pay provision – to central government.
“They think they could do a better job themselves,” Moxham says.
Moxham believes that it is important that politicians and policymakers get in tune with the sentiment of British businesses.
“We already know that implementing GIP has significantly reduced the UK’s protection gap,” she says. “So surely it’s in the government’s interest to encourage more employers to invest in this benefit? There’s certainly a strong argument for a reduction in national insurance [NI] as an incentive for offering a group IP scheme. And given the amount that employers potentially save the State in this area, perhaps there is even a case to be made for increasing NI contributions for employers that do not offer a group IP scheme – after all their employees will make far greater use of the State-provided employment support allowance.
“Broadly speaking, policymakers are in tune with the need to create a ‘supportive network’ to replace the spoon-fed nanny state. So let’s hope this means that self investment in protection will feature in party manifestos during the run up to this Spring’s election campaign.”