Any IFA taking a hard look at the group critical illness market (GCI) could be forgiven for calling for a microscope. Premium income for this minnow of the protection market came to little more than £2 million last year, compared to the hundreds of millions spent on death-in-service benefits or group income protection.
The Association of British Insurers does not even bother to keep figures on sales of group critical illness.
But don’t stop reading.
Some industry experts predict that GCI could soon see some of the impressive growth in sales experienced by individual critical illness cover in recent years. They also argue that there are opportunities for IFAs, because GCI, as with its individual counterpart,is easy to understand, simple to explain, and therefore popular with clients. GCI has a longer pedigree than you may think. The first policies were introduced at the start of the 1990s, just in time for the recession, when companies were more concerned about laying staff off than giving them new perks. But there are hopes that it can now overcome its baptism of fire and become a major player.
“This is a huge market for IFAs but one they haven’t promoted to any large extent,” says IFA Brian Lentz, of Portfolio Insurance Consultancy and Mortgage Brokers, of Hatfield, Hertfordshire.
“One reason is that there is limited information on what is available and who provides it. Another is that companies became used to tightening their belts during the recession and are not attuned to offering staff benefits.”
Lentz points out that even when companies are receptive, they tend either to look at death-in-service first, or to favour the traditional option of private medical insurance.
But, he believes that if they are very switched on, companies do realise that GCI has a number of advantages over the better known group income protection.
“The problem with income protection is that it is directly income related. Critical illness is a lump sum benefit, which means there does not have to be this link, and this can help keep the cost to the employer down.”
He adds it is also a good way of retaining staff, and can also have advantages over a pension scheme, although he admits it is often the pension scheme that attracts employees in the first place.
If staff leave, they can take their pension with them. But if they are facing health problems they may not wish to relinquish their illness cover. Another advantage for employers, Lentz says, is that GCI makes the task of releasing staff on health grounds less painful if that person is leaving with a cash sum courtesy of the employer’s insurance policy. It is made even easier to handle as companies can offset their premiums against corporation tax, he says. However, GCI does generate a benefit in kind tax charge for the employee.
There are currently only a handful of insurers offering GCI. These include Swiss Life, which claims to be the largest player with 44% of the market, Guardian Employee Benefits, Royal & Sun Alliance and Legal & General.
“GCI is still in its infancy,” points out Lentz. “Product providers don’t make a big play of it, and those who don’t offer it don’t appear inclined to jump on the bandwagon. The market needs more providers to enter before it really takes off.”
He argues that growth also depends on IFAs changing their attitudes and educating themselves about GCI: “Critical illness is sold best by IFAs but hardest by direct sales. However, I would prefer a company to buy it direct rather than have no group cover at all, because the more people who purchase it the faster the market will grow.”
He also argues that GCI could be a good springboard into the corporate market for IFAs who currently only deal with individual business: “If an IFA is looking to expand their business, they don’t have to have a client bank full of employers. If they are seeing an employee they can ask whether their company offers critical illness, and if they don’t seek their permission to approach their employer and discuss the ramifications of critical illness.
“They can then point out that it is cheaper than people think,” Lentz adds.
Peter Anderson, market manager for group risk business at Royal & Sun Alliance, says GCI premiums on a scheme for 20 employees would average at around £50 a year for £25,000 benefit. This is cheaper than group income protection, although he says it is around twice the cost of £25,000 death-in-service benefit.
When you consider that ABI figures show that working adults are 10 times more likely to have to stop work due to critical illness than die before age 65, GCI looks somewhat more appealing. Anderson explains: “Some advisers have fallen into the trap of linking critical illness with life cover because both involve lump sums. But while four times salary life cover is fair enough, it is not a justified level for GC benefit.
But he asks: “If an employee had a heart attack and was then slipped four times their salary, what would happen the day after leaving hospital?” He believes that they might not come back to work – which is not really what the employer is seeking to achieve. A figure such as £25,000 is an attractive sum, but not so attractive that the employee would not be tempted to return to work.
Different lump sums can be offered depending on the seniority and/or importance of staff, and the industry concerned.
Royal & Sun Alliance has one scheme with a London vehicle parts manufacturer where directors are covered to three times salary, senior staff to two times and others one-and a-half times salary. The 35 equity partners of a firm of solicitors have taken out higher benefits of £100,000 each, with £20,000 spouse cover and £15,000 child cover.
GCI may prove more appealing to some employers than others. Employees with no financial dependents and no family to support them if they have health problems, may find GCI more attractive than group life.
“If you have a company with a lot of single people it may prove a more attractive benefit than, say, death benefit. It may also prove popular in emerging industries where skills are scarce,” says Anderson.
Peter Fenner, market consultant at Swiss Life, says GCI has appeal to companies wanting to introduce health protection benefits without stretching to the expense of income protection. He says the opportunities for IFAs are growing. “One interesting thing about GCI compared to group life and income protection is that it is probably going to be developed by different types of IFAs. The larger benefits consultancies who are already heavily involved don’t tend to focus on critical illness. It’s often the smaller brokers who move into GCI because they haven’t got preconceptions or existing systems to untangle and re-establish,” says Fenner.
“Critical illness is a less technical area than some areas. For example group life is covered by pensions legislation and IFAs have to know the ins and outs of Inland Revenue limits of what they can provide,” he says.
“IFAs should already understand critical policies, although there are some key differences. The range of benefits under group policies tend to be smaller than under individual.”
Fenner explains: “We use pre-existing conditions rather than underwriting everybody, similar to PMI, and there may also be a moratorium period applied, say to people with high blood pressure. This keeps the administration simpler. Individual contracts tend to be fully underwritten.”
Many GCI providers do now provide the option of adding permanent total disability benefit at extra cost to cover some excluded conditions.
Fenner predicts an increase in policies under voluntary arrangements, where the company sets up the scheme and negotiates cheaper group rates, but the employee pays the premiums.
Rebecca White, group risk marketing manager for Legal & General, expects GCI to grow alongside the popularity of flexible benefits packages: “This is where the employer offers a range of products and allows employees to choose. They may have a set pot of money and choose things like dental care, PMI, company cars, and, since critical illness has proved successful individually, I would expect it to prove popular.”
She adds: “IFAs will play a key role, because there are differences between providers. The IFA helps the employer get value for money by trawling the market and recommending the most suitable product.”
David Turner, product manager for Guardian Employer Benefits, which launched GCI in May 1995, says it is increasingly important for IFAs to tailor corporate protection packages round the particular requirements of the client.
“Many employers shy away from traditional long-term PHI. They find it inappropriate to offer a benefit for life when they are not offering a job for life. In the blue collar market, if you can obtain PHI cover at all it is either extensive or comes with a weaker definition of disability. Group critical allows employers to afford back-up in this situation.