It looks like 1999 could be a tough year for insurers and brokers working in the group income protection market. The sector is doubly vulnerable to any prolonged economic downturn. Insurers and brokers find it harder to sell the cover to employers, who become even more unwilling to spend money on employee benefits they deem a luxury rather than a business essential. At the same time, recession is proven to lead to an increase in income protection claims as the stress bites, adding pressure to premium costs at exactly the wrong time.
Yet, against this gloomy outlook, the group income protection market is going through a quiet revolution. It is redefining both the product that it offers and the way it handles claims. Both should help to make insurance more affordable to companies. Providers hope that this will give them at least a fighting chance of maintaining some growth in business through economic turbulence.
The market for group income protection is not huge. Although between 25% and 30% of employers buy some form of income protection, they frequently restrict it to more senior staff. In all, an estimated 6-8% of the working population are covered by group schemes, roughly the same numbers as have individual income protection cover. Industrywide total premium income for group schemes was £260 million in 1996, according to reassurer ERC Frankona.
Larger employers are more likely to offer some form of income protection-style benefit than smaller companies, although this may not always be insured. Insurers market schemes for five or more employees, and the majority of companies on their books have less than 100 staff.
The top five insurers have around 70% of the market; UNUM is by far the largest player (£72 million of premium income in 1996), followed by Royal & Sun Alliance, Swiss Life, Sun Life of Canada and Legal & General.
Other companies who are serious contenders in the sector include Canada Life, Generali, Guardian Financial Services, Norwich Union and Zurich Life.
Rebecca White is group risk and marketing manager at Legal & General. “Sales of group income protection have not really taken off, and market penetration remains relatively low,” she says. “This is despite a number of good marketing opportunities over the past five years, such as the changes in state benefits.
“One of the problem issues remains the perceived cost. Group income protection can cost between 1% and 2% of a company’s payroll. In these competitive times, some employers feel they have to watch every penny.”
UNUM too feels that the perceived cost of cover has been a brake on growth. Spokesman Andrew Smith says the insurer has commissioned research this autumn into how buyers see the product. “We have a feeling that employers still think that group income protection is more expensive than it really is,” he says. “If the research bears this out we’ll have to do something about that perception.”
He too talks of “steady rather than spectacular” growth in the market. Some of the old rules in income protection have been rewritten over the past five years. Blue collar workers were perceived as much poorer risks than white collar staff. “That gap has narrowed dramatically as the office has become a tougher place,” says White. “Companies have cut back and downsized their workforce. The pressures on those who remain increase. Employees are generally fearful about their jobs and that all leads to an increase in claims linked to stress or other mental problems.”
Smith says that over the past five years, UNUM has seen a 90% increase in claims for mental illnesses, largely stress. Claims for chronic fatigue syndrome, perhaps better known as ME, are up 45%. And claims for bad backs or repetitive strain injury problems, both linked to long periods at office desks, are up 38%. Ironically, claims linked to heart attacks have dipped by a third.
A number of companies have been trying to evolve.the traditional income protection product to make it more attractive and more affordable to buyers.
One way of making the sale easier might be to simplify cover. The level of insurance is often expressed as 75% of salary minus any State benefit. White argues that it is actually easier for employers and employees to understand a level benefit of 50% of salary, an option which Legal & General has been pressing over the past year.
Another way of getting a company started on income protection is to sell a limited term policy. Historically, income protection pays an income up to a person’s normal retirement date, possible 30 or 40 years hence. But the labour market has become much more flexible and the notion of a job for life is all but gone. So employers and employees are more willing to accept limiting the term of benefit under the policy. Common limits are two, three or five years of claim. White says: “Employers take the view that something is better than nothing. An income protection scheme with a two year limit of benefit will cost roughly half as much as one which pays out to retirement.”
Tinkering with the basic product alone, however, is unlikely to give group income protection a huge boost. Insurers are considering more radical change.
John Ritchie, marketing manager at Swiss Life, says the most significant developments in the future will focus on how claims are handled. Traditionally, insurers have become active with a claim when benefits have started to be paid. With deferred periods, this can be three, six or even 12 months after an absence from work has started.
Ritchie says: “Getting involved at 26 weeks is too late. The relationships between the individual and the employer and between the individual and their GP have already changed. Attitudes have become fixed on all sides.”
What Swiss Life and others are pushing for is a more flexible approach to claims. This will mean brokers and insurers taking a proactive role, managing the claim from start to finish and being willing to fork out cash to pay for treatment or rehabilitation months before they would have traditionally been involved in a claim (see box).
If insurers get this right, there may even be a market in selling their claims management services to bigger companies who self-insure their income protection risks.
That is certainly the aim of Martin Harvey, a founder of Working Partners, based in Tonbridge, Kent. Working Partners is both an intermediary and a consultancy, specialising in designing integrated medical management schemes for companies. He deliberately blurs the boundaries between different types of insurance products. “We go in there as both doctors and employee benefit consultants,” says Harvey, “offering advice on health screening, occupational health, PMI and income protection.” There are also links to employers’ liability insurance.
He says: “The resistance in the market is that different insurance contracts are frequently looked after by different departments. The insurance manager will handle employers’ liability cover, the pensions specialist frequently buys income protection and the human resources department may have the job of sorting out PMI. We suggest firms set up a healthcare strategy committee to get people working together. It helps them realise that by running effective medical screening and assistance programs they can cut claims and premiums across all these types of insurance and reduce employee absence.”
Harvey says that an increasing number of insurers are willing to work with him. “From the employer’s point of view, income protection can still appear an expensive proposition. Insurers have been struggling to expand in the corporate sector and I think this is one reason why they are rushing to embrace active claims management. If it brings down costs, it should make the product an easier sell.”
But in the longer term, if this kind of integrated healthcare becomes the norm, as it is in the US, there are questions about whether group income protection will survive as a stand-alone product. Certainly, for larger employers, it may in time disappear into a general pool of spending on employee healthcare and support.