Sam Barrett discusses the opportunities for growth and challenges on the horizon for the group risk market.
With strong sales figures for 2016 taking many in the group risk industry by surprise, it’s understandable that many are feeling optimistic. But, while there are plenty of opportunities for growth, a number of challenges lie ahead too.
For many the highlight of 2017 was the joint Department of Health and Department for Work and Pensions work, health and disability green paper, Improving Lives. Published towards the end of 2016, this put forward group income protection (GIP) as a means to help keep people in work.
A white paper is expected before the end of 2017, but Paul Avis, marketing director (group insurance) at Canada Life UK, is already upbeat about its contents. “It’s very positive,” he says. “The government’s welfare bill is £366bn a year, its third biggest expense after the NHS and pension, so it’s not surprising it’s looking for ways to reduce this. Delivering vocational rehabilitation through GIP could be the solution.”
While prospects for GIP may have stolen the limelight, other group risk products have also fared well in 2017. Katharine Moxham, spokesperson for Group Risk Development, says that sales of all products have been buoyed by the continued roll-out of pension automatic enrolment. “As it becomes the norm to offer a pension, more employers are looking at how they can differentiate their benefits package. A benefit such as group life is a low-cost way to do this,” she explains.
Pension automatic enrolment has helped in another way too. With more organisations introducing flexible benefits platforms to make pensions easier to administer, it makes sense to offer additional benefits either as part of a flex scheme or as voluntary benefits. “I expect to see sales of group critical illness insurance continue to grow on the back of flex. The numbers are still small but it’s a popular benefit,” Moxham adds.
Another area of growth is excepted group life, with its fortunes benefitting from the reduction in the pensions lifetime allowance from £1.8m to £1m over the last few years. While registered group life benefits count towards this allowance, excepted group life benefits don’t, so sales have rocketed.
While this is great news for the product, and those employees saved from busting the allowance, Avis has concerns. “Trustees need to be aware of the additional requirements they’re under and take appropriate tax and legal advice,” he says.
Although the sales figures for 2017 are likely to reveal growth in many areas of the group risk market, it’s also been a year for some divergence in pricing strategies. Wendy O’Callaghan, principal and head of large corporate consulting at JLT Employee Benefits, says there’s been a noticeable demarcation between providers. “There’s been talk of the market hardening for some time but while some insurers were taking a more long-term view and pushing through increases of around 10%, others were intent to grab market share by undercutting these prices,” she explains.
While this means that cost saving is still an option, O’Callaghan believes it also points to the fact that the market has stayed fairly static for many years. Indeed, while the number of employees covered may have grown, Swiss Re’s Group Watch 2017 shows that the number of GIP schemes has remained largely unchanged. “Growing the market remains a challenge,” she adds. “We’ve seen a small number of enquiries from virgin business but this lack of growth is the main reason insurers are fighting over market share.”
Rather than get caught up in this pricing battle, this has lead many consultants to focus much more on the value of group risk benefits. “Benefit spend has doubled for some employers since pensions automatic enrolment was introduced so we need to help them get more value for their overall spend,” explains Morag Livingston, head of group risk and wellbeing at Secondsight. “Redesigning group risk benefits is a good way to do this.”
As an example, rather than offer GIP that pays until state pension age, a limited payment term product will reduce an employer’s spend and may also be more appropriate. “No one expects a job for life so why should a company pay an employee forever if they’re unable to work long term?” adds Livingston. “An employer can reduce the premium by up to 50% by switching to a limited term product. One of my clients switched and was able to introduce a cash plan and critical illness insurance on the back of the savings.”
Added-value benefits can also help. These are becoming more commonplace with the latest crop including Aviva’s interactive wellbeing app and Unum’s cancer support service, Harley Street Concierge. “There are some great added-value benefits around,” adds Livingston. “Promoted properly these can increase the perceived value of an employer’s benefits without any additional spend.”
New year challenges
Many of these trends are set to continue into 2018, with GIP’s role in welfare reform and the need to get more value from the group risk spend likely to dominate the market. Changes in legislation will also bring new challenges.
In particular, April 2018 sees the removal of the salary sacrifice tax advantages from schemes that were already in place when the change was announced. This could stall the take-up of benefits as Nick Homer, head of market management for corporate risk at Zurich Life, explains: “Flex has historically been an area of growth but as some employers use the tax savings generated through salary sacrifice to fund these platforms it could make it less attractive. I don’t expect to see a huge change for existing schemes but it may deter employers from introducing flex.”
Group risk insurers also face challenges delivering benefits to smaller employers, especially where a small premium makes it unviable for a consultant to provide advice. “A lot of work is being done to highlight how cost effective these benefits are so I expect there to be a step change with technology in this space. This will make it easier for insurers and brokers to engage with SMEs,” explains Homer.
External factors are also likely to disrupt the market, in both positive and negative ways. Brexit is a perfect example of this. On the one hand, the battle for talent could push up the appeal of benefits while, on the other, economic pressures could put them out of more employers’ reach.
Similarly, pensions are also likely to influence the take-up of group risk benefits. Minimum contribution levels for automatic enrolment increase in April 2018, with employers paying in 2% of qualifying earnings, up from 1%, and employees paying in 2.4% instead of 0.8%. This could put pressure on other areas of benefit spend.
Likewise, any moves on the pensions lifetime allowance could further increase demand for excepted group life.
These pressures are likely to result in root and branch reviews of benefits according to O’Callaghan. “Employers will want to see that their group risk benefits are supporting the business and delivering value,” she explains. “This could lead to more promotion of added value benefits among employees.”
But, while there are potential challenges in 2018, it’s likely to be a positive year for group risk benefits. Increased focus on employee wellbeing, supported by many of the added value benefits now available, and the government’s promotion of GIP as a means to help people stay in work, is set to raise the profile and appeal of these benefits.