Is the rise in group protection cover more apparent than real? Helen Swire looks at what has been going on in the sector, and what 2017 may bring
The overall group risk industry picture from the past 12 months is nothing if not positive. More than 11.5 million people are now covered by group risk schemes, according to Swiss Re’s Group Watch 2016 (published in April) – an increase of 300,000 members in 2015-16, with growth in in-force death benefits (5.2%), critical illness schemes (11.4%) and long-term disability income benefits (4.2%).
So why are industry experts saying that some of these results are disappointing, while others are describing the market as ‘frustrating’ and ‘predictable’?
Paul Avis, marketing director at Canada Life, says: “The group risk market has gone extraordinarily well through periods of austerity and recession. In terms of premiums and employee cover, the industry cannot be happier. However, the lack of new-to-market employees is a constant frustration to insurers – especially in the war for talent, where the lack of market penetration should provide a lot of opportunities for employers to differentiate themselves from their competitors.”
Nonetheless, several factors have influenced the increase in overall employees covered by schemes – as well as the changing trends over the past year.
Representatives of leading industry insurers, including Canada Life, Aviva, Ellipse, Legal & General and the group risk body GRiD (Group Risk Development) have all cited pensions auto-enrolment as the major driver of growth in the market.
It can be a benefit differentiator for many employers, as Chris Morgan, distributor and partnerships manager at Ellipse, points out: “Now that everyone needs to be enrolled, larger companies have taken the approach of also providing everyone with group life cover.”
“Companies have taken the opportunity to take auto-enrolment further, and have more pension scheme members covered for group life,” agrees Lee Lovett, chairman of GRiD. “A lot of companies who haven’t had group life at all are now starting to invest in new schemes and put cover in place.”
The reduction in the lifetime allowance from £1.25m to £1m is driving a move in group life registered schemes to excepted schemes, which provide a lump sum pay-out not included towards your lifetime allowance. Although at face value this seems an obvious shift, employers need to be aware of entry and periodic tax charges and take advice accordingly.
“A noticeable trend is that an increasing proportion of schemes offer benefits for a fixed duration rather than up to retirement age, and the main driver for that is cost,” says Lovett, while Avis also notes a reduction in the volume of death-in-service pension schemes due to UK longevity.
Employment and Support Allowance
Despite cost being a key influence on the market, the reduction of the ESA state benefit by 30% in 2017 is steering employers towards group income protection. Lovett says: “The market’s making great progress, but it should be an absolute cornerstone for employers.”
The smallest segment of the market has also proved the fastest growing over the past year. “Critical illness is the most exciting in terms of growth – the star in the product portfolio,” says Avis. The lump sum benefit is driving choice, with 60–65% of the growth in critical illness coming from flexible benefit schemes.”
What does 2017 hold?
As auto-enrolment reaches the smallest companies, there is an opportunity to spread the group risk message beyond the large corporates.
Morgan says: “There is clearly potential. If we were to capture 5% of employers’ auto-enrolling in 2016 and 2017 and encourage them to invest in group risk products, we could transform the market.”
The challenge will be penetrating the market effectively. “It’s about getting more SMEs to introduce something,” adds MartinuNoone, managing director, Legal & General. “The majority have nothing in place for absence, income replacement, or dependents’ cover should somebody die in service. We’re trying to increase our online self-service capabilities, so SMEs can get more employees on the system in a way that’s automatic and simple for them.”
As well as piggy-backing auto-enrolment to introduce group risk products, employers are increasingly thinking in terms of differentiating their benefits – that is to say, offering more than just the pension that everyone will have staged into by 2018.
The absence picture
It really is in the hands of the smaller employers to take the group income protection and critical illness market into new realms. Morgan points out that smaller employers looking at policies in the next year will want to manage absence. He says: “Providers will need to supply products that help businesses to manage absence on an everyday basis as well as those that deal with serious long-term absence.”
The technology sitting behind many income protection schemes is providing employers with a really clear return-on-investment picture which may encourage new employers into the market in 2017. As flex and online benefit schemes become more common, group critical illness products offered this way will continue to grow.
Government versus employer
Although salary sacrifice and tax-efficient benefits are subject to governmental review, the Association of British Insurers is looking at the feasibility of providing some financial or tax advantages for taking out income protection cover. It wouldn’t all be bad news for the government if a tax advantage were to be offered.
“The government wants to reduce welfare benefits to people for being off sick,” says Lovett. “So the need for private cover is going to increase, and should act as a positive motivator to employers to think about putting cover in place.”
Challenges to overcome
So in simple terms, the group risk market has experienced growth – and anticipates not just more growth, but also innovation and new custom into next year.
But of course, it is not quite so simple to expect this to flood in on the back of SME auto-enrolment. Legal & General’s Noone says: “Employers love the idea of a simple policy, but are concerned about the challenges of affordability, and think it’s more complex and costly than the reality.”
Employees, too, are failing to understand the benefit – even when research shows that for many, when catastrophe hits, their savings would only leave them a month from the breadline.
The group risk body, GRiD, is fully behind increased communication and awareness into 2017.
“Employees just don’t know what cover they have or who provides it,” says Lovett. “Lots of products have additional support, helplines, return-to-work help and so on, and people have an even lower awareness of these things: it’s a massive challenge to make people aware of what they have in place. That would help people to appreciate their company and what they provide a lot more.”