FOCUS ON FACTS
What is group income protection?
Group income protection pays a regular monthly benefit if staff are unable to work due to long-term sickness or disability. Standard schemes pay benefits until retirement date, but limited-term schemes pay for a maximum of
two to five years, or sometimes up to 10 years. Income protection can also include services to help with rehabilitation and to tackle absenteeism. It is also referred to as permanent health insurance (PHI) or income replacement.
What are the origins of group income protection?
Income protection, in one form or another, can be traced back to Holloway Plans, the first-ever income
protection policies offered in the 19th century. The group product that we now know date back to the 1950s or
the 1960s.
Where can employers get more information and advice on group income protection?
Industry body Group Risk Development (Grid) provides information and lists intermediaries at: www.grouprisk.org.uk. Information is also available here.
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NUTS AND BOLTS
What are the costs involved?
Full-blown group cover typically costs between 1% and 1.5% of gross payroll. Limited-term cover of two to five years can cost between one third and half of this.
What are the legal implications?
Employers must ensure the commitments they make in their contracts of employment are in line with the benefit delivered. They must also check that their stance on issues such as termination age and which sections of the
workforce are covered comply with employment law. Insurers can help employers comply with legal obligations at the claims stage, such as requirements to make ‘reasonable adjustments’ under the Equality Act 2010.
What are the tax issues?
Group income protection cover does not constitute a PllD liability for employees, but benefits which are paid monthly via the employer’s standard payroll system have income tax and national insurance (NI) deducted from them. Schemes are not subject to insurance premium tax (IPT) and, if offered to the majority of employees, are normally an allowable business expense.
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IN PRACTICE
What is the annual spend on group income protection?
According to Swiss Re’s latest Group watch report, in 2009 overall in-force premiums totalled £568 million. It is unlikely that this figure has increased significantly since.
Which providers have the biggest market share?
Unum has about 50% of the market, followed by Canada Life, with about 20%. Aviva, Legal and General, and Resolution (comprising Friends Life and Bupa Group Risk, under Bupa Health Assurance) all have shares between 6%-10%.
Which providers have increased their share the most over the past year?
Zurich Corporate Risk, which entered the market in February 2009, increased its share by over 300% and has written several schemes in excess of £100,000 premium income. Resolution has increased its share from about 5% to 9% after acquiring Bupa Group Risk.
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The government’s welfare reform programme has brought the importance of group income protection schemes into keen focus for many employers, says Edmund Tirbutt
Group income protection (GIP) gives employers an insurance mechanism to provide employees with a regular income if they are unable to work because of long-term sickness or disability.
Benefit payments start after an initial deferred period, typically six months, and normally continue until the claimant either recovers or reaches their intended retirement date, although lower-cost schemes that pay out for a limited term are also available. Staff who want to ease their way back into the workplace on a part-time basis can receive a partial benefit.
GIP schemes also provide a range of services that can help reduce absenteeism and boost employee wellness. For example, insurers are keen to intervene early to help rehabilitate staff back to work during the deferred period.
Many major providers also offer free employee assistance programmes (EAPs) and other wellness-related tools as add-ons to GIP schemes. Employers are increasingly appreciating these as they realise the implications of the government’s welfare reform programme.
Katharine Moxham, spokesperson for industry body Group Risk Development (Grid), says: “A series of ministerial announcements have indicated that employers will be expected to become increasingly involved in rehabilitating and accepting disabled people into the workplace. Employers are well equipped to do this with group income protection.”
A tougher state benefit system, involving harsher assessments and reduced pay-outs, should also see an increasing appreciation of the core insurance offering. Paul Avis, sales and marketing director at Canada Life, says: “There will come a time within the next 18 months when employers and employees both realise their perception of state benefits is largely an illusion and decide group income protection is a more urgent priority than other benefits.”
Receiving exemption from the removal of the default retirement age last January has given insurers new impetus after fearing that the costs of having to insure older workers could have resulted in many schemes being cancelled.
New business is scarce
Nevertheless, genuine new business remains scarce. Most insurers are preoccupied with hanging on to existing schemes and say their market share has remained broadly static during the past year. According to Swiss Re’s latest annual Group Watch report, published last year, premiums in force dropped by 12.5% in 2009 compared with 2008.
Provider numbers have contracted following Aegon’s departure from the market in June 2009 and Resolution’s acquisition of Bupa Group Risk (part of its acquisition of Bupa Health Assurance) last February. This will be brought under the Friends Life brand (formed from Friends Provident and Axa UK life businesses).
But the balance has been partially redressed by the entrance of Zurich Corporate Risk in February 2009. Group life and critical illness insurance provider Ellipse is also poised to enter the group income protection market this year, with its product currently in development.
Cost-conscious employers have shown increasing interest in the pay direct option, which enables claimants to be removed from the payroll while receiving income protection. This saves employers paying national insurance (NI), pension contributions and other benefits. David Dolding, head of consulting at Lorica Consulting, says 20% of clients have switched to a pay direct option at renewal.
Pay direct has also been made more attractive by European legislation that suggests employers could be liable for accrued holiday pay if an employee is on long-term sick leave. But lack of case law leaves the situation unclear, and most income protection providers are willing to cover the potential increased costs if requested. Exactly what knock-on effects providers will experience from UK pensions legislation also remains uncertain.
This month’s reduction in the pensions annual tax-free allowance from £255,000 to £50,000 could boost demand for income protection by increasing tax liabilities for many taking ill-health early-retirement pensions from defined benefit schemes. But wordings around who is exempt from this remain ambiguous.
Opinion is also divided on how demand for group income protection will be affected by the national employment savings trust (Nest). Some believe an employer preoccupation with pensions could adversely affect sales, while others feel it could create cross-selling opportunities.
A trend towards limited-term income protection schemes, which, according to Swiss Re, accounted for less than 7% of schemes in 2009, is considered likely. These schemes pay out for a pre-defined period, typically two or five years, although some will pay out for 10 years.
Andy Stephenson, group risk national sales manager at Aviva UK Health, says: “Switching to limited-term schemes can involve having to change the contract of employment, which can be very difficult.”
Premiums likely to rise
There is also agreement premiums will rise soon. Helene Gullen, commercial marketing manager at Unum, says: “Brokers I have spoken to believe rates will harden. There is anecdotal evidence it is already happening, but it is hard to prove.”
One major insurer is rumoured to be preparing to increase rates by 10% to 20%.
Another market move creating a buzz is the launch of Unum’s Select product in February, which offers the option of company-paid or voluntary cover, or a mixture of the two. This is one of the first mainstream launches of voluntary income protection in the UK and could help the market grow. Prior to this, Personal Group introduced its voluntary group income protection product, which is underwritten by UK insurers and available via salary sacrifice for employees.
Chris Ford, director of group risk at Jelf Employee Benefits, expects some other insurers to follow suit in the next couple of years.
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