Eleven million UK employees were covered by group risk insurance at the end of 2013 – 300,000 more than were covered at the end of 2012, according to Swiss Re’s Group watch 2014 report , which was published in April.
If you read nothing else, read this …
- Legislative changes in recent years have simplified group risk benefits provision.
- Industry trends, such as lump-sum payouts for life assurance, are reducing employers’ costs.
- Group income protection is more than just a disability benefit.
But growth in the provision of group risk benefits must be coupled with employers’ and employees’ comprehension of their merits.
Here, Employee Benefits lists, and debunks, the top six misconceptions and myths about group risk benefits.
1. Group risk benefits are too complex
Legislative developments in recent years have simplified group risk products. Jamie Winter, senior consultant in Towers Watson’s health and group benefits practice, says: “You can argue that there is some complexity in the underlying terms and conditions, but that would be true of any insurance policy. We have definitely seen a trend in recent years of more simplified benefit designs.”
For example, life assurance benefits are now commonly provided as a single lump sum rather than a lump sum plus a death-in-service pension.
“The trend now is to replace the old lump sum plus death-in-service pension design with a core lump sum plus additional lump sum design,” says Winter. “The latter would still provide the core lump sum in all death cases, and then an additional lump sum would also be payable if there was a qualifying dependant at the date of death. This is a much simpler design to communicate to employees.”
The Welfare Reform Acts of 2007 and 2009 have also helped to simplify group risk benefits. The government has tightened the medical criteria used for state benefit claims applications and some of the benefits available may be time-limited. Therefore, far fewer people are receiving state incapacity benefits and, if they do, the benefits’ value is lower in real terms and uncertain in duration.
Winter adds: “Given this, employees are starting to question why a fixed deduction is made from their group income protection [Gip] benefit calculation when the likelihood of receiving this benefit is so small. The reaction to this has therefore been for employers to start to remove the offset for state incapacity benefits from the Gip design.”
It has therefore become much more common for employees to receive a fixed percentage of salary at, say, 50% or 70%, if they became long-term disabled.
Chris Rofe, vice-president of employee benefits at Lockton Benefits, says: “If someone doesn’t understand state benefits and the assessments that are going into state benefits, then they should remove that caveat altogether and just go into a flat percentage of salary.”
2. Group risk benefits are too expensive
The UK group risk market remains competitive, but the move towards lump-sum life assurance actually means that costs are going down.
Winter explains: “Traditionally, four-times salary as a lump sum might typically cost an employer 0.5% of payroll. We now regularly see rates much lower than that, even at 0.25% of payroll. These are increasingly cheap.”
The cost of Gip products is also falling as more employers embrace limited-term options. “Typically, a five-year limited-term scheme would cost around 30% less than a traditional full-term scheme,” says Winter.
There are also added-value benefits on offer with most Gip products, saving employers the time and money involved in sourcing multiple providers.
Nick Cosh, head of group risk sales at PMI Health Group, says: “Some contracts now have sick-pay insurance, which kicks in at four weeks. The employer can insure an element of its own sick pay and still get the ancillary benefits of the rehabilitation services and employee assistance programme, which go hand-in-hand with Gip contracts.”
Employers can also be more cost-efficient by offering group risk products as part of a flexible benefits scheme. Here, they offer staff access to a certain level of cover as a core benefit and then allow them to flex up for additional cover or to include a family member.
The Benefits Research 2014, published by Employee Benefits in May, found that 15% of respondents offered critical illness insurance via a flex scheme, while 10% offered life assurance and 7% offered group income protection in this way.
3. Group risk benefits are not relevant to all employees
Group risk benefits are often seen as being better suited to certain age demographics, rather than an entire workforce. But the reality is, with state benefits being withdrawn and employees living and working longer, group risk benefits have never been more relevant to all staff.
Towers Watson’s Winter says: “The state is withdrawing from supporting people who are long-term disabled. State incapacity benefits are going away and are being replaced by means-tested and jobseeker-type benefits, so it is more important than ever that employers consider providing a Gip benefit to their employees.”
Cosh believes younger staff are becoming the most important demographic to insure. “They are the most cost-effective and a large proportion have no savings,” he says.
“When you’re younger, you haven’t amassed assets. If something were to happen that removes your income, then your options are limited, because what are you going to do for the rest of your working career if you can’t work?”
4. Group income protection is just a disability benefit
There is an assumption that a Gip product is just a disability benefit, designed as a continuation of an employee’s salary when they have a long-term illness or disability.
But policies’ increased focus on vocational rehabilitation and return-to-work services debunks that myth.
“In an environment where limited-term Gip products are growing in popularity, we are finding that employees are not communicating them as a long-term salary continuance or disability benefit, but as a rehabilitation period,” says Winter.
“Employers are saying, ’we will support you financially on the payroll and we will throw lots of rehabilitation at you during that limited-term period to do our best to get you back to work’. It’s not a disability benefit any more, it’s a rehabilitation benefit, and that’s equally important.”
5. Group risk benefits mean an employer is stuck caring for an employee for an indefinite period
PMI Health Group’s Cosh says some employers are concerned that offering group risk benefits to employees means they will be stuck on the payroll for an additional five, 10 or 15 years. However, the prominence of pay-direct Gip means that employers can provide the benefit and manage their employee headcount.
“Normally, the employer puts GIP through the pay-as-you-earn system while the employee is off sick,” says Cosh. “If the employer wants to manage headcount, because perhaps that employee is not coming back to work, it has to get agreement from the insurer that the benefit can continue, otherwise it could fall foul of employment law issues under the Disability Discrimination Act.”
Pay-direct Gip formalises the arrangement, so the insurer can take over the claim from the employer after a set period. Cosh adds: “It means the benefit stays in force and still allows the employer to manage headcount and be compliant with disability discrimination.”
6. Group risk insurers try to avoid paying claims
One of the more negative views of the group risk industry is that insurance firms try to avoid paying claims.
In reality, the industry is becoming much more transparent. Group Risk Development research, published in May, showed that the industry paid out £1.24 billion in claims in 2014.
Winter says: “It’s a bit of a myth that insurers, both in life and in disability benefits, are seeking ways not to pay claims. That is definitely not the case. They are more transparent and they liaise better with employers, trustee bodies, occupational health specialists and HR, and indeed the employees themselves, in terms of group risk benefits.”
For employees to fully appreciate the group risk benefits provided by their employer, it is important that the benefits are well understood, both by the employer and the employee, and well communicated. This could go a long way to dispelling the myths and misconceptions associated with group risk.