Group risk: How the market is changing

If you read nothing else, read this . . .

• Phasing out the default retirement age will have a negative impact on both employers and employees, because group risk products could become more expensive.
• The Equality Act 2010 could affect pricing in the group risk market because the cost of these products often changes depending on factors such as age and gender.
• Welfare reform is a positive step for employers and employees. It puts the onus on the employer to offer vocational rehabilitation and ensure an employee returns to work as soon as possible, even if it is in a different role.
• The 2012 pension reforms will pose challenges for the group risk market and could prompt a review of ill-health early retirement benefits.

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Legislation has been changing the landscape for group risk, and the market has a variety of requirements to fulfil, says Jennifer Paterson

The normally unchanging group risk market has been affected by a number of legislative developments in recent years. Welfare Reform Acts (2007 and 2009), the Equality Act 2010, pension reforms (past and forthcoming), the proposed removal of the default retirement age – and the arrival of a new coalition government – have all thrown up issues for employers that want to implement a group risk strategy.

Age-based pricing for insurances, in particular, has been throwing up some thorny issues. So in January 2010, the Government Equalities Office published a policy statement Equality Bill: Making it work – Ending age discrimination in services and public functions which stated that a tailored exemption would be drafted allowing age to be used where fair and reasonable, that age bands that keep prices down for consumers as a whole would be permitted, and providers would be permitted to apply age limits to their products where relevant to risks or costs.

Phasing out default retirement age

In the Queen’s speech on 25 May, the new government committed to phasing out the default retirement age (DRA), which, from a benefits point of view, is potentially bad news for both employers and staff. If employers cannot apply a lawful age at which they will cease to provide group risk benefits, the perks could become prohibitively expensive.

Industry body Group Risk Development (Grid) is lobbying the government to grant dispensation for group risk benefits. Spokeswoman Katherine Moxham says: “Grid is working hard to ensure the government understands these issues and we end up with a workable product at the end of the day.”

For example, life assurance products, which make a lump-sum payment to an employee’s family should they die while in an organisation’s service, will become more expensive, but only over a period of time. Jamie Winter, head of healthcare and risk consulting at Towers Watson, says: “There will be a gradual increase in cost. Most employers will bear that increase in cost and just monitor it over time.”

A change in the DRA is likely to have a far more dramatic impact on the cost of group income protection benefits, which provide a replacement salary if an employee is unable to work for more than 28 weeks. “In theory, if [the DRA] is removed entirely and if there is no dispensation given for group risk benefits, then that will make group income protection benefits unaffordable overnight because there will be no end date for a claim,” says Winter. “If that does happen, I think we will see some employers cancelling their income protection schemes on grounds of cost.”

Link upper age limit to state pension age

One answer industry members suggest is to link the upper age limit to the state pension age. Ron Wheatcroft, technical manager at Swiss Re, says: “State pension age goes up and the cover of age that employers are allowed to use would follow it. The state recognises there is a break point between benefits in work and in retirement, so why not apply the same sort of thinking?”

Another solution would be to underwrite group life assurance and group income protection benefits to age 70. But this would not be possible with critical illness insurance, which pays a tax-free lump sum to an employee if they suffer a critical or terminal illness, because the risks of developing such a condition increase after the age of 65.

Malcolm Small, senior adviser in pensions policy at the Institute of Directors and director of portfolio and retirement planning at the Tax Incentivised Savings Association, says: “Much beyond [age] 70 and, at the absolute latest, 75, you are really starting to get into the territory of individually underwriting the risk, which is clearly cumbersome and time-consuming. This is potentially bad news for employers as it means more administration and potentially bad news for the employee because there is a possibility they might not be covered for a period.”

So the industry continues to call for benefits to be exempt from age discrimination laws, particularly given the change to the DRA. Swiss Re’s Wheatcroft says: “If people do work beyond the DRA or it is abolished, then the employer would have to give an objective justification as to why they chose not to provide income protection benefits to all members of staff irrespective of age because, on the face of it, it is discriminatory.
Return to work

“Potentially, [employers] could have scheme members whose disability benefit is actually higher than the benefit they get when they want to take their pension. So the motivation to eventually return to work would not necessarily be there, but the incentive will be to remain within the scheme to try to take those benefits. What the industry needs is a solution that recognises there should be an exemption for group risk benefits in the workplace.”

Effects of the Equality Act

Another piece of legislation affecting the group risk market is the Equality Act, which received Royal Assent on 8 April this year. Under the legislation, employers will be required to review gender pay differences in their organisations, publish the results and provide for changes to the way individual claims are enforced. Its intent is to harmonise and, in some cases, extend existing discrimination law covering a variety of characteristics, such as age, disability, religion or belief, and sexual orientation.

Wojciech Dochan, head of commercial marketing at Unum, says: “I think there is going to be a lot of work around the legal aspect of ceasing group risk benefits at a specific age connected with the Act.”

The main area of group risk benefits affected by the Equality Act will be pricing. Chris Ford, director of group risk at Jelf Employee Benefits, says: “Insurance has been traditionally based on mortality statistics: men die earlier than women, women tend to be more sick than men. You cannot change that. If you try to bring in a pricing mechanism that says everyone is treated the same, what impact is that going to have on policy and pricing assumptions?”

The Equality Act will affect life assurance, income protection and critical illness insurance in different ways. John Russell Smith, client director at Lorica Consulting, says: “I do not think it is going to have a huge impact on life assurance because providers are fairly relaxed about people living longer and healthier, and employers would not agree to people working beyond the default retirement age if they did not think they were fit for the purpose of their role.”Income protection is a wholly different matter because there is no product to support the change in the Equality Act. I cannot imagine any providers will seek to offer open-ended incapacity cover to people beyond the current retirement age. I think there will have to be a complete rethink of the way these benefits are delivered.”

Critical illness cover

In terms of critical illness cover, having to equalise the cost across an entire workforce may distort total premiums for employers.

Jelf’s Ford adds: “The basic principle of insurance is being undermined by that legislation. It makes sense that someone who is young, fit and healthy should be able to buy insurance relatively cheaply and for someone who is older and predisposed to illness, it should cost more.”

Developments in welfare reform in the last couple of years have also put more onus on employers to provide vocational rehabilitation and support to enable employees to either remain in the workplace or return to work following a period of absence. For example, Welfare Reform Acts passed in 2007 and 2009 have impacted the group risk market with their aim of increasing the number of people judged fit to work in some capacity.

Russell Smith says the Equality Act is a hugely positive step. “It allows employers to engage more closely with occupational health providers and income protection insurers.”

There is hope in the market that welfare reform will jump-start the income protection industry. Jelf’s Ford says:

“The [income protection] product is not used by enough employers. Welfare reform places greater emphasis on an employer to encourage and get people back into the workplace.

“The rehabilitation vocational support that is available from most of the mainstream UK insurers within their income protection product would help them do that and provide other employee assistance programme support to the employer and employee.

“I think the challenge for the industry is to get the income protection policy back into the spotlight. What we need to do is almost bring it up as part of a solution to welfare reform.”

Problem of long-term absence

The group risk market is well placed to help employers offer vocational rehabilitation and ensure long-term absence does not become an escalating problem. Many income protection and some critical illness providers now include extra services, within the price of their product or for a fee. Most of these are aimed at enhancing employers’ healthcare provision, such as diagnostic tools, employee assistance programmes and services that enable staff to access treatment more quickly.

Moxham says: “I am not sure how much employers have really taken on board that much of the responsibility for vocational rehabilitation will actually fall on their shoulders. There has been a quiet revolution going on that a lot of employers are probably not well-versed on.”

Ford says there is no great compunction on employers to offer vocational rehabilitation, although the legislation serves as encouragement to do so. For example, the new fit-note system encourages employers to take a more rehabilitative approach by making changes to the workplace to help staff return to work if they are fit to do so.

“We think these are signposts towards a future where we end up with compulsory rehabilitation, and employers have to provide services,” says Ford. “I do not know if that is an EAP, occupational health or rehabilitation, but the government will put the onus on employers to rehabilitate people.”

Pensions legislation

Pensions legislation is also affecting the group risk industry. For example, the introduction of the national employment savings trust (Nest) by 2012 could prompt a review of ill-health early retirement benefits where these are offered to staff in place of existing more traditional schemes. Dochan says: “In the old days, when employers had DB pension schemes, people went into early retirement and were funded by the pension fund. That is not available any longer. There needs to be some provision for people who, as they start to work longer, are going to have more health problems.”

Compulsory auto-enrolment into a pension scheme will also pose challenges for the market, says Winter. “There are many group risk schemes where eligibility is linked to membership of a pension scheme. If auto-enrolment comes in and suddenly take-up in a pension scheme leaps from, say, 50% to nearly 100%, the organisation will have doubled the cost of its group risk scheme overnight. Employers are, presumably, going to want to react to that in some way and they will be looking to redesign the benefits so they remain affordable for everyone.”

The 2012 pension reforms will also bring into the pensions environment staff who have never saved for retirement before. Wheatcroft says: “The question the industry needs to look at is: is there a way simple group risk products might fit alongside Nest? There is plenty of scope to do things there.”

Of more immediate concern is the state of the economy, which has resulted in a very competitive group risk marketplace. “This has been characterised by more frequent rate reviews, higher fee cover levels and falling premiums,” says Moxham. “The economic difficulties we are facing have brought employers to demand lower operating costs.”

In the months and years to come, employers need to keep their eyes open to both new opportunities and legal pitfalls.

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Issues affecting group risk

Age discrimination

On 27 January 2010, the Government Equalities Office published its policy statement following the consultation on ending age discrimination in services and public functions, including allowing providers to apply age limits to their products where relevant to risks or costs.

Equality Act 2010

The Act received Royal Assent on 8 April. Its intent is to harmonise and, in some cases, extend existing discrimination laws covering a variety of protected characteristics, such as age, disability, religion or belief, and sexual orientation. It includes a requirement for employers to review gender pay differences within their organisation, publish the result and provide for changes to the way in which individual claims are enforced.

Welfare Reform Acts

The Welfare Reform Acts of 2007 and 2009 introduced measures such as a personal capability assessment alongside a new employment and support allowance to assess an individual’s entitlement to state benefits and the possible support needed to get them back into the workplace. The legislation aims to place greater responsibility on employers to provide vocational rehabilitation and support to enable employees to stay in the workplace.

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Group risk products

Life assurance

A death-in-service benefit that provides a lump sum for an employee’s family should that employee die while in an organisation’s service.

Critical illness insurance

A tax-free lump sum which is paid to an employee if they should suffer a critical or terminal illness, or have one of the operations covered by the policy.

Income protection

Provides a replacement salary if someone is unable to work for 28 weeks or more. Before that period, statutory sick pay rates apply. Many providers offer this salary replacement for set periods, such as two or five years, although traditionally it applies until retirement.

Rehabilitation services

These provide counselling and support services to help speed up employees’ recovery and their return to work.

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