There are a host of reasons why employers look to re-broker group risk benefits, says Edmund Tirbutt
Insurers have issued so many statements about the need to review group life and health cover arrangements of late that employers could be forgiven for assuming that they should be undergoing a re-broking exercise every five minutes. Most calls to action have centred around pensions simplification legislation and the Employment Equality (Age) Regulations, both introduced in 2006, and changes to the Welfare Reform Act 2007 due to come into effect this October, which will result in claimants for the new employment and support allowance (ESA) undergoing an assessment period of up to 13 weeks following 28 weeks of receiving statutory sick pay.
In practice, however, there are few cover changes relevant to these pieces of legislation that can’t wait until regular review meetings at the end of rate guarantee periods, which typically take place annually for group private medical insurance (PMI) and every two years for group risk products, such as income protection, life assurance and critical illness cover. When mid-term re-broking does take place it tends to be driven more by price considerations.
Some, but by no means all, insurers point to a trend towards annual mid-term re-broking carried out by consultants on larger group risk schemes, where even a half a percentage point premium saving might justify the fees involved. But for smaller schemes this may not be cost-effective.
There is also a trend for newer benefits consultants to offer competitors’ clients a free cover review as a way of getting their foot in the door and trying to prove they can potentially offer a better value service. Stuart Gray, managing director of Portus Consulting, says: In four-out-of-five cases, when we offer free reviews, we obtain cost savings, [which] are typically in the region of 10% to 15%.”
Mid-term re-broking can also occur in response to an acquisition, merger or other restructure, or if an employer has a particular complaint against an insurer, such as disillusionment with its service standards or with its refusal to pay valid claims. The credit crunch has so far not led to a panic demand from employers for cost-cutting reviews say industry experts. Although some do not rule out this happening in a few months’ time, others say the economic slowdown could actually result in less re-broking if employers try to keep intermediaries’ fees to a minimum.
Most re-broking, therefore, continues to be confined to the end of the rate guarantee period. Intermediaries typically discuss the current underwriter’s renewal terms with clients around a month before the renewal date and indicate whether it is worth incurring the costs of a market review. With group PMI, the vast majority of schemes normally elect to have a review, but with group risk benefits a significant number of employers still forsake the opportunity. John Sansome, practice manager, employee benefits division at Towry Law, says: “We probably advise 60% to 70% of group risk clients to undergo a re-broking exercise at renewal, which is slightly higher than five years ago. The increase reflects the fact that there have been new entrants to the market and that traditional players have been raising their games by bolting on added-value features and coming up with product differentiators.”
Even if an employer is reluctant to switch away from its current insurer, carrying out a market review can still be used as a tool to try to secure reduced premiums to match prices quoted elsewhere. Bob Free, national business development manager at Canada Life, says: “During re-broking, we are coming under quite a lot of pressure from brokers trying to achieve as keen a price as possible, and a couple of other insurers seem to be determined to hang on to business at virtually any price at renewal. This started happening at the end of last year and marks a notable change of approach as there seems to be an acknowledgement throughout the market that it is more profitable to retain existing business than to put new business on the books.”
As with mid-term re-broking, price is a bigger driver than changes in cover, plan design or addressing grievances. Research carried out by Mercer on PMI among its health and benefits clients in 2006, found 60% said re-broking was about re-negotiating on price.
Nevertheless, cover changes can still be an issue. Those wishing to trim costs at annual reviews of PMI schemes, for example, may decide to take an excess or to cut back on psychiatric cover or maternity cover. For both PMI and group risk products, a re-broking review could provide an opportunity for employers that are thinking of allowing staff to work past the default retirement age of 65 years, as set out in the 2006 age discrimination regulations, to extend their cover to the relevant new maximum retirement age.
For group life assurance benefits, meanwhile, employers may decide to take advantage of the A-Day changes and opt for a lump sum of more than four-times’ salary at the expense of a dependant’s pension, while for group income protection they may decide to take advantage of a new trend for insurers not to insist on state benefit entitlements being deducted from scheme benefit payments.
Employers may also wish to consider changing the terms of their income protection scheme to one with a 41-week deferred period to reflect the new state benefit structure under the Welfare Reform Act 2007. Some insurers are expected to offer this option from October, but others have yet to make a decision. Steve Browning, group protection product manager at Friends Provident, says: “We are getting requests for 41-week deferred periods but we are still deciding whether to offer them, as our understanding is the assessment period [for ESA] could take less than 13 weeks. We cannot understand why people are asking for the 41-week option. It seems a bit of a knee-jerk reaction but it could be driven by employers’ needs to cut costs.”
Another possible move for employers wishing to reduce income protection costs would be to switch from a scheme that pays out benefits until retirement age to one that pays out for only a limited period of between two and five years. But this option continues to be the subject of far more talk than action. Implementing such a major change may involve having to consult with the workforce to change their contracts of employment.
Employers may feel it is more practical to consult on a range of changes together rather than on one in isolation. This may enable them to combat any ill will engendered by cost-saving measures by including sweeteners, such as the ability to obtain cover via a flexible benefits scheme. The next major catalyst, therefore, may be the introduction of planned pensions changes in 2012. Until then re-broking may continue to consist of little more than tinkering at the edges.
The impact of the Welfare Reform Act 2007
Perhaps one of the biggest myths currently surrounding re-broking is the idea that the changes to state incapacity provision under the Welfare Reform Act 2007 somehow require employers to take immediate action. Paul White, senior consultant at Aon Consulting, says: “It has been a smokescreen. The industry has been saying that you must do something but in fact you have to do nothing, unless you actually want to. You may, for example, decide that you want to offer more sickness cover to compensate for the more restricted availability of state benefits but it can wait until the biannual rate review.” The forthcoming introduction of the Act, however, has provided consultants with the opportunity to work to engage client’s interest in keeping them up to date with developments.
Paul Ashcroft, principal at Mercer Health and Benefits, says: “With Welfare Reform, we’ve been fairly clear that there is no need to do anything just yet. After explaining the options [to clients in] February the feedback we got is that most had decided to do nothing, and a modest number intended to make limited changes to terms at their next review.”
Tullett Prebon reviews annually
Wholesale financial markets intermediary Tullett Prebon has re-broked its income protection scheme annually since 2004. It began using Jelf Group for the exercise last year.†
Debbie Lamb, benefits consultant, says: “Income protection is a developing market and I am always looking to see if there is a better deal available. If something more attractive appears I’ll switch.”†
So far, the firm has remained with Unum, although its scheme has undergone some changes in structure following a merger in 2004 which left Tullett Prebon with two schemes with Unum. One paid claims until retirement and the other for five years. In May 2006, these were replaced by a single plan that pays out for only two years. “After the merger, we focused on actively managing sickness policy to reduce potential claimants. The next step was to reduce coverage because the only way to control costs is via the benefits.”