Insurers are looking to new product designs and additional benefits to help boost the group income protection market, says Sam Barrett
After market penetration figures stalled at around 11% in the 1990s, group income protection insurers have been looking for ways to stimulate demand and respond to changes in the employment arena. As a consequence a number of new product designs and additional benefits have come on to the market.
One of the biggest drivers behind these developments was the introduction of age discrimination legislation last October and a national default retirement age of 65 years. From a group income protection perspective, this means that policies are now written to cover employees until age 65 years rather than age 60. This extension has resulted in some pretty hefty increases in cost. Bob Cheesewright, group risk marketing manager at Friends Provident, says: “The increases depend on the age of those covered but they will typically be between 25% and 50%.”
The reaction to this type of increase has been varied. Stuart Gray, managing director of Portus Consulting, explains that most of his clients have accepted the higher premium. “It’s a contractual benefit so although they might not like the increase they prefer to pay it rather than change the terms of the policy and have to reflect this on contracts of employment and so on,” he adds.
But not every employer has been happy to meet these increases, and a small number have removed cover altogether. Others have looked at ways to contain the price with insurers often happy to offer lower-cost solutions.
In these cases, limited payment term policies have proven particularly successful. Rather than pay benefits until 65 years, this type of cover restricts payment for anything from two to five years and so, although cheaper than full group income protection, isn’t in breach of age discrimination legislation. Steve Bartlett, consulting director at Jardine Lloyd Thompson, says: “There’s definitely more interest in these options. Workforces are more transient now so employers don’t feel they need to provide cover until age 65 [years]. However, it is important that employees understand they are getting more limited cover.”
The number of employers resorting to self-insurance to cover the cost is also increasing, however, some are also looking to retain some income protection cover so they can tap into the policies’ rehabilitation benefits if necessary. So, for instance, employers might extend the deferred period before payments begin to 52 weeks or longer to obtain a reduced premium but still use an insurer’s early intervention procedure to manage claims. Wojciech Dochan, head of commercial marketing at provider firm Unum, explains: “We’re seeing more interest from companies that were previously self-insured. With age discrimination and the high incidence of ill health they like to have support from an insurer.”
As well as designing options to help employers comply with the age discrimination legislation, insurers are also developing new products that reflect the more transient nature of the workforce.
One example is Unum’s Capital Option, the style of which is also available on a less formal basis from other insurers. This provides a replacement salary for up five years. If, at the end of this period, the employee isn’t likely to return to work their employer receives a lump sum, which they can use to provide a leaving service benefit such as an additional pension contribution. “We do get interest in this but it tends to be from companies that have never offered anything before,” explains Dochan.
Last year, Unum also increased the number of options it offered to employers with the launch of its Pay Direct plan. This is a style of product that has been available informally from other insurers for many years and it allows the benefit to be paid directly to employees, rather than through their employer, so there is no requirement for staff to remain on the payroll.
Legal & General has also upped the product development ante this year with the launch of its Progressive plan, which brings rehabilitation more formally into the equation by setting out targets at different points through the plan. In the first two years, the employee is given help to return to their own job, while in years three and four the definition of occupation is broadened to a ‘suited occupation’. After year four, they must, at the very least, be unable to perform activities of daily working, for example, by suffering from a lack of communication skills, walking ability, dexterity and eyesight, to continue to receive benefit.
Glenn Laming, sales director for group protection at Legal & General, says: “It’s around 20% cheaper than traditional group income protection so we expect it to appeal to a new audience.” He adds that, as well as companies looking for cheaper cover, he also expects the product to appeal to organisations with blue-collar workforces.
Insurers are also adding new benefits to existing options to strengthen their propositions. Canada Life, for example, has introduced an added-value benefit called Best Doctors, which enables employees and their families to obtain a second opinion from a leading doctor when they are diagnosed with a serious illness. This checks their diagnosis and puts together a treatment plan for the individual.
The insurer has also addressed employers’ needs with its Business Care package. Colin Micklewright, head of group income protection at Canada Life, explains: “This gives employers access to an information and support service covering everything from health and safety to legal and taxation issues.”
Employers using the service receive a regular newsletter, have website access and can get legal advice at any time.
Other providers, such as Unum, meanwhile have added absence management services to their products to help improve the way organisations deal with sickness and, hopefully, prevent minor problems turning into group income protection claims.
So, with insurers hungry to grow the market, group income protection is evolving into a benefit for employers as well as employees.
Focus on facts
What is group income protection?
Group income protection provides a replacement income if an employee is unable to work as a result of a long-term illness or injury. This is paid after they have been absent for a predetermined time, known as the deferred period, which can be anything from 13 weeks to 104 weeks.
The insurer will continue to pay perks until the employee returns to work or until their normal retirement age, although it is also possible to get a limited payment term policy, which will pay out for up to five years.
What are the origins of Group IP?
Group income protection can trace its roots back to North America, making its debut in the UK in the 1970s.
Where can employers get more information and advice?
Group Risk Development (Grid) is the industry body that promotes the advantages of group protection. Its members include insurers, reinsurers and intermediaries. Its website (www.grouprisk.org.uk) contains details of group protection products as well as contact details for its members.
The Association of British Insurers can also provide information about group income protection. Visit www.abi.org.uk or call 020 7600 3333.
For more articles on income protection, visit www.employeebenefits.co.uk/benefits/ grp_risk
What is the annual spend on group income protection?
According to Swiss Re, more than £600 million was spent on group income protection in 2005. This provides cover for around 1.8 million employees.
Which group income protection providers have the biggest market share?
Unum has around a 50% market share, followed by Canada Life and Legal & General. Other players include Aegon, Norwich Union, Friends Provident and Bupa.
Which group income protection providers increased their share the most over the past year?
Insurers are reluctant to divulge their group income protection sales figures but in recent years acquisition has driven this growth.
Among those that have boosted their books through acquisition activity in the last few years are Unum, which acquired Sun Life Financial of Canada in 2003, and Canada Life, which bought Royal & SunAlliance’s group risk business in 2002.
Nuts and bolts
What are the costs involved?
The average cost is between 1% and 1.5% of the total insured salary roll depending on the profile of employees covered. It will be lower where staff are younger, are white-collar workers or a limited payment term is selected.
What are the legal implications?
When implementing or changing a group income protection policy it is important that the benefits offered sit with the contract of employment. Employers also need to be mindful of the age discrimination legislation that came into effect last October. Insurers have increased the maximum retirement age from 60 to 65 years in line with requirements but employers will need to consider self-insuring employees who work beyond this age.
What are the tax issues?
Benefits are paid to the employer who passes them to employees through their payroll system so national insurance and income tax will be deducted. Group income protection is not treated as a benefit in kind and an employer can get corporation tax relief on premiums.