A quick trawl of the financial press might suggest that auto-enrolment for group income protection is already a done deal, given the amount of coverage this has received. However this is far from the case for a number of reasons, some of which are outlined below. So, does auto-enrolment provide a great opportunity for the group risk market to grow?
This year sees small and medium enterprises reaching their staging dates and eventually all employers will be covered by 2017. Group insurers have already seen a positive impact of auto-enrolment from the large employers providing group life schemes. This has been the result of extending the numbers of employees in the pension scheme and life insurance being an automatic add-on, where eligibility is often based on ‘all pension scheme members’. As auto-enrolment reaches smaller employers it is less likely that they will already have a group life scheme in place and hence this creates an opportunity for the adviser. While discussing pensions, the adviser has the chance to bring group life into discussions for, possibly, the first time.
It is the adviser’s responsibility here to demonstrate how easy and affordable it is for them to provide a basic level of group life cover for all employees. For example, cover of £50,000 each or 1 x salary could be provided for less than 0.1 per cent of salary roll. Group life insurers have identified this opportunity already and are adapting their proposition accordingly.
So, if we are already seeing signs of the group life market capitalising on opportunities arising from auto-enrolment, what about group income protection? IP is more complicated than group life for a number of reasons, not least because the product itself is more complex, but also due to the confusing array of state disability benefits.
The answer could be in a simplified group IP product. Running in parallel with the auto-enrolment discussions has been the simple products initiative. Whilst simple IP did not form part of the initial proposals for simple products, it was recognised as a priority and this led to a joint collaboration between Association of British Insurers and Group Risk Development to develop this concept further. The outcome is an outline product specification where the remaining sticking point is the interaction with state benefits. Research suggests there will be a small minority – approximately 1 per cent of households – that could be worse off through having a simple IP cover, which is contrary to one of the key criteria for a simple product. Further discussions will hopefully resolve this point in due course. Putting this technicality to one side, for the vast majority of the working population – the other 99 per cent – there now exists a draft simple group IP product that would provide a basic level of cover.
Whilst for a proportion of this group, the benefit may not be sufficient to cover all monthly expenses, some cover is certainly better than none. In this context, it is also worth considering that pension auto-enrolment will not provide an adequate pension for many, but it will provide a basic income in retirement. So a longer term vision could see a simple group IP product forming the basic level of cover required if auto-enrolment for this group IP became a reality.
It is unlikely there will be a change in government legislation obliging employers to provide IP cover in the foreseeable future. But, it is a well known fact that the Government is looking to reduce the deficit and large budget items, such as welfare, are bound to come under the microscope. Whilst this political backdrop is helpful, the fact remains that for auto-enrolment group IP to become a reality, the industry will need to put together a clear and powerful business case that demonstrates the financial upside for the Government if they were to pursue this option.
However, other outcomes are possibly more likely, particularly in the shorter term. One option could be a differential national insurance (NI) contribution for employers, dependent on whether they provide IP cover. Clearly, an employer would hope this would result in a reduced NI contribution for those providing IP cover. But an additional NI contribution for those not providing cover might be more likely.
Sales for group protection, specifically IP, aren’t likely to significantly increase without something changing. If we look at a five-year timeline, linking to the expected term of the new Government, perhaps we could hope for an NI ’nudge’ towards employers providing group IP. Hopefully, this would sit alongside an accredited simple group IP product, which ultimately becomes the default model for employers being obliged to provide group IP cover. So there is certainly potential for material growth for the group risk market, but not without a stimulus for change and a good deal of effort by the various parties involved.
