Many of the wrinkles that need ironing out relate to self-insured schemes. The draft regulations pertaining to the DRA exemption produced this February did not make it sufficiently clear whether it applied to self-insured schemes as well as insured ones. The Department for Business Innovation & Skills (BIS) has, however, advised industry body Group Risk Development (Grid) that the exemption is not intended to cover self-insurance except in the special circumstances where the employer is itself a financial services provider.
In theory this should boost demand for income protection as a result of some of the very large employers who self-insure deciding that the DRA exemption tips the balance in favour of going the insured route. But most insurers are not yet reporting an increase in demand for quotes from this source.
One reason for this is probably that the relevant employers are not yet aware that most self-insured schemes definitely don’t qualify for the exemption. Indeed, at the time of writing, some insurer spokespeople still did not realise this. Another factor is that it remains unclear exactly how self-insurance should be defined in this context.
Steve Browning, group protection product manager at Friends Life, says: “I think many self-insured schemes don’t know whether they are covered by the exemption or not. For example, we don’t know whether a scheme with a stop-loss counts as being insured. I believe that if you have a captive insurer you are covered as it’s a separate legal entity and you are physically paying a premium to an insurer, but if you just have your own in-house self-insured fund then I don’t believe its covered. But the only way it will be clarified is by case law.”
The younger the workforce the higher the potential SPA. So failing to act will mean storing up problems for a few years’ time
Additionally, there is always the chance that employers or employer bodies may ask for this exclusion to be reconsidered. Advisers may also currently have more pressing priorities than to be proactively contacting clients about self-insurance issues. Paul Avis, sales and marketing director at Canada Life Group Insurance stresses that most will first be intent on checking that insured clients are fully compliant with the DRA but he adds that he has yet to see a flurry of activity in this respect.
Avis says: “One of the concerns we have is that advisers believe the DRA issue is limited to income protection but they should also be looking very clearly at life and critical illness cover to check wordings are compliant with the new rules. Absence wordings under group life and things like total permanent disability wordings that usually take people through to normal retirement age need scrutiny.”
Param Basi, technical director at AWD Chase de Vere, reports that he has found that a lot of schemes had been rewritten with a retirement age of 70 in mind because the employer thought the DRA exemption wouldn’t go through. He expects most who have taken this approach to stick with it and hasn’t yet had anyone discuss switching back to an age 65 basis.
Another main area of focus for intermediaries is adjusting wordings to reflect future changes in the State pension age (SPA) – which is due to start increasing on a staggered basis from 2018 and to reach 68 by 2046.
Steve Ellis, head of group risk at Premier Choice Group, says: “We are advising clients to make changes now to life, income protection and critical illness cover to anticipate SPA changes in the future. Employers with young workforces are mistakenly believing that it doesn’t apply to them but it actually applies more because the younger the workforce the higher the potential SPA. So failing to act will mean storing up problems for a few years’ time.”
Uncertainty as to whether current State retirement age proposals will be amended means that wordings are commonly being changed to reflect a retirement age that is the later of 65 or SPA, with a clause inserted to say that income protection insurers reserve the right to alter pricing if the SPA rises above 68.
James Walker, group risk technical manager at Legal & General, says: “In last year’s government Spending Review the coalition said that it would look into the possibility of bringing forward the dates of the changes and raising the actual new retirement ages further, but in recent weeks there has also been talk of delaying changes to women’s pension ages. So no-one can be sure exactly what will happen.
“For death in service, changing to the latter of 65 or SPA may not even involve an increased charge but, for income protection, it could increase the premium by around 3 per cent. Group income protection insurers may have to impose an additional charge for new claims if the SPA rises above 68 once they have assessed the new termination age.”
I think many self-insured schemes don’t know whether they are covered by the exemption or not
“If they’ve actually started paying a claim the insurer will not have to pay beyond 68,” continues Walker, “but it remains unclear whether the employer will still be liable to do so up until the new termination age. Our understanding is the employer may be able to justify stopping payment at 68 but we won’t know for sure until it is tested in court.”
Although it may take years for the grey areas to be resolved, this tends to be the case following most legislative change. Furthermore, such issues seem small fry in comparison to the main problem of securing genuine new business. Whilst obtaining the DRA exemption has removed a negative it has not provided a guarantee of future progress.
Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: “Although the exemption is good news, will it actually provide certainty? The need to keep promoting the benefit doesn’t actually go away, so we need to keep getting the important messages across.”
Steve Bridger, head of group risk at Aviva UK Health, is amongst those hoping that the results of the government review of sickness absence due to report this autumn could pave the way for progress, but he acknowledges that it is too early to say whether the government will actually be offering incentives to encourage group risk take-up.
Bridger says: “So far the review has engaged with a number of group risk providers, including ourselves, and it has been asking how group risk benefits the economy and helps support the welfare state. I am confident that it will see that employers have a duty of care and can play a major part in raising awareness of group risk benefits.”
Many other commentators, however, do not hold up much hope of any real progress being made until the economic recovery is well underway. They point out that most employers have a fixed budget for employee benefits that they can’t increase and, if anything, are under pressure to reduce.
Instead, many see the best chance of any immediate significant improvement occurring lying in the tv advertising campaign being started by Unum this October and continuing into 2012. The aim is to double the size of the group income protection market in the next three to five years by raising awareness of group income protection as a whole amongst the public to an extent that the man in the street starts asking their employer whether or not they have the product.
70 to become the new norm?
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, welcomes group risk’s DRA exemption but he thinks it will prove difficult in practice for employers to refuse benefits to those aged over 65.
He says: “If it’s a good employee and both sides want them to work on past 65 it’s going to seem strange if they suddenly don’t have income protection and life cover, particularly if the person sitting next to them with half their experience gets these benefits. It will seem morally wrong, and some people who look after themselves and are still highly energetic at 65 would certainly find it demotivating.”
Herbert can see a lot of sabre rattling from the unions next year and also envisages the consumer press taking an outraged position at the perceived inequality involved. He doesn’t know where it will end up but suspects that age 70 will become the norm for termination of benefits.
“The whole DRA thing seemed a bit rushed,” he continues,” and if they had spent more time thinking about it they might have reached the conclusion that 70 was in fact a more logical age for the exemption. The advent of a new coalition government probably contributed to measures being taken with undue haste.”