The make-up of the UK working population is changing. Over the last 20 years, the proportion of workers who are aged 35 and under has decreased from 43 per cent to 35 per cent. More marked is the increase in the 50-64 year old group and the decrease in the 18-24 year old group.
But in addition to the natural changes in the profile of the working population following the post-war baby boom, there has also been an impact from recent legislative changes.
The standardisation of retirement ages for men and women and the removal of the default retirement age in the Equality Act 2010 mean that more individuals are choosing or needing to work for longer.
The desire to continue working past the traditional retirement age to bolster pension provision also comes in part due to shortcomings in investment returns and consequent low annuity incomes.
Another feature of the labour market is the approach of some large employers to proactively recruit older workers, with their expertise, experience and maturity making the workplace more diversified than before.
School-leaver and graduate unemployment has been increasing in recent years, so there is less ’youth’ coming into the working population. There are now 815,000 18-24 year olds unemployed, equating to a 19.8 per cent unemployment rate in this age group, compared to a rate of 8.3 per cent across the board.
So what does this all mean for group life assurance premiums? It is well known that life expectancy is improving but mortality increases with age. With reduced staff turnover, youth unemployment and increasing numbers of 50+ employees the increased risk of insuring an older workforce needs to be reflected in higher premiums.
In these recessionary times with the working population ageing year on year, price increases will be commonplace
Canada Life provides cover for over 2.5 million employees in approximately 20,000 schemes, and the ageing issue has been frequently observed. The extent needs to be fully understood by insurers, advisers and employers, as this will be the most significant aspect of inevitable price increases.
Consider this scenario – it is not unusual. Company A is a manufacturer and provides death in service benefits of 4 times salary. In January 2010, it had 100 employees and the average age of these lives was 40.
Over a 2-year period, the turnover of the workforce had been very low with only five employees leaving and due to the recession Company A had decided to recruit only two new employees onto its graduate employment programme.
In addition, two employees had decided to continue working past their expected retirement age of 65. So by January 2012 – the date at which the group life premium was renewed – the average age of Company A’s employees had increased by 2 years to 42 and the insurance cost had risen by over 20 per cent due to the increased mortality risk.
So any prospective insurer offering a blanket 10 per cent discount to Company A from the incumbent insurers existing rate may find claims experience far worse than anticipated, leading to heavy losses and the prospect of even larger rate increases in the future for Company A, which could reflect poorly on the adviser.
The practice of offering large discounts for small schemes with no claims can also be flawed. Why would the future experience of two similar small schemes by industry and location be markedly different, just because one of the schemes had made a claim in the last year?
However, every scheme is unique and depending on the make-up of benefits and age profile of its employees, the premium of a scheme can go up or down as the underlying risk of the insurance changes.
If the change in the weighted average age by benefit is at the older age range, the price increase could be substantial whereas it could be quite small for schemes with very young lives – the curve in the mortality graph becomes very steep from the mid-40s.
In these recessionary times with the working population ageing year by year, price increases will be commonplace. Prices will increase across the industry, posing a challenge for advisers who will have to educate their clients about the diverse reasons why – and allow the employer to budget for a smaller but more consistent increase.