The market data reported in the latest Swiss Re Group Watch publication give some very positive messages about the current state of the group risk market. In-force premiums at the end of 2011 totalled just under £1.53bn, an increase of 2.9 per cent over 2010, with premiums, insured benefits and the number of lives insured for death benefits, long term disability income and critical illness all up.
In contrast, two years ago results were disappointing. In-force death in service and long term disability income premiums were down, in the case of disability premiums by 12.5 per cent. Ahead of us back then was the risk that the removal of the default retirement age would see many employers close down existing schemes, with long term disability income schemes particularly vulnerable. Given that three-quarters of insured income benefits are provided through workplace arrangements, this would have been very bad news, given the government’s clear intent to reduce dependency on State provision. Looking at the market now, we really have turned the corner.
The 2011 results show a slight shift in the business make up with the role of the employer moving, albeit gradually, to one of facilitating rather than providing cover. About 10 per cent of the in-force premiums are in respect of flex and voluntary arrangements.
This is partly because some employers are looking to share the costs, for instance where an employer provides long term disability income benefits for an initial term, for example five years, but allows the employee to top up the cover.
Developing this facilitation role further, employers could have a key role in giving employees access to financial products as “traditional” advice services are transformed in response to regulatory changes such as the Retail Distribution Review (RDR). This could include providing access for the purchase of so-called “simple products”. Although we have yet to see the detailed proposals from this HM Treasury-led initiative, we expect the recommendations to include easy-tounderstand and, possibly, kitemarked products which can be purchased and made available without advice.
Purchasing cover through an employer works well for many employees. 57 per cent of employees re-searched by Swiss Re in late 2011 who expressed a preference were either “very” or “fairly” comfortable with buying protection in this way. This may not be quite as high as the internet (63 per cent) but, by contrast, the relative figure for purchasing through a supermarket brand was 23 per cent.
Pension auto-enrolment will present a huge challenge for employers, from which the group risk market will not be immune as employers reassess their remuneration costs and packages.
Initially, as the timetable encompasses the largest employers, some may choose to include auto-enrolled employees in group risk schemes where eligibility is linked to pension scheme membership. We will need to make this process as painless as possible. It is likely that most growth in member numbers will be in death benefit arrangements. As a rough guide, based on total market data, the average cost of death benefit cover per scheme member is just over £100. But many of those who are auto-enrolled will be lower-income earners and so the extra cost per member could be significantly lower than this.
While the RDR is focused on retail investments, the greater interest in protection that many predict could stimulate more demand for both retail and group risk products and services
There is little doubt that many financial services organisations are extremely stretched as they struggle to implement legislative and regulatory changes from later this year onwards while continuing to service and grow their customer base. For the group risk market, many of these changes will have little, if any direct impact. For instance, employment-related schemes are generally exempt from the changeover to gender-neutral pricing from the 21st December. While the RDR is focused on retail investments, the greater interest in protection that many predict could stimulate more demand for both retail and group risk products and services.
There are plenty of reasons for optimism but, given the uncertain economic outlook, we expect employers to continue to examine every cost and question the value of the benefits they provide to employees. There can be no room for complacency. But past experience suggest that, once a group risk scheme is in place it is quite rare for it to be closed altogether, unless there is some fundamental restructuring of the business, perhaps through a merger or an acquisition.