The group risk market has certainly not remained unscathed by the financial traumas of the last two years and there is a considerable way to go before it experiences anything approaching business as usual. But the consensus view is that things could have been an awful lot worse.
A distinct lack of scheme cancellations and benefit reductions has been particularly welcome, with employers demonstrating a clear preference for downsizing and introducing pay freezes instead. Research carried out in October 2009 by industry body Group Risk Development (GRiD) indicated that the overall value of benefits packages had remained the same for 75 per cent of employers. The fact that group risk had been enjoying very little genuine new business before the financial crisis and had been depending largely on rebroking has also provided a further cushion. Unlike in fields like the mortgage market, providers did not find themselves missing what they didn’t really have in the first place.
Peter Fenner, a spokesman for Ellipse, says: “Redundancies and recruitment freezes have obviously all had an impact on group risk, but this has tended to happen periodically and I don’t feel that so far it has been any worse than the early 1990’s recession. There, is, however, always the possibility of a double dip.”
Premium income for both group life and group income protection – or ’group long-term disability income’ as it is referred to in Swiss Re’s Group Watch 2010 – both fell during 2009, and in the case of the former this was the first fall since Swiss Re began to collect the market data. Nevertheless, the actual amounts being covered increased during the year: in-force sums assured for lump sum death benefits increased by 4.3 per cent and in force annual benefits rose by approximately 2 per cent for income protection.
The reductions in premium income can be attributed largely to a highly competitive marketplace but this in turn has resulted directly from the economic mayhem, which has made employers seemingly incapable of valuing anything other than the cheapest price. Providers have therefore found themselves quoting 10% to 20% more for the same business.
Ian McMullan, managing director, group insurance, at Canada Life, says: “Some of the pricing has been ridiculous and premiums have risen by no more than about 1 per cent in the last six months. Pricing will start to increase when claims experience from the recession is in the picture, but this takes time and will be the last piece of the jigsaw. With blue chips, underwriters typically look at the last five years’ claims, so it may take another two or three years to really feel the impact. We’ve definitely seen an uptick in the number of claims, particularly from stress as a result of all the downsizing.”
There will clearly be plenty of downsizing still to come, particularly in the public sector as a result of the savage cuts announced by the new coalition government. But the resulting drop-off in scheme membership numbers is likely to be offset to some extent by a new trend towards public sector bodies being attracted by the keen rates on offer and deciding to opt for group risk products rather than self-insuring.
Nevertheless, fewer companies are now going out of business and the casualty rate amongst the actual group risk providers could have been far worse.
Anyone who takes the current market players for granted should remember that AIG had to be thrown a lifeline by the US government and also that at one time people were even questioning the viability of a company as well run as Legal & General, whic which saw its share price fall as low as 21 pence as incorrect doubts circulated about its ability to meet its obligations to policyholders. Indeed, the number of players has actually increased during the last two years because, although Aegon withdrew in June 2009, we have also had three new entrants (see box below).
Reflecting on the mood barely two years ago, McMullan says: “You had a situation in which intermediaries were looking very nervously at AIG and wondering whether they could place business with it although, from what I can gather, no intermediaries actually switched away from it.
ut don’t underestimate the impact of the credit crunch on Aegon’s withdrawal. At the end of the day the parent group did a strategic review and decided that group risk wasn’t core to it going forward. But we must remember that after the collapse of Lehman Brothers the parent was bailed out by a loan from the Dutch government. There was huge pressure on the group to look at capital requirements and repay loans, and so its group risk operation was affected.”
Even commentators who acknowledge that a significant degree of damage was caused to group risk by the credit crunch tend to point out that every cloud has a silver lining and that one direct benefit of the economic mayhem has been that governments, employers and insurers have all become much more receptive to change.
Ron Wheatcroft, technical manager at Swiss Re, highlights a marked trend in the direction of excepted group life schemes as opposed to registered schemes. Excepted schemes, although still accounting for a relatively modest share of lump sum death benefit premiums, increased that share from 5.2 per cent in 2008 to 7 per cent in 2009.
Wheatcroft says: “The shape of the market is beginning to change and it could be that employers have begun to think more as a result of the crisis and have realised that the simplicity of excepted schemes can be attractive. People have been seeing things that didn’t happen in their lifetimes, like consumer queues outside Northern Rock and names like Woolworths & MFI disappearing, so being aware that changes like these can happen could make them more willing to accept changes elsewhere.”
The fact that the government is clearly having to consider new solutions out of necessity in a bid to solve the nation’s severe financial problems could also bode well for the group risk industry as all the indications are that ministers are beginning to consider the benefits of insurers starting to form partnerships with government. The two camps could, for example, join forces to offer a straightforward mechanism for topping up State disability benefits or to introduce auto-enrolment for group life.
David Gulland, managing director at RGA Re says: “The insurance sector is better placed to provide rehabilitation and early intervention, and the public sector tends to take a shorter-term view over the benefits of these. We have seen examples in France and Abu Dhabi of public/private partnerships sharing the healthcare burden between the private sector and the state. Hopefully the coalition can learn from these examples and show greater willingness to consider such initiatives.”
Although there has as yet been no unequivocal governmental statement, the idea of public/private partnership was mentioned in a paper produced by the government-launched Insurance Industry Working Group in July 2009 and has been alluded to in ministerial speeches from the Department for Work and Pensions. GRiD is also trying to extend the debate of possible auto-enrolment of protection alongside auto-enrolment of pensions.
Lee Lovett, director of group reinsurance at Munich Re says: “Ideas about public/private partnerships are starting to be discussed a lot more, although they are likely to take three to five years to implement. So, although government cutbacks can be bad news, they can also create opportunities for insurers. It could therefore be that something good comes out of it all. These things could have been appropriate decades ago but they tend to get put on the ’too difficult pile’ unless there is a crisis.”
Expert view
Nick Homer, group risk development manager, Zurich Corporate Risk
“This is a hard market to enter at any time and we could hardly have picked a worse time”
Crisis fails to deter new entrants
Possibly the best proof of the resilience of the group risk market to the problems caused by the credit crunch is that it has subsequently attracted three new entrants. All seem intent on remaining for the long haul.
Lloyd’s syndicate Sagicor entered the group life market in January 2009. The following month Zurich Corporate Risk began quoting for group life and group income protection, and by September 2009 Ellipse, which provides group life and group critical illness cover, had also engineered a soft launch.
Martin Herrick, head of life at Sagicor, says: “We never thought of shelving our plans and, although 2009 didn’t go as we wanted, we are on course to meet our target for 2010.”
Nick Homer, group risk development manager at Zurich Corporate Risk, says: “The fact that we went ahead with our launch and have been reasonably successful surely says a lot. This is a hard market to enter at any time and we could hardly have picked a worse time, yet under the circumstances we have done extremely well. One other major insurer was rumoured to have shelved a proposed entry but, all in all, it could have been a lot worse.”
Ellipse even reports that one of the drivers behind its entry was a perception that the financial crisis had actually accelerated a trend for companies to move towards flex and total reward schemes as a result of making them more willing to embrace change generally.
