Group critical-illness insurance and group life assurance do not usually pose too much of a problem. Dave Kay, commercial products manager at Unum, explains that group life benefits, for example, have been constrained by tax regulations as these are treated as an occupational pension scheme for these purposes.
Last year’s pension simplification changes, however, enabled insurers to review their offering and provide some previously unavailable flexibility.
In the group income protection market, however, there is much greater potential for employers to request bespoke schemes that are tailored to their organisation’s needs. But the extent to which this flexibility is actually available is a matter of some debate.
Matthew Lawrence, head of practice risk and healthcare at Aon Consulting, says: “There is still a group of providers that stick to the letter of the law.”
Not surprisingly, the views of providers and advisers differ on this issue. In advisers’ experience, there is a general consensus that the size of a scheme has a great impact on how much flexibility they are able to secure for clients.
While the level of product flexibility has increased in recent years, with the development of features such as limited-term payment options, many advisers still believe the market is lacking in true flexibility.
Steve Smythe, health and risk consultant at Jardine Lloyd Thompson Benefit Solutions, says: “The notion of flexibility pretty much depends on the size of the scheme and the potential for profitability for insurers. You tend to see a bit of reluctance to deal with smaller schemes. Where there is a large scheme, they are more willing to have a conversation with senior underwriters.”
Organisations are typically divided into three categories for insurance purposes: those with up to 250 lives, employers with more than 250 lives and corporates with more than 500 lives to cover.
Philip Ashwell, regional director compensation and benefits at Heath Lambert Consulting, says: “Flexibility in the market is fairly universal for larger schemes. The caveat is in the underwriter that you speak to. The larger providers are hit and miss. The easiest way to describe it is like a postcode lottery. They will offer some degrees of flexibility in cer- tain areas.”
Most advisers are unwilling to publicly name and shame the providers they deem to be inflexible in their approach. As a general rule, however, the larger providers are typically cited as not always being particularly willing to offer bespoke terms.
Smythe adds that most underwriters will discuss some level of flexibility for group risk schemes although this is primarily, but not exclusively, at the larger end of the market.
Some providers, such as Canada Life, now offer group risk products aimed specifically at SMEs, which has helped advisers match solutions to their clients. Norwich Union also provides group income protection cover for schemes with three lives upwards.
Simon Bailey, head of marketing for employee benefits at Aegon Scottish Equitable, says most providers generally offer flexibility built into products. “Where you can clearly get an idea of the future risk, you can offer grea- ter flexibility.”
This view is backed up by Marion Ware, head of marketing at Canada Life Group Insurance, who explains that the more lives that are covered by a scheme, the easier the underwriting process becomes, which then enables insurers to offer greater choice in areas such as the scheme’s design and terms. “Provided you have got a reasonable number of core lives covered, that will take away the worry of underwriting,” she explains.
In some cases, scheme underwriters may be able to offer some level of bespoke terms and conditions to meet employers’ needs, provided that they can quantify the risk for the insurer.
Bob Cheesewright, group risk marketing manager at Friends Provident, explains that, in many cases, the better providers will include flexibility in the terms of a scheme’s contract.
Key questions to ask to secure this include: how long is the deferred period, how long will benefits be paid for, how much will be paid and against what definition of disability will these be paid? “Someone talking to a scheme underwriter may be able to do a great deal against that menu,” he says.
Many providers, for example, now offer limited-term payments, which enable employers to set how many years they wish the benefit to pay out for. Alternatively, they may wish the scheme to pay out a single lump sum instead of making annual payments for the length of its contract.
Other products, such as Unum’s Pay Direct scheme, will continue to pay benefits to an individual even if they leave an employer’s service, thus removing the long-term liability that employers incur under traditional income protection schemes.
However, Bailey acknowledges that there are sometimes limits to what can be offered, particularly if it is not considered commercially viable. “You will always get some things that you just can’t accommodate,” he explains.
Providers that are heavily re-ins-ured will also be able to offer advisers less flexibility.
Looking at the issue from the other side, most providers believe that a number of advisers do not take full advantage of the flexibility that is on offer around group income protection.
According to Cheesewright, the most common type of scheme taken out by advisers on behalf of their clients is 75 per cent less single persons’ allowance, has a 26-week deferred period and is payable until the age of 65 years.
“Most intermediaries don’t go too far from a certain degree of flexibility. How much are you prepared to be flexible, bearing in mind that most want the same thing?” he says.
In some cases, providers believe that this is partly to enable advisers to compare the cost of schemes. “You will have some advisers that operate a straitjacket approach who are keen to compare apples with apples and prices with prices,” says Bailey.
David Cross, head of health and risk at Watson Wyatt, explains that advisers are faced with a tension between the desire to tailor schemes to clients’ exact requirements and selling insurance products that are easy to administer but remain cost-effective.
One way to enable employers to offer schemes that can be tailored to suit individuals within their workforce is to do so through a flexible bene- fits scheme. This, however, has yet to become common practice. “We’re still waiting to see a huge emergence in flexible benefits but I think it will come,” says Kay.
Critical-illness insurance is the most common group risk benefit that is included in flex. This provides staff with additional flexibility around whether to include options such as family cover, if required, at no extra cost to their employer.
Most providers agree that the inclusion of group risk products in flexible benefits schemes has little impact on what happens in the market. However, Cheesewright adds that employers will typically amend their core benefits package to fit in with what they offer through flex.
Despite advisers’ perceived lack of flexibility in what they receive from providers, many do acknowledge that this is beginning to change, with providers taking a more consultative approach.
“There has been a lot of discussion and interaction. Providers are asking for opinions in terms of what is needed,” explains Ashwell.
Smythe adds: “Insurers are becoming increasingly aware that flexibility is what is required.”
The market now looks set to develop further, with a number of providers currently looking at enhancing their product ranges over the coming year. Kay says: “We at Unum have got some ideas on the stocks for next year, probably around the limited-term piece and the Pay Direct options organisations are taking.”
Other insurers, such as Aegon Scottish Equitable, Friends Provident and Canada Life, also intend to review their product proposition but have yet to finalise the details of what steps, if any, they intend to take.
So while the market appears to be changing, it is not going to happen overnight. “You can never have enough choice. It’s getting better but it’s a slow process,” concludes Smythe n When Lucite International UK Limited devel- oped the new defined-contribution section of its pension fund with Watson Wyatt, it was keen to implement an ill-health ben- efit which aligned with the needs of the business, and provided a benefit for the scheme’s members.
The early intervention and rehabilitation services offered by group income protection were seen as a valuable potential addition to its existing healthcare benefits.
The company favoured a limited-term group income protection design although it also wanted to provide a subsequent lump-sum payment, which was to be based on the employer’s future pension contribution liability through to retirement age. This lump sum would then be used to boost the value of the member’s defined-contribution pension account. Lucite, therefore, required an insurer which, could not only provide cover on the selected basis but could also integrate its rehabilitation expertise into Lucite’s existing absence management procedures.
Following a full review of the market, the company selected Unum to provide the benefit. Unum had to adapt its standard Capital Option prod- uct quite considerably to meet Lucite’s spe- cific needs.
Unum also demonstrated its ability to align its claims management and rehabilitation offering with Lucite’s needs through a series of presentations and meetings at the company’s main sites.
In brief…
- Organisations are typically divided into three categories for insurance purposes: those with up to 250 lives, employers with more than 250 lives and corporates with more than 500 lives to cover. All providers will offer flexibility for schemes of 500 lives or more.
- In some cases, scheme underwriters may be able to offer some level of bespoke terms and conditions to meet employers’ needs, providing that they can quantify the risk for the insurer.
- Providers argue that most advisers do not take full advantage of the flexibility that is on offer around group income protection.