The group risk market is very competitive, and with scheme reviews occurring every two years there are frequent opportunities for advisers to check if other insurers are offering better terms than the holding office.
However, some schemes have effectively been denied access to the benefits of competition due to particular circumstances attached to them – these circumstances arise at member or scheme level.
The problems at member level occur if any of the members with benefits subject to underwriting – where they are above the free cover limit or otherwise lie outside the free cover provisions – have had benefits declined or postponed by insurers’ underwriters. At subsequent reviews, rival insurers will want to know details of all underwriting decisions. On finding a member who has been declined or postponed they are likely to decline to quote for the scheme. If all the insurers take the same line, which is often the case, the holding office is stuck with the scheme – and the client is stuck with the holding insurer, who will usually hike the scheme premiums up, partly to reflect the extra risk they know is attached to the scheme, partly because they can do so in the knowledge that there won’t be any competing premium.
Once in this situation, a scheme can be stuck in it for years. But it is often the case that the special terms may no longer be applicable. For example, someone who has had a heart attack in the months prior to their assessment would likely have their decision postponed for six to 12 months. People’s conditions improve and underwriting practices change, but re-assessment of these members is rarely offered as an option due to combinations of cost, process inefficiencies and inertia.
But it doesn’t have to be this way. Underwriting approaches have undergone rapid change, bringing more efficient and cheaper ways to assess members, such as online assessments and tele-interviewing. Using these, it is possible to pre-assess the member before quoting for the scheme as a whole. So, in circumstances where the underwriting of particular members has a large bearing on the underwriting of a scheme as a whole, underwriters can get possession of all the relevant information and make an informed judgement, rather than just assuming the worst in every case.
At a scheme level, the issue is primarily focused on catastrophe cover for group life schemes. The concept of limiting aggregate payouts resulting from one catastrophic event is a relatively recent one, directly emerging from the attack on the World Trade Center in 2001. As is often the case when a new threat is identified (think back to the 1980s when HIV/AIDS first emerged) the underwriting response, driven largely by reinsurers who held the greatest exposures, was to define limits in quite broad terms. While the event limits were set high enough – £100 million per event being typical – for most schemes to be unaffected, a significant number of large employers, particularly those in what are considered ’high risk’ locations, found themselves with a shortfall between the benefits promised to their employees and what insurers would pay in the event of a disaster – a shortfall that the scheme trustees would be liable for. Cover for it could be obtained from specialists, for example within the Lloyd’s market, but often at a high cost that could even exceed that of the primary cover. Alternatively, a scheme’s cover could be shared by several insurers. Either way, solutions were hard to arrive at, and their complexity again made it difficult for advisers to find alternatives at subsequent reviews.
As with member underwriting, though, the handling of catastrophe risks has been refined since the original response. Rather than a blanket approach for all schemes, event limits are set that more closely reflect the actual needs of individual schemes. While monetary limits were originally aligned to postcodes, the geographic parameters can now be more tightly drawn to individual buildings or even floors within buildings. The entry of new providers to the market such as Ellipse and Zurich has also provided extra capacity, so there should now be real choices open to clients affected by the imposition of event limits.
As underwriting tools evolve and improve, the efficiency of the market improves. Advisers who explore these opportunities add value for their clients by providing them with options they would otherwise miss out on.