Completing the Picture

Following the last GRAF in February this year, it concerned me to hear that employers were increasingly enquiring about their contractual liabilities and that over 82 per cent of attendees reported that their clients were looking to reduce their Group Risk benefits. With our ambition to continue to organically grow our Group Risk portfolio in 2009 and beyond, I braced myself for tough times ahead.

Our recent Health of the Workplace 3 Report confirmed that employers were either considering cutting, or had cut spending on their Group Risk policies with Group Income Protection being slightly higher (8%) than Group Life (7%).

The research also showed that despite nearly nine in
ten business leaders believing that the current economic climate makes it even more important to protect their employees, just 1% of businesses are planning to introduce new benefits this year – a view substantiated by our own experience which show that although we are still writing virgin business, it is switch business that is predominantly driving our Group Risk portfolio growth.

Changes in a challenging market Not surprisingly, since the last GRAF, we’ve seen a number of changes in the Group Risk arena, most notably, Aegon’s withdrawal from the market.

We’ve also seen changes in Group Risk practice with schemes increasingly being rebroked on an annual basis (rather than at rate review) in an attempt to drive costs down.

Whilst we’re pleased to say that Aviva’s Group Risk retention (and indeed new business) levels have remained high, we believe that this approach isn’t best practice; a view shared by three quarters of the GRAF attendees who stated that the current rate of re-broking turnover in the market didn’t represent an efficient and sustainable way for the industry to be run.

With cost containment being key, requests for reduced benefit options such as pay-direct, lump sum/cash benefit and limited payment terms are increasing. To date, Aviva’s experience suggests that the take-up of this type of contract is low.

This is a view reflected by GRAF with 63% of the members stating that there is an increased interest in options such as pay direct and lump sum but it’s unlikely to be translated into action at this point.

This reticence for change could however be reversed following the recent case of Stringer v MRC that was referred to the House of Lords to review how sickness absence affects a worker’s right under the Working Time Directive.

The new ruling, which follows recent guidance from the Advocate General (AG) in the European Court of Justice, means that holiday continues to accrue during periods of sickness absence. And, if the employee’s contract of employment is subsequently terminated, they will be entitled to payment in lieu of untaken holiday (based on statutory annual holiday pay of 4 weeks).

Furthermore, if the worker is unable to take their entitlement to holiday before the leave year due to sickness, then it can be carried forward to the following year. Where previously employers had some discretion over whether they accrued holiday pay or not, they are now legally bound to cover these costs.

The impact of this change on Group Income Protection is set to create an interesting debate, with the attendees at GRAF equally split in their views. Over a third (38%) felt that the change would pave the way for an increased demand for pay-direct or lump sum as employers look to terminate their employee’s contract early.

However, the same amount felt that the change would have little or no impact on the industry. We believe that this change will almost certainly affect Group Income Protection in one of two ways; it will either prompt employers to look for ways to decrease this additional liability through a pay-direct or lump sum option, or alternatively, the more paternalistic employers may seek additional cover to protect them against the costs associated with holiday pay. Given the current trends and demand for cost containment options in the Group Risk market we believe that it is more likely to be the former.

Whatever happens, one thing is very clear. With employers currently facing a contradiction between the need for investment in employee health and the financial priorities for the businesses it’s imperative that we all work together to continue to raise the profile of Group Risk amongst employers and key stakeholders to ensure that it remains at the top of their “shopping list”. With this in mind, we welcome and wholeheartedly support the great work that GRiD is already doing on this front.