Gilt yields, an ageing population, interaction with state benefits and political intervention all present long-term challenges to the group risk sector. But, discovers Edmund Tirbutt, there are reasons to be cheerful
Ask a dozen group risk experts to identify changes in the nature of the risks facing their sector and all will start with the financial landscape. Interest rates and gilt yields are at unprecedentedly low levels and no one expects this situation to change any time soon.
Volatile and falling investment returns have had a particularly severe impact on group income protection and death-in-service dependants’ pensions, for which long-term interest rates are a key pricing element. Premium increases have therefore been quite conspicuous.
According to Swiss Re’s Group Watch 2015, GIP in-force premiums rose by 6 per cent during 2014, benefit amounts by 4.2 per cent and lives insured by 1.9 per cent. In-force life premiums rose by 8.9 per cent but benefit amounts rose by 4.2 per cent and lives insured by 1 per cent. Continued premium increases could obviously affect future employer demand.
But a trend towards getting rid of death-in-service dependants’ pensions and replacing them with additional lump sum life cover should help curb group life premiums in future. According to Swiss Re, in-force death-in-service dependants’ pensions numbered only 3,294 in 2014, compared with 3,652 in 2013 and 4,423 in 2010.
Towers Watson senior consultant Jamie Winter says: “In a defined contribution environment, a typical dependant’s pension might be 25 per cent of salary, payable to the dependent partner for life. But improving mortality and very low investment returns have seen the annuity cost to the insurer going through the roof in the past five or six years and the willingness of the insurance market to offer the benefit is reducing.
“Four death-in-service dependants’ pension providers out of 11 have withdrawn during the past three years and I think others will follow. In my opinion, dependants’ pensions will have become very rare in 10 years’ time and this will help control group life premiums and make the value of death-in-service benefits more visible to employees.”
The other most widely touted concerns refer to challenges posed by an increasingly ageing workforce. According to the Office for National Statistics, the number of people aged over 60 will increase from 15.1 million in 2015 to 21.4 million in 2035.
Because most employers to date have taken advantage of the exemption enjoyed by group risk from the abolition of the default retirement age, the fear is that, eventually, there will be a clamour from employees asking why they no longer have group risk benefits. The need for cover for older workers is starting to be addressed by limited-term GIP with no upper age limit but it could take a generation for demand to come to fruition.
Group Risk Development spokesperson Katharine Moxham says: “Having three generations in the same workforce will create challenges to making benefits packages relevant and these are beginning to be flagged up. Someone in their 20s won’t be interested in the same thing as someone in their 70s, so more flexibility is likely to be on the agenda.”
Otherwise, views on the most pressing issues are somewhat fragmented. Canada Life Group Insurance marketing director Paul Avis is unusual in singling out the current rolling-out of Universal Credit as a significant potential threat.
GIP, which has never been means-tested before, is being means-tested against the housing benefit element of Universal Credit. If this precedent means that eventually it will become means-tested against all state benefits – as individual income protection is – GIP could become regarded primarily as an executive perk rather than as a product for all employees.
Avis says: “So far, Universal Credit has been rolled out to only a minority of people. But it will be an issue that gathers momentum as the roll-out
continues because it will undermine the positive message about the value
of group income protection.”
Effect of pension reform
Avis also highlights possible complications arising from the unintended consequences of pension reform. If people decide to use the new pension freedoms to dip into their pension pots, it could affect their GIP benefits for that year as they will reduce by the amount of the pension that claimants take.
Avis says: “It’s really not clear what stance insurers will take on the new pensions flexibility. While the regulators argue for product simplicity and we all support this, wider environmental factors are undermining our ability to deliver on the requirement.”
Swiss Re technical manager Ron Wheatcroft points out that pension reform is also having a knock-on effect on group life through the reductions in the lifetime allowance – which fell to £1.25m in April 2014 and is due to fall again to £1 million in April 2016.
He expects this to support the trend towards excepted group life schemes, which are non-pensionable and therefore fall outside the lifetime allowance. According to Group Watch 2015, in 2014 excepted group life premiums grew by 27.9 per cent from the year before and benefits by 29.4 per cent.
Ellipse chief executive John Ritchie singles out pandemic, natural catastrophe and political risk as primary areas of concern. The last of these could result from protection becoming auto-enrolled.
He says: “The Government could start changing the rules or interfering too much with insurers’ ability to handle claims, as we have seen happening in Australia and Israel. Pandemic risks such as Ebola, bird flu and the lack of effectiveness of antibiotics are also easy to get complacent about. All these things need to be constantly monitored, modelled and reappraised.”
But there is also no shortage of positive factors looming that can at least help to combat these risks. Of particular note is widespread anecdotal evidence that, as the economy recovers, health and wellbeing are figuring more prominently on corporate agendas. This could in due course be taken to a new level by the impact of wearable devices that measure employees’ exercise levels, movement and sleep patterns and provide feedback on whether they are adequate.
Moxham says: “The data gathered from these wearable devices could ultimately be used to reduce premiums and the impact could counter some of the negative factors on the horizon. Employers are increasingly realising that health and wellbeing impacts on the bottom line and having this conversation with group risk providers can have a positive effect on premiums.”
It is early days but Aviva is offering a free Fitbug device to all members of its Havensrock GIP proposition run in conjunction with PSHPC, and it has done trials with other wearable devices.
Aviva head of propositions, UK health, Ally Antell says: “We have seen that it’s a great way to engage with customers and provide an added-value tool but we are still working on the question of how we use the data. We feel there is an opportunity to embed this technology in the next generation of smartphones and, when this happens, we expect it will result in much higher adoption rates.”
Zurich Insurance group risk propositions manager Nick Homer cites far more future positives than negatives.
He says: “We can help older employees manage their health, and technological advances may see job roles become less manual and therefore lower risk. The continued trend towards flex can help mitigate premium increases by using salary sacrifice and Solvency 11 should help reduce pressure on costs as some providers will be seeking to manage costs in the most efficient way.”
Munich Re head of business development Lee Lovett is another who views the glass as at least half full. With the exception of the investment climate, he regards the current risks in the market as being “sort of business as usual”.
He says: “I am possibly even more relaxed about the outcome than I have been at some points in my career. Overall, there are more opportunities for the group risk market than threats to it.”
INTEREST RATE REDUCTION IMPACTS ON DEPENDANT’S PENSION
An anonymised case study provided by Canada Life shows how just a 1 per cent fall in interest rates can move the goalposts dramatically in terms of the investment needed by insurers to cover the provision of death-in-service dependants’ pensions.
Under the terms of this employer’s death-in-service scheme, a level pension was payable to the legal spouse equivalent to 33 per cent of the member’s basic salary and a claim was received on the death of a 58-year-old male member who had been earning £15,000 a year. His spouse was aged 55.
Assuming that the dependant’s £5,000 pension would be paid for around 30 years, in a 4 per cent interest rate world the capital required for investment over the period of payment was £86,460. But at an interest rate of 3 per cent, the investment needed increased by slightly over £12,000 to £98,511. Current 15-year gilt rates are little higher than 2 per cent.
Canada Life Group Insurance sales director Jon Ford says: “A 1 per cent reduction in the interest rate resulted in a 14 per cent increase in the investment needed. In the short term, the difference in initial investment costs may not seem significant but insurers must plan for long-term payments.”