The ageing challenges for group risk

The group risk industry felt it dodged a bullet with the 2011 exemption from the abolition of the DRA. Edmund Tirbutt investigates what has happened to cover for older workers since then.   

The group risk industry’s initial reaction to the news that it had acquired an exemption from the abolition of the default retirement age (DRA) in October 2011 was overwhelmingly one of relief. The consequences of not obtaining one had seemed unthinkable, with the main concern being that if employees of any age became automatically entitled to group life, income protection and critical illness cover then the escalating costs involved could threaten the products’ very existence. 

Zurich Corporate Risk group risk proposition manager Nick Homer says: “The issue was really risk mitigation as there was a big cloud hanging over the industry before we got the exemption, particularly for group income protection, for which the benefit payments would have otherwise been open-ended. But confidence was restored.”

The removal of this cloud and the much-mooted opportunities for arranging client meetings to discuss the resulting implications for group risk arrangements did not however translate into large new business volumes. While it is possible that the 9.7 per cent rise in in-force group risk premiums recorded for 2012 by Swiss Re bears testimony to at least some belated impact, it is hard to distinguish this from other factors.  

At the very minimum, most employers were expected to want to alter their scheme wordings to extend current cessation dates to state pension age (SPA) – to reflect the future increases due in this beyond 65. In addition, considerable demand was anticipated for raising scheme ages to 70, or even 75, to cover employees choosing to work beyond SPA. But action on both fronts has been well below expectations.

But Unum reports that only around 20 per cent of its group income protection schemes have moved from cover expiry date to SPA, and Canada Life, whilst volunteering no actual figures, expresses disappointment in activity levels from advisers. 

Canada Life marketing director Paul Avis says: “Most schemes have two-yearly rate reviews, so they have been through the review process. But they are mostly saying they are sticking with cover to age 65. This is despite the fact that cover to SPA can cost nothing for life and only 2 to 3 per cent for income protection. We would like advisers to quote SPA cessation ages on all our benefits routinely.” 

When it comes to raising scheme ages beyond SPA, income protection has experienced far less demand than life, and cost is a big issue here. Most group risk insurers are offering life cover to age 70 without a material increase in cost, and to 75 with only a modest increase. With income protection, on the other hand, adding another five years to the cover term can easily cost 50 per cent more  with a scheme with an average age of 40 and could even cost several hundred per cent more for an older scheme. 

Gallagher Employee Benefits chief executive Tim Johnson says: “Of our 400 group risk clients most group life schemes have extended cover to 70, and a small proportion to 75, but not one group income protection client has asked for an extension beyond SPA. They’ve all had the subject raised with them at least once and, although some thought about it, every single one regarded it as too expensive. A lot of employers are also questioning why they should insure employees when they’ve got a pension they could take.”

Punter Southall Health & Protection Consulting (PSHPC) is also unaware of having any group income protection clients that go beyond SPA, and feedback from insurers does little to contradict this picture. Aviva has no group income protection schemes at all that go beyond SPA, and Zurich Corporate Risk and Unum estimate that under 5 per cent of their group income protection schemes do so. 

 Zurich Corporate Risk also reports that when extensions do take place with income protection it tends to be on the basis of having specific employees individually underwritten. Having made a precedent, employers can’t then turn down future requests from others for cover extensions for fear of being discriminatory, but it’s still cheaper than raising the entire scheme retirement age – which could act as an incentive for people to work longer and involve having to pay claims that begin before SPA to age 70 or beyond.

So, contrary to a wealth of predictions made during 2011, cover issues for older workers have been far from an overwhelming preoccupation for group risk insurers.

Unum head of proposition development Andrew Potterton says: “The whole subject has been pretty quiet and other economic dynamics have been more significant. Much more of a concern has been the fact that we’ve had to look carefully at investment considerations with regard to the management of long-term claims. Because investment returns have been poor it has impacted on premiums.” 

Furthermore, no one seems to be predicting any significant increase in demand for group income protection cover beyond SPA in the future.

i2 Healthcare director Simon Derby says: “I do think that over the coming years the numbers of employees working past 65 will increase markedly because of financial restraints but I would expect hardly any of them to have group income protection cover. Why should employers provide a benefit they have no need to when employees can draw their pension?  No-one mentioned this point when we first secured the DRA exemption as they were so desperate to herald a new dawn for income protection on the back of the changes. So they didn’t think it through.”

Another point that appeared to be blatantly overlooked during all the euphoria in 2011 was the fact that the older employees become the more likely they are to have to work with long-term health conditions – which potentially has an impact both on income protection costs and on the demand for income protection and other workplace health and wellness programmes. 

As Dr. Sayeed Khan, chief medical adviser at manufacturers’ organisation EEF, told attendees at Corporate Adviser’s  Group Risk Industry Forum last January, the prevalence of chronic diseases in employees aged 65 to 74 is nearly quadruple that in those aged 25 to 44 (see box). 

Indeed, employer research results released by Group Risk Development in November 2013 showed that the
percentage of employers whose
absence rates have remained unchanged but who have seen an increase in age-related conditions had risen from 14.5 per cent in 2012 to 22.8 per cent in 2013.

Friends Life director of group protection David Williams says: “The real challenge for employers is whether or not they are in a position to manage an ageing workforce and understanding which conditions become more prevalent. This will eventually have some group risk implications but I don’t believe it is their first concern.”

Justine James, director of HR consultancy Talentsmoothie, which has been carrying out research into ageing workforce issues, highlights Continental examples of how employers have found it worth investing in equipment to help older limbs work longer. 

For example, in 2007 managers of BMW in Berlin set up an experimental assembly line with older employees featuring hoists to spare ageing backs, adjustable-height work benches and wooden – as opposed to rubber – floors to help hips swivel during repetitive tasks. The result was that the older workers did a better job than their younger colleagues on another line at the same factory. 

Many of these changes are consequently being implemented at plants across the company, and other changes are being incorporated such as movable instruction screens with large letters and a magnifying glass, and a two-hour rotation cycle to keep minds sharp by regularly switching task. Other car manufacturers are also considering introducing similar changes.  

James says: “Our research shows that older people do need a bit more help in the workplace, and the potential benefits of employees working later should outweigh the potential downsides of deteriorating health. But no-one’s really discussing the matter yet as employers are worried about age discrimination and employees are worried that they will be made redundant.” 

Should such working practices start to catch on in the UK, it could potentially make group income protection cover for the over 65s more affordable by reducing claims bills. ONS figures in June showed the number of workers over age 65 topping 1m for the first time. That means 9 per cent of the
workforce are now over state pension age, and this figure is set to growth.
The time will surely come when it becomes economical for working
practices to take more account of changing demographics. n

Common health problems in men Age bands

by age band (prevalence per 10,000) 25-44 45-64 65-74  

Common cancers (specifically lung, bowel, 2 48 349

breast, prostate)

Diabetes 97 458 1059

Senile dementia (e.g. Alzheimer’s  5 8 35

& similar conditions     

Psychosis (schizophrenia & similar) 93 98 74

Other mental disorders 586 696 661

(e.g. anxiety, depression)  

Parkinson’s disease 1 10 65

Hypertension 125 996 2289

Heart disease (e.g. heart attacks, angina) 16 337 1152

Stroke 7 75 319

Chronic lung disease 367 452 914

(e.g. asthma, bronchitis)  

Arthritis (including rheumatoid arthritis, 277 642 1182

osteoarthritis, joint problems)

Back and neck disorders 617 753 851

Musculoskeletal disorders, excluding 501 909 1186

back and neck

Total 2694 5482 10136

Source: Dr. Sayeed Khan, EEF