Providers may be right to want to change the way business is transacted. But advisers are not expecting it to happen overnight, finds Edmund Tirbutt
Group risk intermediaries regularly complain about the amount of admin they have to clear up for their insurer partners. Moves by some providers to do parts of the business process currently dealt with by intermediaries were the subject of debate amongst delegates at the Group Risk Adviser Forum held in London last month by Corporate Adviser in association with Aviva.
New market entrant Ellipse’s desire to achieve much closer links with employers is an example of what could mark a new trend in group risk administration.
Jamie Winter, head of healthcare and risk consulting a Towers Watson, said his understanding of what Ellipse wanted from the market was a more efficient administration model in place rather than a fight for business with intermediaries.
He said: “Ellipse is trying to set up an efficient structure using electronic transfer of information which doesn’t need the intermediary in that part of the process. Their idea is that they pull quarterly or monthly data and then tap it into their system. They then apply age-related rates, produce a premium and go ’Bang, this is how much you are going to pay this month’. In principle this is a brilliant idea, but the problem is that the larger clients, which they intend to start targeting, tend to have very complex structures and eligibilities and things that are quite hard to bring into a one-push button. So you have got 12,000 employees in one scheme and a group of 12 people who have been Tupe’d across on another basis. Dealing with that is the challenge.”
Simon Derby, director at i2 Healthcare argued that it was impossible for any provider, however smart their systems, to deal with employers. He said: “Putting it quite bluntly, I do not think that insurers are capable of servicing employers direct. We, as intermediaries, are the buffer between the insurer and the client, and even with the clout we have, that comes from the large books of business we hold with these insurers, we still have to do a hell of a lot of running around. Insurers going direct is not going to happen.”
The prospect of group risk providers targeting employers direct may have receded with Ellipse’s decision to distribute through intermediaries after all. But while such an approach could be perceived as direct competition to intermediaries, some advisers believe it is exactly the impetus the market needs to bring in new customers.
John Dean, head of health and protection at Punter Southall, told delegates that a desire on the part of group risk providers to go direct was precisely what is needed to grow the group risk market.
Dean said: “I would absolutely love it if insurance companies tried to go direct because they would aim at the people who are uninsured. These people would listen and might be interested, in which case they would be more likely to engage in advice. Only a very small percentage of the potential UK market is covered for group risk products but none of us intermediaries sell insurance. We sell advice.
“Having previously been a sales director of a company that sold direct and through intermediaries, I can tell you that 75 per cent of your direct sales that become warm leads end up being intermediated sales. Unless insurance companies do something, this market is going to remain stagnant and boring for a long time.”
This continued lack of genuine new business was considered the single most important factor preventing limited term income protection from taking off in the near future. Two thirds of attendees anticipated that under 25 per cent of group income protection business written in 2010 was going to be on a limited-term basis.
Chris Ford, director of group risk at Jelf Employee Benefits, said: “A lot of employers are currently interested in the concept of limited term and in the potential savings it could realise for them but in the cold light of day they are not prepared to change what is already promised. So, whilst I think it’s going to have a good place for new business, it is unlikely to have a significant impact on existing business.”
Derby was “amazed” at the complete lack of desire shown by employers to reduce benefits during the downturn, even though they have been quite prepared to make redundancies and introduce salary freezes and pay cuts.
Derby said: “The majority of new group income protection business I wrote last year was on a limited term basis but I find it strange that there has been no appetite to upset contractual arrangements. In one classic case I could have saved an employer half a million pounds but when I mentioned the subject of limited term I was greeted as though I’d walked into the room with a nest full of vipers.”
Towers Watson’s Jamie Winter also highlighted opportunities that could result from defined benefit pension schemes closing to future accrual and from Labour’s recent announcement that it plans to rush through legislation to scrap the mandatory retirement age before the next election.
Winter said: “All these people coming out of defined benefit schemes are going to need some sort of ill-health benefit going forward and it’s a golden opportunity for the market but they are not going to want full term. They will want limited term, capital options and direct pay.
dditionally, if they remove the retirement age altogether then suddenly group income protection becomes instantly unaffordable, so limited term becomes the only solution.”
But opinion was notably polarised on what effect the complete scrapping of the compulsory retirement age would have on group income protection business volumes. A substantial 44 per cent thought it would have no effect at all, whilst the same proportion thought it would reduce business by 20 per cent or more.
There were also mixed views on the suitability of capital options (lump sums payable at the end of a short-term benefit period, at which point the employee is normally removed from the payroll.) A number of attendees were concerned that dumping people off the payroll early normally meant them having to do without other insurance covers but Sarah Prosser, consultant at Lorica Consulting, argued: “If an employer is that concerned about employees retaining other insurance benefits then perhaps they are not suited to limited term anyway.”
It was generally agreed that the attractions of capital options would be greatly increased if the taxation situation could be made clearer.
Punter Southall’s John Dean said: “I understand that Unum is saying that its capital option lump sum is tax free and, interestingly, on the capitalisation of claims I’ve had this year in virtually all cases the Revenue has agreed the money is tax-free. But we have to have clarity.”
Advisers were barely luke warm however, when it came to the prospect of employees benefiting from a lump sum from a group critical illness contract. Only 11 per cent thought critical illness cover was an essential component of a broad group risk offering, and the fact that company-paid cover was taxable as a benefit in kind was considered a big issue. So was the exclusion of pre-existing conditions.
David Barker, risk adviser at Enrich Reward, reflected: “It would be fair to say that they’ve made the product over-complicated in the sense that different insurers cover different conditions and have different survival periods. It can be hard to get clients to understand that and to buy into the product as a benefit, especially when they’ve already got group income protection.”
Ford even thought there was a slight danger that critical illness cover could actually be confused with group income protection but added that the product lent itself quite well to the voluntary market.
He said “It’s quite easy to put on there with the right number of lives. The mechanics are there and the insurers who do it are good at it, and the admin works. But different interpretations of free cover limits and of underwriting can be a problem.”