Age against the machine

Abolition of the DRA was never a serious threat to the PMI sector. But while the exemption is welcome, some older workers are discriminated against, finds Sam Barrett.

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Phasing out the default retirement age and allowing employees to remain in the workforce beyond age 65 has implications for many employee benefits.

But while group risk benefits such as income protection would have faced far greater challenges if the insurance industry had not been granted an exemption on the DRA, the medical insurance industry will nevertheless see some developments on account of the formal announcement last month that employers must allow older workers to work longer.

Age plays a significant part in determining medical insurance premiums. “By age 40 premiums increase by between 1 and 2 per cent a year but the steepest part of the curve is between age 60 and 75. At this point premiums increase by around 5 per cent a year until someone reaches age 80. At this point each additional year makes very little difference to the overall risk,” says Fergus Craig, commercial director at Axa PPP healthcare.

But, while age is a major determinant on premium, from a group medical insurance perspective, lifting the default retirement age is unlikely to have a significant effect.

“It won’t make a big difference to us,” says Alistair Sclare, director of healthcare at Groupama. “As people get older they’re more likely to suffer long-term conditions that would mean a claim on income protection but, in terms of medical insurance claims, there’s not much difference between a 63 year old and a 65 year old. Although there could be issues on an age-related scheme where an employer takes on an older employee, who may already have a lengthy medical history, and they need to be medically underwritten, generally employers would only be looking at a slightly higher premium each year for age-related SME business.”

Why should a 65 year-old employee face double the P11d tax charge of a youngercolleague? It’s not fair

Experience rating
For experience-rated corporate business, it’s also unlikely that the removal of the default retirement age will have a major impact on pricing. John Russell-Smith, client director at Lorica, says this often comes down to the health profile of the older employee. “People that are older and still in employment tend to have looked after themselves better than those that have retired. They’re more motivated to stay fit and healthy. You don’t suddenly see an upturn in claims when an employee reaches 65,” he explains.

Additionally, although an increase in age does generally equate to an increase in claims, this isn’t necessarily the case for employees.

According to Kevin Murdoch, senior proposition development manager at Aviva UK Health, while some conditions become more common as we age, others fall off the list of likely ailments. He explains: “There is a shift in claims pattern as we age. As an example, a female cancer such as cervical cancer is more likely to occur at a younger age than at age 65 plus. Instead there’s a greater risk of chronic conditions and orthopaedic procedures such as hip and knee replacements. An ageing workforce could lead to an increase in premiums but it’s unlikely to be significant.”

Double charging
But, where the medical insurance industry may see more of a fundamental change is with the actual pricing of large corporate schemes. Although a total premium is set based on experience, when this is broken down by employee, anyone aged 65 plus is automatically charged double the rate of younger employees. The exemption the industry has been granted to the insurance industry means this will be allowed to continue.

“This is age discrimination,” says Russell-Smith. “Why should a 65 year-old employee face double the P11d tax charge of a younger colleague? It’s not fair and I’ve picked up a couple of schemes this year where I’ve challenged the insurer for using this pricing method.”

Although Russell-Smith’s experience shows there is clearly some room for manoeuvre, many of the insurers defend this practice. Tal Gilbert, head of research and development at PruHealth, says it’s sensible to do this. “When you look at the underlying risks, costs do increase with age. It’s much fairer to do this than have a single rate for all ages. Further, even when charged twice the flat rate, the employee is still getting a better deal than if they had bought their own policy on an individual basis,” he says.

Arguments for adopting this position also look at the simplicity of the approach from an administration perspective. With a more granular approach, where different rates are apportioned according to age or age band, there would be more work involved completing P11d tax forms.
Some also point out that charging a flat rate across the board is discriminatory. “If you have a flat rate across the board you’re discriminating against younger employees,” says Craig. “Why should a 27 year old employee pay a higher rate so a 65 year old gets cover at a highly competitive rate? Do this and you risk losing the younger people from the scheme, leaving you with a risk pool made up of employees that claim.”

But, Russell-Smith isn’t convinced by these arguments. “A 65 year old in work is very different to a 65 year old retiree. It’s fair to charge the retiree more: they are more likely to suffer more ailments than someone who’s still working,” he says.

He does admit that caution sometimes needs to be applied when ditching the double rate for employees aged 65 plus. “Employers need to be careful if they’re extending cover to dependants,” he explains. “If you have a 65 year old female employee, they might have a 70 year old husband at home. This could have a much more serious effect on the risk pool.”

65 year old in work is very different to a 65 year old retiree. It’s fair to charge the retiree more: they are more likely to suffer more ailments than someone who’s still workin

The risks involved with this can be mitigated by restricting cover for dependants, although Russell-Smith says that, in spite of having a large number of employees aged over 65 across his client base, it’s not a problem he’s encountered yet.

But, although insurers defend the current position on pricing, some accept that the position may change.

Craig says that as more people stay in work over age 65 there may be a need for review. Likewise Murdoch is comfortable with a shift in the current pricing formula. “It is fairly unusual to have someone aged 65 plus on a corporate scheme but it will become more commonplace in the future. We’re already happy to accommodate different ratings if a client or broker comes to us. As long as we get the overall premium we don’t mind how it’s calculated,” he says.

Further, rather than see employers look to equalise premiums for older employees, Murdoch says that some will ask for a revision so they can charge older employees more for cover.

While the way corporate schemes are priced across a group may be up for review as more older people stay in the workplace, there’s also a possibility of more fundamental changes as medical insurance adapts to its new older customer base.

As premiums rise, whether as a result of an ageing workforce or as medical advances push medical inflation up, employers may look to replace insurance with something lower cost or with a more sustainable price such as a cash plan. “We could see more cost and cost plus business or caps being introduced on some conditions to reduce the potential liability for the insurer,” says Murdoch.

Flexible benefits programmes may also become more popular as employers look to shift the responsibility for higher premiums to the employee. Or employers may simply look to restrict the extent of cover, retaining it for executives but leaving lower grade employees out in the cold.

But few believe the change in demographics will bring on the demise of medical insurance. “The principle of medical insurance will remain,” says Russell-Smith. “Employers and employees appreciate the reassurance that it offers. It’s all about protection against the unknown.”

Where he does think a change may occur is with the type of healthcare benefits provided through medical insurance, with more insurers promoting health and wellbeing benefits rather than simply picking up the tab for medical expenses.

As you get more older people in the workforce it will be increasingly important to look at keeping them healthy

This has proved popular at PruHealth, where a range of health and fitness incentives encourage younger people to stay in the risk pool and supports long-term premium sustainability. Gilbert believes that, as working lives increase in length, the importance of this will increase too.

“The difference in health between those people that look after themselves and those that don’t increases with age,” he explains. “As you get more older people in the workforce it will be increasingly important to look at keeping them healthy.”

Other insurers are also looking at this model. For example, Bupa includes an interactive health programme, Positive Health, on its corporate schemes. This is designed to support and encourage employees to improve their health and wellbeing.

Aviva has also extended into this area with its programme, MyHealthCounts. This assesses an employee’s health and wellbeing then enables them to set targets and follow programmes to improve their status.

“Targeting health and wellbeing will become more and more important. A simple programme to reduce cholesterol could have a significant impact on employees’ health and subsequently on claims too,” says Murdoch. “Medical insurance won’t be affected to the same extent as group risk products but I do think there will be more emphasis on keeping employees in work and healthy.”