Some insurers are getting twitchy about the new entrants auto-enrolment will bring to group risk schemes.
Edmund Tirbutt examines the risks
You could be forgiven for thinking there are no underwriting concerns in connection with pensions auto-enrolment, but drill below the surface and you will see some providers are nervous at the risk they may be taking on.
Six months ago group risk advisers’ minds had been put at ease by many providers saying the issue of whether those auto-enrolling should be treated as late entrants was no longer an issue as they would be spared from medical underwriting as long as they didn’t exceed the free-cover limit.
But a glance under the bonnet suggests things were never going to be quite that straightforward. Some insurers are still making employees who were auto-enrolling subject to certain parameters.
Carlos Correia, principal at LCP, says: “Some insurers are saying that they waive underwriting as long as the benefit involved is below a certain level. This could be only £250,000 for life cover when the actual free-cover limit was £1m to £1.8m. Insurers are also taking different stances towards those who are already absent at the point of auto-enrolment. But things are continually changing and insurers may get more generous as they go along.
“Some are trying to make things as smooth as possible while others are getting too hung up on exact pricing for additional premiums and seem to have been struggling to come up with sensible working terms. It’s disappointing they didn’t think it through first to check their proposals actually worked.”
Aviva has been in the more liberal camp, reasoning that – although there would always be the odd exception – those joining its group risk schemes as a result of auto-enrolment won’t be doing so with the aim of deliberately selecting against it. All below the free-cover limit are therefore being spared underwriting, and long-term absenteeism information is not required from insurers for life schemes of larger than 50 lives.
Legal & General had only been waiving medical underwriting for those actively at work on life cover and dependent’s pensions of up to £250,000 and income protection cover of up to £50,000 of benefit. But its stance has changed from this month. Now those joining schemes of up to 100 lives for life cover and dependent’s pensions within a tri-annual event will not require underwriting if they are within the free-cover limit and actively at work – and there is no actively at work requirement for schemes of above 100 lives. For income protection anyone actively at work and joining within a tri-annual event will not require underwriting if they are within the free-cover limit.
But even if all insurers come completely in line in this respect there are a still a range of other underwriting issues that intermediaries should be paying attention to.
Paul Avis, marketing director at Canada Life Group Insurance warns that they must check to ensure that an influx of new members due to auto-enrolment doesn’t make schemes exceed event limits for catastrophe cover. London based firms often have limits of £100 million but some have them as low as £50 million or £25 million.
He also points to potential issues concerning employees who don’t initially meet the auto-enrolment eligibility criteria, such as very low earners and those whose earnings take them above the free-cover limit, and where people have previously been underwritten but declined or had special terms imposed.
Avis says: “Some low earners will automatically come in and out as their earnings fluctuate and so the simplest eligibility criteria is to include all employees, so everyone is clear who is covered and who is not. High earners need to be especially careful because if they have fixed or enhanced protection they will lose it if they are not immediately opted out of automatic enrolment.
“Furthermore, a tax charge on the loss of the protection would need to be levied. There is an advice issue here regarding whether this should be picked up by the individual adviser, the trustee, the HR team or compensation and benefits. Employers need to agree who is responsible and act accordingly.”
Avis continues: “Anyone who has been previously underwritten and declined but is being reconsidered as a result of auto-enrolment will not benefit from the free-cover limit and anyone who has had terms imposed won’t get those terms revised without further medical underwriting.”
But insurers are taking some notably different stances towards such non-standard health risks.
Unum regards employees who have previously had special terms imposed as a non-issue on the grounds that they would probably already be in the scheme. But it would want to re-underwrite anyone who has actually been refused entry in the past unless there has been a favourable shift in scheme profile such as a significant increase in the size – which it points out could well happen as a result of auto-enrolment.
Aviva, on the other hand, will not enquire whether anyone has previously been declined or accepted at special terms on either an individual or group policy as long as they are within the free-cover limit. The only exception is if they were previously declined or had special terms for the scheme they are now trying to join. Although it reserves the right to do a rate review if schemes grow by 25 per cent, in practice it may not do so if auto-enrolment results in average ages and average benefits coming down.
Steve Bridger, head of group risk at Aviva UK Life, says: “The chances that they’ve been in a group risk scheme if they haven’t been in a pension are quite small, and salaries and ages should be lower. We are not overly worried about auto-enrolment from a risk point of view but we are far more worried about service and administration issues.”
Bridger’s optimism regarding underwriting issues is very much shared by the reinsurance community. Ron Wheatcoft, technical manager at Swiss Re Life & Health, reports that auto-enrolment is not causing too much concern as the anti-selection risk doesn’t seem that great. He is unsurprised that all companies aren’t taking exactly the same stances but thinks they will end up being very close together.
Lee Lovett, head of business development at Munich Re says: “As with a lot of new things, insurers tend to be a little bit conservative and play it safe initially, so some are getting a bit worried about some of the things around the edges. But one could draw a parallel to the abolition of the default retirement age when initially insurers said they must underwrite cover extended to the over 65’s but then said they needed only limited underwriting, and some may now not even underwrite at all.
“I could see this going the same way, and in a few years’ time auto-enrolment may not be considered a concern and insurers may readily extend group risk membership to all those being auto-enrolled without asking further questions.”
Stephen Ellis, head of group risk at Premier Choice Employee Benefits, warns that advisers need to be very careful that they don’t fail to disclose material facts about people who are applying for pension-linked life cover but who have been previously declined by a life scheme.
He says “It is important to be open and honest with insurers or it could come back to bite you. But if you declare it and some time has elapsed it may still be possible to get the employee terms, although it really needs to be a good couple of years since they were turned down.
“It’s really a case of knowing the circumstances of the individual case so that you can have a meaningful conversation with the insurer and can persuade them that the risk may have improved.
We have a handful of cases still going through of people being re-underwritten after being declined and they should get some sort of terms.”
These particular cases are not in fact linked to auto-enrolment because Premier Choice Employee Benefits has already de-linked around 90% of its group life schemes from pension schemes. Nevertheless, Ellis fears that auto-enrolment could be the catalyst for such situations arising with other advisers.