Limited liability

Predictions of a trend towards group income protection schemes offering short-term benefit payment periods have been made for a decade now, without ever materialising in anything more than a limited way.

Such arrangements currently account for less than 7 per cent of all income protection schemes, according to Swiss Re (see box below). But a combination of unprecedented pressure on employers’ expenditure and the benefit restructures that will flow from it mean some advisers think short term benefit payment periods’ time may have finally come.

The theory behind the concept is sound. Indeed every income protection expert agrees that if income protection was designed from scratch today it would be more likely to have a limited payment period than a standard one – which pays out until an employee’s intended retirement date if they fail to recover sufficiently from their illness or injury to return to work. The idea that a job is for life has become well and truly outdated, so surely a benefit structure that pays out for a maximum of two, three, four or five years is more logical, especially during a recession? After all, providers volunteer cost discounts of 30 to 40 per cent for a five-year payment period and of 70 to 75 per cent for a two-year one.

All major providers offer limited payment periods, either via an option or separate package or simply by tailoring their standard format to suit incoming requests. Some also offer capital options, which pay a lump sum at the end of the limited payment period. Furthermore, the Income Protection Task Force is taking the limited payment concept so seriously that it is considering introducing a Kitemark to help non-specialist intermediaries establish which of these schemes constitute good value.

Nevertheless, despite this vast reservoir of enthusiasm and commitment, the proportions of their income protection books that most providers volunteer limited payment schemes account for differ little from the Swiss Re average – Canada Life (6.7 per cent) and Aviva (less than 1 per cent) being exceptions.

Glenn Laming, sales director for group protection at Legal & General, says: “There is a view that once the benefit is in place it’s not that straightforward to remove but we tend to believe it’s not as complex as people make out. Employers often say they can’t switch because of their contract of employment but this doesn’t seem to stop them making changes to their pension arrangements. “The challenge is whether we can convince the market whether up-front services like physiotherapy and counselling are valuable, because there is a clear link between early intervention and early return to work. Unlike 10 or 15 years ago, there is a lot more focus on these services, and the more they are valued the less likely employers are to worry about the length of the term.”

According to Laming and many others, however, the real breakthrough will not come until providers start writing genuine new business. This, they argue, is where employers are most likely to go down the limited payment route. Swiss Re Group Watch 2009 figures, which show that overall in-force premiums for group income protection for 2008 increased by 1.2 per cent in 2007, suggest there is very little new business of any sort.

Colin Micklewright, head of income protection business development at Canada Life says: “The dominant factor is that most group income protection business is recycled, which means that employers will only be interested in like-for-like quotes as opposed to considering changes in benefit structures. I’ve been involved in group income protection for around 20 years and I don’t think the number of schemes has ever risen much above current levels.

“The big opportunity occurred when employers moved from defined benefit to defined contribution pension schemes and it was thought that a lot of income protection would be used to plug the gap for ill-health-early-retirement. But that never really happened even though income protection seemed an ideal solution. We would like to see much more business done and we accept that not everyone can fund full-term cover.”

Those who pin the bulk of the blame on lack of new business inevitably point to the need to make the man in the street more aware of the existence of group income protection and they highlight the work being done by industry body Group Risk Development (GRiD) in this respect. But another school of thought feels that we might not have to wait so long for a breakthrough because widespread switching towards limited payment formats from existing schemes is lying just around the corner.

Mark McLeod, group risk and healthcare manager at Towry Law, says: “I genuinely feel the moment has arrived, although it will not be reflected in the Swiss Re figures until next year. Clients have been very keen to talk about scheme redesign and cost-cutting measures, and the feeling at a recent GRiD meeting was that limited term income protection will grow threefold during the next year. So it’s only a matter of time before we start seeing actions starting to speak louder than words.”

“People have been talking about limited term for a good 10 years but we haven’t had a recession during that time, and there is never going to be a better opportunity to push the approach, even if only as a temporary measure. The savings are so significant that we feel many employers won’t be able to overlook the opportunity. The alternative may be to cancel cover, which would be unthinkable for many.”

This viewpoint is supported by the fact that some providers report a recent increase in quotes for limited payment income protection that has not yet been converted into actual demand for new business. But, even if we are due for a massive surge in limited payment business, some commentators will still point to a downside.

Steve Browning, group protection product manager at Friends Provident, says: “All limited payment has done has been to reduce the in-force premium in the market and this is arguably increasing the protection gap. As an industry, this matters because we have to find ways to grow, and our market is judged not just by the number of people covered but also by the amount of cover they actually have.”

Nevertheless, having a limited payment term is surely an awful lot better than having what the vast majority of employers have, which is no income protection cover at all. Furthermore, if the limited payment format becomes the norm it should not in fact widen the £190 billion income protection gap. This is because the method of calculating the gap, which is currently based on cover extending to retirement age, would surely have to change to reflect the new widespread recognition that jobs, and therefore cover, are no longer
for life.

Adviser’s view: Commission a barrier to change

David Dolding, senior consultant at Lorica Consulting, feels that there is at least an element of truth in the idea that commission-based intermediaries do not recommend as much limited payment income protection business as perhaps they should do – because the lower premiums involved earn them less commission.

Dolding says: “If they recommend a big saving of premium and have already been taking the standard 12 per cent commission for group income protection it would be hard for them to say that they were going to up their commission, even though some insurers are able to pay more than 12 per cent. But I think more intermediaries are moving towards fee-based work and this will help to sell more limited term business.”

Lorica Consulting, which is fee-based, estimates that 20 per cent of its existing group income protection book has a limited payment element.

Dolding continues: “I am personally not a big fan of limited payment income protection but every client is different and I put my personal views to one side when the format suits the client. We don’t plug limited payment income protection but we will recommend it if it suits the client. For example, it can be useful for employers wishing to save on costs, can help with terminating employment and can fit comfortably with the flexible benefits ethos.”