Group critical illness cover is on the increase, but improvements around P11D and pre-existing condition disclosure hold the key to greater coverage, finds Edmund Tirbutt
Whatever method you use to measure growth, there can be no doubt that group critical illness cover grew significantly last year. But if you are of the glass-half-empty point of view then you will note that the product commands just under a 10th of the premium value of the group income protection market and just under a 20th of the premium value of the group life market. Add to that the fact that the proportion of group critical illness schemes accounted for by voluntary/flex arrangements is, according to Swiss Re, as high as 61 per cent, and it is clear that any triumphalism should be tempered.
Punter Southall Health & Protection Consulting senior consultant Paul White says: “You have to ask at what point critical illness cover will reach saturation point in flex. The majority of larger flex schemes now have the cover, so there is the danger that voluntary critical illness schemes will only grow as quickly as the flex market in the future.”
The high voluntary proportion in part reflects that many employers feel that private medical insurance (PMI), life and income protection will protect employees adequately against the financial consequences of most serious illnesses, while critical illness cover will just produce a ‘nice-to-have’ lump-sum buffer that isn’t essential.
Additionally, unlike group income protection, critical illness cover offers far more benefit to the employee than it does to the employer. Indeed, it can even run contrary to an employer’s interests if an employee who survives an illness decides to step off the treadmill because they’ve received a sizeable lump sum.
But the most commonly raised barrier to selling company-paid critical illness cover is the fact that, unlike with group life and income protection, it creates a P11D liability for the employee.
Canada Life Group Insurance marketing director Paul Avis points out that the Office of Tax Simplification has a mandate to remove all benefits worth under £100 from the P11D regime, and he argues that company-paid cover would be much more attractive if this happened.
With the average group critical illness premium being around £150 per employee per year, such a move could certainly benefit many schemes. But it could also reduce premium levels industry-wide by creating a trend towards capping premiums at £100.
On the other hand, Group Risk Development (Grid) spokesperson Katharine Moxham wonders whether people don’t get too hung up about P11D liabilities, which are relatively minimal – a basic-rate taxpayer with the average premium only pays around £30 a year in tax. She also wonders whether the cover could be offered on an opt-out basis.
She says: “If employers could make this compulsory but offer those concerned about P11D liabilities the ability to opt out, we could provide free cover in line with other group risk benefits, so we could do without pre-existing condition exclusions.”
This would certainly seem a way of killing two of the biggest birds with one stone, as the pre-existing condition exclusion issue, which affects both voluntary and company-paid cover, is also widely considered a major barrier to sales.
Ellipse distributor partnerships manager Chris Morgan says: “When I talk to employees while doing benefits road shows it becomes clear that some features could be improved, and pre-existing conditions exclusions are definitely one of these. I think there is now an option with the technology available to underwrite people at the outset instead of having blanket pre-existing condition exclusions, which can lead to disappointment at the claims stage.”
Mercer partner John Cowell sees no reason in theory why group critical illness cover shouldn’t be done on a medically underwritten ‘once-and-done’ basis, and is surprised an insurer hasn’t already tried it. Jelf Employee Benefits corporate account manager Leighton Churchill has in fact already raised the matter with insurers and wouldn’t be surprised if at least one tried it in the near future.
Aviva group risk director Steve Bridger says: “We would consider medical underwriting but it’s more suitable for company-paid cover, as pre-existing condition exclusions are the only risk control on voluntary cover. On company-paid it could work, particularly at the smaller end where it’s not untypical to ask for declarations of health on other group risk products.”
Unum head of proposition development Andrew Potterton says: “The most creative thing to do would be to offer cover without a pre-existing condition exclusion but is there a way or an appetite to do that safely? I do think there is growth potential in employer-paid critical illness cover, at least as a flex or base buy-up offering. If it is packaged well, SMEs, having set up their pension arrangements for staff, may consider paying for some cover and offering top-up coverage through salary deduction.”
Punter Southall Health & Protection Consulting’s Paul White feels that insurers could consider trying to make group critical illness cover more attractive to employers by including wellness-related add-ons to help prevent serious illnesses from occurring. He points to the possibility of coming up with something similar to what VitalityLife is doing in the individual critical illness market.
i2 Healthcare director Simon Derby feels that to combat increased claims going forward insurers need to look at using community rating to spread the risk as opposed to rating each scheme individually. He has mentioned the idea to Unum, which hasn’t taken it on board.
A number of commentators also stress the importance of effective communications programmes to increase take-up levels in voluntary flex schemes, which are commonly volunteered as being in the region of 5 to 10 per cent.
Munich Re head of business development Lee Lovett says: “I would think that critical illness cover would be of value to around half the workforce but the take-up level that can actually be achieved would depend on what else is in the flex package. If it’s purely an insurance-based flex package I don’t see why one shouldn’t achieve a 50 per cent take-up.
“But in reality the flex package is likely to include more immediate tangible benefits that employees may prefer, such as discounted gym membership or Cycle to Work schemes. However, it should still be possible to double the take-up of critical illness cover through suitable support and advice.”
Insurers produce useful intranet sites and other communications material but some intermediaries have been reluctant to pass these on because they are concerned that providing insurers direct access to clients could result in clients questioning the value their intermediary is adding.
Avis says: “Recent Financial Ombudsman Service judgments have shown that where insurer, adviser and employer communicate benefits to employees it provides maximum protection against disputed claims. If advisers are worried about our direct contact they should produce their own communications material and we would be more than happy to help without it being branded to us.
“Last year we won two very large critical illness cover schemes and the advisers actually asked us to provide information to employees via them. That enables us to promote services such as Best Doctors and Red Arc much more proactively. Critical illness cover is our priority area for employee and employer communications in 2015, and all our efforts are through the adviser. We’ve got all the materials. Just ask us.”
It is certainly hard to see what intermediaries could have to fear by taking advantage of free insurer services to brand material in the intermediary’s name. Those intermediaries who are reluctant to pass on information branded in the insurer’s name should ask themselves whether they are really adding all the value they could.
GROUP WATCH SHOWS PROGRESS
According to Swiss Re’s Group Watch 2015, in 2014:
-The number of people insured under group critical illness schemes rose by 24.1 per cent over 2013 to 474,727
-In-force premiums of group critical illness schemes increased by 7.8 per cent over 2013 to £72,587,737
-In-force group critical illness schemes increased by 7.0 per cent over 2013 to 2,840.
Swiss Re technical manager Ron Wheatcroft says: “The 90,000 lives added during 2014 were partly the result of increases in existing scheme membership but also the result of two very large schemes starting.
“Interestingly, we get very little feedback from the market on critical illness cover when we ask for input on it in surveys from providers and intermediaries. I think this is because they regard it as being largely a voluntary product.
“I’m along the lines of the view that we are getting from the rest of the market that we will be seeing more growth from voluntary schemes, and this feels right as it plays very well to giving employees more choice. To increase take-up we need to keep the proposition fresh, and peer-group discussion is helpful. But I’m not convinced that all that much needs to change.”