Turning the corner

The latest Group Watch research flags up both concerns and opportunities for the industry says Ron Wheatcroft, co-author of the report and technical manager at Swiss Re

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Our latest research shows that in-force premiums at the end of 2009 across death benefits, long-term disability income and critical illness cover fell by 7.7 per cent. Inforce death benefit premiums fell by 5.1 per cent while long-term disability income premiums fell by 12.5 per cent. Meanwhile, in-force critical illness premiums increased by 6.6 per cent.

Despite the drop in premiums, however, death benefit sums assured and long-term disability income benefits
both rose by 2 per cent. Critical illness benefits increased by 3.1 per cent.

A year ago, when Swiss Re surveyed the main participants in the group risk market, the outlook for 2009 was negative. The difficult economic climate, cost cutting by employers and greater price competition in the market dominated thinking. Respondents anticipated a fall in business across all group risk product types.

The number of in-force death benefit schemes fell from 42,366 to 42,244. Within this, the number of in-force excepted group life schemes rose by 11.1 per cent and now account for 7.0 per cent of all in-force lump sum death benefit premiums compared with 5.2 per cent in 2008.

Excepted group life schemes have simplified death benefits provision outside registered schemes. Nonetheless, the rules could be simplified further. For instance, the common benefit formula limitation across all scheme members imposes an unnecessary degree of complexity. One product provider has an arrangement with a single employer which had to be written as 20 different excepted schemes to ensure it fulfilled the legislation. Clearly, this is inefficient. Some respondents saw the introduction of Nest as a risk to group risk schemes in general with group life
schemes, in particular, a possible target for cost saving.

Simple changes to the excepted group life rules would permit cost-effective death benefit schemes to be provided alongside Nest. At a macro level, this is important because Nest members are likely to be mainly lower earners with little or no easy access to financial products who have become uneconomic for the retail market to serve. Importantly, changes to the excepted group life rules would bring no risk to the Nest timetable.

Looking forward, this year’s survey found growing but cautious optimism that the market had “bottomed out” and that we would begin to see growth again, albeit modest

The number of long-term disability income schemes fell by 4.5 per cent to 17,796 at the end of 2009. Of these schemes, 7.1 per cent incorporate a limited benefit period, the most common being two years or five years, an increase from 6.7 per cent in 2008.

The changes are more marked, however, when comparing scheme benefits and lives assured. At the end of 2009, 16.8 per cent of all scheme benefits were subject to a limited payment term, an increase from 11.1 per cent in 2008. The percentage of insured lives increased from 15.0 per cent to 18.4 per cent, suggesting that it is the larger schemes where benefit levels are changing.

It is a moot point whether these changes result from employer concerns about age discrimination employment law or cost-cutting. In practice, it is probably some of each. The group risk market has continued to engage positively with government officials to secure an exemption allowing insurers to set an upper age limit for risk benefits. We need a sustainable solution – one solution would be to link the upper limit to the State Retirement Age, reflecting the age limits already adopted for many state benefits.

Looking forward, this year’s survey found growing but cautious optimism that the market had “bottomed out” and that we would begin to see growth again, albeit modest.

The more positive outlook may, to some extent, be linked to the increased profile group risk is enjoying as a result of the work of Group Risk Development (GriD). This is important because many employers have had next to no awareness of group risk in the past. There is still much to be done, however, with consumer research conducted by Swiss Re in 2009 indicating that more than five million people think that they have long-term disability income insurance through an employer-sponsored arrangement. This over-statement, by a factor of three, is consistent with research carried out back to 2004.

In addition, the group risk market needs to foster and continue to grow closer links with government agencies. Furthermore, we need to work to get more public support from government that group risk is a good thing. With the increased emphasis on benefits in the workplace as a result of Nest and greater member choice through flexible benefit schemes, there is a great opportunity to widen consumer access to risk cover.