Little knowledge is a dangerous thing

The removal of the earnings cap, the roll-back of state benefits and the role of self-paid IP are all impacting the group risk market. Edmund Tirbutt reports

Katherine Moxham
Katherine Moxham

Employers have a worrying lack of understanding of the effect of the removal of the ’Earnings Cap’ along with other pre-A-day rules over a year ago, leaving themselves exposed to potentially huge liabilities, said delegates at last month’s Group Risk Adviser Forum in London.

The subject was one of several issues debated at the event, that included the future of self-paid GIP, the effect on group risk of the roll-back of the NHS and sickness benefits and the potential for new workplace products that combined PMI and IP.

Samantha Hayes, health and group risk consultant at Berwick Devoil Healthcare, reported that a lot of employers she deals with haven’t heard of the Earnings Cap issue, so stressed the importance of advisers giving them the relevant information. Simon Fletcher, client relationship director at Johnson Fleming, also acknowledged that he came across plenty of new clients that haven’t yet taken any action.

This reflects recent research by industry body Group Risk Development (Grid) that showed a worrying lack of urgency from employers a year on from the removal of the ’Earnings Cap’. It found 36 per cent of employers had taken no action on the removal of the rules and 30 per cent were still undecided on what course of action to take.

Two-thirds of employers therefore continue to inadvertently face uninsured liabilities and unbudgeted costs unless action has been taken by employers or trustees – such as putting a salary cap back in.This is because the Earnings Cap was automatically removed and the Lifetime Allowance generally came into play as the maximum lump sum payable on an employee’s death in service.

Grid spokesperson Katharine Moxham had more positive news with regard to the potential impact on group life of the reduction of the Lifetime Allowance on April 6th this year. She was able to report that recent HMRC clarification had dispelled fears that payments of group life premiums might have the effect of nullifying fixed protection.

Moxham said: “HMRC has basically said that as long as death benefits were defined benefits then fixed protection wouldn’t be affected.

Ambiguity concerning stand-alone schemes has also been clarified. In determining whether a stand-alone group life scheme will be viewed as a defined benefits arrangement, HMRC will look at the policy, the scheme rules and the employee’s contract of employment. So, where the scheme rules simply refer to the benefits covered by the group risk insurance, this shouldn’t be a problem, as the benefits will be clearly defined somewhere. “

While pension tax rule changes had impacted group risk, delegates reported little evidence that resources diverted towards pensions auto-enrolment were taking a toll on group life or GIP spend. Fletcher said that he was seeing “massive concern about the costs of auto-enrolment,” but reported that he was not yet witnessing it impact on spending elsewhere. Hayes said that a lot of the smaller firms hadn’t even thought about the issue yet and Stephen Hackett, head of employee benefits, health and risk, at Bluefin, said that in his experience many clients hadn’t actually done any potential cost calculations.

Opinions were divided on the extent to which group risk was likely to benefit from any scaling back on the NHS. Hayes felt that NHS cutbacks were likely to provide an opportunity.

She said: “We do a lot of private medical insurance (PMI) as well as group risk, and the NHS comes up straight away in conversation and makes employers think about issues like sickness absence. I think the whole general public realises that the NHS is being cut back on and will find the recent news about a third of people being kicked out of hospital between midnight and first thing in the morning particularly shocking.”

Stephen Hackett
Stephen Hackett

But Hackett was more sceptical. He said: “The problem we are facing is that employers have a limited budget for benefits together with the big additional cost of auto-enrolment and I don’t see many of them suddenly announcing that they are going to open up group risk products to all staff on the back of NHS cuts. But I do agree that the cuts could open the door for self-pay by making individuals who haven’t bought a private product think about doing so, although I don’t think that even self-pay will necessarily succeed without a lot of education.”

“Aviva’s TV ads were more shocking. But a lot of my friends didn’t really get the Unum tablecloth ad. They were left wondering what this guy was doing pulling a tablecloth”

Hayes strongly echoed the need for education. She said: “I bet that hardly anyone in the street knows what they would get paid if they went off sick, and a lot of people think that everything will be fine because of the articles in the newspapers about families getting large amounts from the State. It can make people a little angry when they realise they don’t even earn a quarter of what these people are getting. There need to be more stories in the papers about those who can’t afford to live off £70 a week benefits rather than about those scroungers living off £50,000 or £60,000 a year.”

This low level of understanding of the financial risks to workers who fall long term sick was key to the relatively low level of interest in self-paid IP, said delegates. Hackett was not surprised that the self-pay approach hadn’t yet taken off after just one year of Unum promoting it but he did feel that it had longer-term potential.

He said: “You were never going to change the British psyche in a year however many millions you threw at it because it needs a co-ordinated policy over five to 10 years. 20 or 30 year olds may be burdened with student debt and all sorts of things but if they could have a bit of a cash pot by, for example, giving up a bit of life cover if they don’t need four times salary and trading it for a bit of critical illness cover, then I could see it working in that scenario.”

But Fletcher raised question marks about the pricing of voluntary cover. “Are the people who want to buy it the high risk people, and therefore does the premium go through the roof?” he enquired. “It’s quite a difficult market for them I would think. I don’t think initial forays into voluntary schemes have been overly successful so I guess providers are questioning the market themselves. When people hear the news and hear about the NHS it stirs them into conversation but it doesn’t stir them into any action.”

But could more emotive use of advertising and other forms of communication result in a greater call to action? In a straw poll at the event, all attendees felt that employee-facing group risk communications should be more hard-hitting, with Unum’s recent TV advertising not escaping criticism for this very reason.

Hayes said: “Aviva’s TV ads were more shocking. But a lot of my friends didn’t really get the Unum tablecloth ad. They were left wondering what this guy was doing pulling a tablecloth. I think it should have been a lot more in your face.”

Fletcher and Hackett both wondered if the State could also conduct advertising campaigns.

Hackett said: “It does need something from the State if it wants to transfer responsibility to the individual. There is no point in Unum taking it on alone. It has to be coordinated, so the industry needs to get together with the State and agree it at a high level and start pushing that message, especially as the State is making disability benefits harder to get.”

Hackett also proved particularly vociferous on the subject of rate hardening, which is finally kicking in. He described it as a double-edged sword. “It will result in some employers being squeezed,” he explained, “but on a more positive note it may make them look at different benefit solutions. Additionally, I expect the steadily increasing interest in group critical illness cover to continue, particularly in relation to replacing cancer cover currently offered by private medical insurance (PMI). I don’t think PMI was ever designed for paying out individual claims of £100,000 or more, so it’s a big discussion to be had.”

“We are talking to a couple of our large clients about taking cancer out completely from PMI and replacing it with company-funded critical illness cover at a low level of £10,000 or £12,000 so the individual can top up if they want to. Whether or not they will actually go ahead I don’t know, as it’s an incredibly emotive subject, but I think the trend generally will continue.”

Samantha Hayes
Samantha Hayes

Hayes said with little between providers on rates, she was placing a greater reliance on added-value features like Best Doctors. She said insurers ought to do more to market them, and spoke of the possibility of arriving at a truly integrated PMI/income protection hybrid.

She said: “There needs to be a group product where if someone is off for two or three months you use the PMI to try and get them back but then the income protection can kick in if you don’t. That would be the way forward.”

Moxham felt such a concept had “huge potential” and emphasised that having both products with the same provider could remove a barrier and truly integrate the journey. Hackett pointed out that Aviva is effectively trying such a model by using the same claims team for those who place more than one product with it, and Fletcher reminded everyone that Aegon had offered a menu product that enabled employees to buy different levels of life cover, income protection or critical illness cover.

Fletcher said: “The Aegon menu was quite an interesting concept but no one has had a look at it since Aegon left the market to see if it is viable. But I don’t see why that type of integration shouldn’t happen, and we haven’t really seen anything new in the market. There’s been a bit more link between PMI and wellness, and income protection has become a little more flexible, but apart from that nothing has happened.”

Were insurers marketing departments to go into overdrive and develop something new in the area, intermediaries would certainly give it a fair crack.