RDR, auto-enrolment and welfare reform could make 2013 a year of revolution for group risk. Edmund Tirbutt sees challenges to be overcome if the industry is to make the most of it
The forthcoming combination of RDR, pensions auto-enrolment and welfare reform could result in a “Group Risk Revolution” which propels group risk to the top table of corporate agendas for employee benefits, said delegates at last month’s Corporate Adviser round table. But serious caveats flagged, ranging from the lack of preparedness of intermediaries to use fee-paying business models under RDR to potential problems arising from wealth managers entering the group risk arena without first acquiring the necessary expertise.
In a straw poll at the event, two thirds of attendees said that, taking all these factors on the horizon into account, they expected a significant increase in the group risk business they write three years from now, and 40 per cent expected a slight increase. With regard to RDR specifically, 80 per cent felt that the commission ban would result in generalist IFAs distributing slightly more group risk products, and 20 per cent felt they would distribute significantly more.
Nevertheless, Paul Avis, sales and marketing director at Canada Life Group Insurance, warned that RDR could result in there being fewer advisers around as a result of clients questioning the value of fees and that advisers who weren’t yet ready for RDR needed to “wake up and build a suitable business model as opposed to just focusing on gaining qualifications.” After all, they are being required to adapt to the first major shift in remuneration since the 1980s by January 2nd 2013, he said.
Elliott Silk, director of employee benefits at English Mutual felt that talk of a 20 to 30 per cent drop- off in adviser numbers was unduly alarmist because we would have probably lost 10 per cent in the next couple of years through retirement anyway, and many of these will merely accelerate their departure. Roy McLoughlin, senior partner at Master Adviser, also stressed that commercial realities were always going to make passing exams the number one priority.
McLoughlin said: “Everyone needs exams first, otherwise they can’t trade. I get the impression there are lots of advisers out there who still have exams to take, so other RDR considerations will have to be pushed back. Remember also that, because most IFAs are self-employed, those taking exams will be taking their eye off the ball.”
Silk emphasised that intermediaries didn’t in fact have anything like six months to comply because it can take up to 60 days to obtain a Statement of Professional Standing and deal with other technicalities. He feared a mad last-minute rush in which the Chartered Insurance Institute (CII) and other organisations weren’t going to be able to cope with checking records and statements. As those intermediaries who had already made the transition to fee-paying had reported falling income levels during the transition, these latecomers would inevitably feel the impact on the bottom line.
Even established specialist intermediaries could find themselves increasingly having to cross-subsidise pensions business as clients realise that they are having to both meet auto-enrolment costs next year and pay their pensions adviser a fee.
McLoughlin said: “Cross-subsidy is to a certain extent happening at the moment with a lot of corporate advisers and will inevitably come in if small IFAs can’t get clients to pay a fee. If you feel you can make money from group risk or other benefits then you might be prepared to run a pension with no direct money coming in. But it’s a commercial risk and you may have to walk away.”
Profit margins of existing specialist intermediaries could also be squeezed by the entrants of more generalist intermediaries indulging in unrealistic pricing.
Silk said: “Private client IFAs with very little experience of the corporate market may come in and undercut experienced advisers without thinking about the fact that they need an administration team in their back office behind them and need to deal with claims. Clients get used to paying less, so we may see some pressure on margins even though commission still exists in the group market.”
Of more widespread concern was the possibility of such new entrants operating without having obtained suitable levels of expertise, because health issues such as pre-existing conditions made the field a minefield for the uninitiated.
Silk recalled how he had come across a case of a private client adviser winding up a money purchase pension scheme without realising death in service was attached to it. Within a few weeks an employee on a £100,000 salary died, resulting in a £400,000 professional indemnity (PI) claim.
Allyson Gayle, senior consultant, risk & healthcare, at Premier Benefit Solutions, said: “There is a definite risk that wealth managers may think it’s an easy ride. They may overlook the person with cancer or material events that can result in millions of pounds of uninsured liabilities.”
It was therefore considered essential that group risk insurers were able to provide these newcomers with an appropriate level of back-up.
Lee Christian, senior consultant, health and risk practice, at JLT Benefit Solutions, said: “The key for intermediaries coming into the market is to get support from the insurance community. There are a lot of important things they can’t afford to get wrong, because doing so can be very costly indeed. So they must ask the right questions at the review and make sure they have all the information for disclosure for the insurers so that if a claim is presented down the line it’s a valid one.”
Avis highlighted how his company was offering a Group Risk Academy for the next six months to take people back to the very basics, and he expected other group risk providers to follow suit to give newcomers maximum support and get them up to a level of competence and confidence in group risk. He could see “a real emphasis on education from insurers around the basics of group risk right the way through to the technicalities of flex, voluntary and registered versus excepted group life discussions.”
But it wasn’t only newcomers who needed technical support. Peter Murphy, client relationship director at Willis, said: “We don’t necessarily always have all the answers, so we rely heavily on insurers for their input. We try and take the best of everything and put our own spin on it.”
Gayle: said “I do think employees will be looking for more from what they are actually spending, rather than reducing cover and looking for lower premiums, and we are going to be looking to insurers to help us with that. Smaller employee benefit consultants like ourselves are much more about overall client solutions, and I see quite frequently that clients are willing to pay if you can actually show them what they are paying for.”
McLoughlin volunteered that he thought the educational process for newcomers could be greatly helped by the introduction of further exams.
He said: “Yes, there is a protection exam but it hasn’t helped that it doesn’t count towards your Level 4 qualification, and if it did do then more people would have taken it. So I think there needs to be more pressure, particularly with the new blood coming through, for that to be accredited within Level 4 or within whatever’s next. Exams do help in the education process and I think there should be a dedicated group risk one.”
Murphy agreed that exams can help but felt that lack of awareness of group risk amongst employers was a greater problem because a lot of them had never actually heard of the products.
Christian also attached great importance to imparting broad educational messages. He said: “I think it’s just getting clear information out to clients and going to talk to them face to face. It’s the only way you are going to get them to understand what group risk is all about. Many clients give me a call and say they want to talk about group income protection but when we start talking we find they want to talk about group healthcare or critical illness cover.”
Avis went so far as to suggest income protection should actually be the first thing that corporate advisers talk about to corporate clients. But Murphy replied with an emphatic ‘No’ on the grounds that the product is only one consideration in a broader absence management conversation.
Murphy said: “We are selling absence risk management to our clients, and part of that conversation also includes group income protection as a safety net at the end. Maybe the face of the income protection or group risk market should change slightly and focus more on that?”
Silk agreed that absence management was a crucial issue, pointing out that 75 per cent to 80 per cent of his firm’s clients don’t know the cost of absence to their business. He said “HR departments are running on skeleton staff and people just haven’t got time for this amongst their normal people jobs.”
McLoughlin pointed out that attitudes would probably change markedly if they or someone they know experienced having a live income protection claim. “A live claim has a strange effect on employers and employees and the benefit is appreciated more than ever before,” he explained. “For us, live claims have led to referral business, as a lot of HR people hang around together. There’s a moral, ethical and monetary impact. A fully fledged live and beating claim really brings the benefit home.”
The government’s current programme of imposing much stricter eligibility criteria for State benefits was also considered likely to count positive in this respect, although it was appreciated that it could take time for human stories of people being denied benefits to start figuring prominently in the media.
“We need to get journalists and the wider public aware of the implications of so few people being accepted compared to a year ago, and we probably need to see these stories on the front page of The Sun” continued McLoughlin. “We must educate people as to what happens when you are ill, what the downsides are and particularly the fact that you need to make your own arrangements either personally or via your employer. We must also get the messages over in a way that doesn’t send them to sleep after 10 seconds.
“Intermediaries and insurers should be talking to journalists. If only 8 per cent of employers have group income protection then we need to talk to other 92 per cent who don’t have it, and they will want to know if it pays out. So we need stories.”