Adding 57 new employers to this year’s group income protection stats is nothing to write home about says Canada Life General Insurance marketing director Paul Avis
Why is it that insurers are never happy? An additional 4.5 per cent increase in employees covered and 3.8 per cent increase in premiums means that at the end of 2016 we insured 12,029,790 people and £2.106bn in premiums. As an industry we are a massive success story having already added 800,000 employees in 2013/2014/2015 and in 2016 almost 520,000 new people have been covered: in a single year that is amazing! Surely we are the envy of every other financial services industry and so where is the problem? There are a number….
The biggest issue we have is that too few customers are buying our products. Our customers are employer purchasers or trustees and employees in flexible/online benefits arrangements. If we assume that the core benefit that an organisation would buy is a registered group life scheme then there are only 43,471 of these in the market. While we provide cover from 2 employees most insurers start at 5 employees so, excluding the 0-4 employee UK enterprises, the ONS says that there are 580,290 organisations employing 5 or more people, who could be potential customers for all insurers. As an industry, we have penetrated less than 8 per cent of potential group life customers, while only 3 per cent of employers in this segment have group income protection (17,168) schemes and just over 0.5 per cent have group critical illness cover.
If we were to extract employers with multiple schemes – schemes from organisations that have bought subsidiaries or different pension schemes, these numbers would reduce further. If you are providing benefits from 2 employees, the market potential is even greater and the percentages are even more embarrassing. And I am embarrassed that more organisations are not buying our products and continue to see this as the key industry challenge.
In essence, with only 72,841 schemes in the market we clearly have a job to do. On the positive side we have increased this by 1,675 schemes and so again, on the face of it, this looks pretty good, albeit only a 2.4 per cent increase. But then you delve below the surface and another serious worry emerges.
The most shocking area for me is that there are still only 17,168 employers with group income protection. While the additional 57 new employers are welcomed – and dare I say it cheekily lauded as the first reversal since 2006 – this is simply pathetic in an era when the State benefit alternative has just shrunk by almost a third. A mere 57 new schemes represents a woeful 0.3 per cent increase in organisations purchasing this priority product and so there is nothing to celebrate here at all.
An additional concern is the significant increase in the number of employees covered under excepted schemes. I can understand employer increases, from 2,307 in 2012 to 6,239 in 2016, as this is being driven by the reduction in the lifetime allowance and where a lot more people could be caught by this unintended consequence of the 2005 A Day legislation employers and advisers seem to have responded well. But are there more employers with employees affected?
More worrying to me is the number of people now covered. In 2012 there were 344,889 people covered and in 2016, 644,492. With just under 300,000 additional people in 4 years this could represent the number of people that have been affected by the reduction to £1m in 2016, thought to be more than 450,000, but in 2016 the market grew from 490,911 people covered to 644,492, an increase of 153,581 or equivalent to half of all of those 300,000 additional lives in that year alone. Is this going to be an on-going trend? Have we got to all the employers that have people affected? Two thirds of the 450,000 plus would be a great industry achievement! Or is there more at play here than that? There are a number of possible reasons.
If registered schemes are being transferred to excepted schemes then both periodic and entry charges exist in the excepted regime and these could lead to trustee tax charges, especially in year one.
There remains the need for advice in this specialist area and specific discussions with taxation and legal specialists when considering and implementing an excepted scheme should always be the adviser recommendation to the employer. Recent changes made following the Finance Bill 2017 mean that excepted salary sacrifice schemes no longer benefit from the advantages offered by registered schemes which may lead to a reversal for some larger employers.
Product appropriateness also needs to be assessed – with the estimated average UK pension pot around £87k then, for most, a registered scheme, however generous the death benefits are, will rarely lead to an employee exceeding £1m on death.
Excepted schemes have their place but not for everyone and only with the right advice. In this burgeoning market it will not be long before the impact on potential tax revenue leads to an increased scrutiny on this benefit. That is when the advice given, or not given, will be reviewed.
Am I happy? I should be on the face of it as I work in a thriving industry. But clearly we have a huge amount of work to do to increase customer numbers and ensure that we give the correct, appropriate and well thought through advice when we are with them.