Despite a few lingering challenges, the latest Swiss Re Group Watch survey paints a strong picture of growth in the group risk sector. Chris Morgan summarises the key trends.
The annual Swiss Re Group Watch survey always provides us with thorough data and analysis on which to judge the performance of the group risk market, while sparking much debate amongst industry players.
There is good growth potential, but we must act now to make it happen.
As I see it, there are 4 noteworthy themes from the report.
Growth potential in SME group life
Auto-enrolment is having a positive impact on the group life market. Over the last few years we have seen an increase in the benefits insured and number of employees covered as larger employers auto-enrol employees into their pension plans and offer them group life too.
This year the effect of SME auto-enrolment is starting to become evident, with the number of schemes increasing and average scheme size reducing.
To any remaining doubters this is a clear signal that there is growth to be had in the SME sector and attention must now focus on how to capture that growth.
Of course not all employers will buy. Many are struggling with the costs of auto-enrolment let alone additional benefits, but even if we can attract 5% of employers to buy group life, we'll be transforming our market.
Currently there are 50,993 group life schemes in the market and 1.3m employers who are going through auto-enrolment, meaning 96% don't have cover.
Even if we can attract 5% of the 512,000 employers who are staging in 2016 and another 5% of the 661,000 who stage in 2017, then we will have doubled the size of the group life market (by scheme).
Finding that 5% will not be easy of course, this is a volume game after all. All players - intermediaries and insurers - now need to focus on their marketing strategy and process delivery to find these customers and service them economically.
But this is not just about us. Group life remains a very efficient way of providing a basic level of life insurance to those who need it most, many of whom would not buy it otherwise. There is an important social cause here behind which we should unite.
Everyone is going Excepted
The growth of excepted group life was one of the key headlines from the report, with insured benefits up by 30%. This is almost certainly due to the reduction in the Lifetime Allowance, down from a high of £1.8m in 2011 to £1m this year, which is now affecting many more employees.
Some of the extra demand is also likely to have come from a declining dependents pension market (benefits down 14%), as the current low long term interest rates force premium rates up, it is clear many are replacing these pensions with an excepted lump sum.
This growth in excepted is likely to continue while group life remains attached to the pensions tax regime and the Lifetime Allowance is reducing.
It is unclear how and when changes to the tax relief on pensions will affect group life and indeed some are advocating a break from the pension regime altogether, a move which would certainly be a sensible one in my view.
Nevertheless, we can only react to what we know. With many more employees affected by the lifetime allowance, advisers need to keep the excepted scheme structure in their advisory toolbox.
Simplified trust arrangements can help to remove most of the uncertainty although it's important to point out that the lack of HMRC guidance and case precedent on the application of exit and periodic tax charges, does ultimately mean a calculated trade off.
Is the future in flex?
Another notable observation from the research was the continued growth in the flexible and voluntary benefits market. Critical illness benefits increased by 11%, and the number of people covered increased by 15%.
Almost all of this growth arose in flexible benefit schemes, with 66% of benefits insured in these arrangements. Although this is of course from a low base, as critical illness benefits make up only 4% of the total group risk market by premium, the growth in this product is consistent and encouraging.
I would suggest there are 3 factors holding this product back:
• A lack of cover certainty brought about by the dominance of pre-existing condition exclusions, means that employees with any previous medical history think twice about purchasing cover which may not pay out
• The flexible benefits market is generally only accessible to larger employers such is the cost and availability of administration systems
• The P11D benefit charge is unwelcome and may also be deterring some employees from bearing the extra cost
On the first two points, I would suggest that some incremental product innovation is needed to grow this market.
Group life and income protection products have also grown gradually over the last four years.
The proportion of group life premiums from flexible benefit schemes has increased from 7% to 10%, and disability insurance benefits grew similarly, with 12% of total premiums now in flex schemes.
This general upward trend is only likely to increase as employees demand greater choice and employers seek ways to meet this demand.
In addition to some incremental product tweaks, to really grow the flex market it needs to be more accessible for small and medium sized companies without burdening them with the cost of building bespoke administration systems.
That may be one for another day, but the demand for greater flexibility is likely to cascade down to SMEs eventually, so those who have already spotted this opportunity and are building to serve it are well placed in my view.
Income Protection is in poor shape
There was no increase in the number of insured income protection schemes and only a 1.3% increase in the number of insured employees.
It is true to say that the effect of auto-enrolment is likely to be more pronounced on group life take-up as life insurance is a more natural complement to pension saving, but there is still long term potential for income protection as employers broaden their offering over time.
For a product often considered the most important of the lot, it should be in better shape.
However, it has been encouraging to see much more focus on the effectiveness of once considered "added value " benefits, such as early intervention over the last few years.
This has helped to improve the service provided to employees, employers and insurers, but more can be done specifically to attract SMEs, where a greater focus on the value for the employer is crucial.
Rather than "added value", these need to be integral benefits alongside others such as absence management to provide the employer with a more complete solution for managing workplace absence.
This will help to improve the usefulness of the product, in turn appealing to more new customers.
There is also merit in changing the name too. In the eyes of new customers, Income Protection is still unfavourably associated with Payment Protection Insurance (PPI), and emphasises the benefits for the employee only. Other names such as Sick Pay have potential.
Like any product/service which is faltering, a rebrand and refocus of the value proposition could help the product to appeal to new customers.
Time to grab the opportunity
While I've highlighted some implications from the report which suggest room for improvement, it is extremely positive and should provide a great deal of encouragement for all of us in this industry. But the time to act is clearly now.
Yes some incremental product innovation from insurers should still progress in the background, but the focus has to be on distribution over the next few years.
Given the number of potential new customers coming into our market, there is a growth opportunity we really cannot afford to miss.
If ever there was a time to knuckle down and get on with it, it is now.
Chris Morgan is manager, distributor partnerships at Ellipse
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