Group life

The terrorist attacks of September 11, 2001 changed the group life assurance landscape for good.

Formerly, a straightforward market with few hiccups, the events that unfolded that autumn morning suddenly transformed the sector, as many city centres became too risky to insure.

It therefore comes as no surprise that in recent years the group life market has struggled to see little more than marginal growth in sales.

In 2003, for example, there was almost no growth in premium of income.

However, in 2004, to the surprise of many and rather unexpectedly, the overall group life market's total revenue premium sales made a distinctive leap, growing from £754m in 2003 to £803m, according to recent figures from GE Insurance Solutions.

Gradual softening But although this 6.

5% increase is an improvement on the 1% growth experienced in the previous year, Glenn Laming, sales and marketing director of group risk at Legal & General, is not too optimistic about the statistics.

"We have experienced a steady increase but no more than that," he says.

Agreeing with Laming, Paul Stevens, business manager of group risk at Norwich Union Life and Pensions, believes the increase is due to a simple rise in the cost of cover, rather than an increase in new business.

"Although we are encouraged to see this increase in 2004, in reality, some of this can be attributed to salary and wage inflation," he says.

However, despite this, the number of lives covered under group schemes rose by over half a million in 2004, suggesting the market still offers business potential.

There are, however, a number of factors that are threatening sales.

While the sector saw some growth last year, the number of schemes in the market fell from 54,041 in 2003 to 52,010 in 2004.

This is bad news for the market as a whole as it indicates that new business has slumped.

"While there are good reasons for schemes to discontinue, such as liquidation, receivership or business closures leaving no members, it is clear our reach for new business in the form of new schemes is harder to achieve," says Stevens.

He believes there are two issues to blame for this.

"A possible reason for this is the greater complexity now attributed to group life business, as well as the set up cost incurred by distributors where full scheme documentation is required, measured against achievable commission levels within a competitive premium," he says.

Most firms tend to look very carefully at their outgoings, and with the cost of administrating a scheme creeping up, some companies are now opting to self-insure, instead of choosing a traditional group life scheme offered by an insurer, in the hope that it will drive down cost.

Another issue facing the sector, and which has been haunting it since the 2001 terrorist attacks, is the lack of reinsurance cover for 'high risk' locations in the UK, with the City of London being a prime example.

While there has been a gradual softening of views from both reinsurers and insurers on the subject, this issue is unlikely to ever disappear.

To cope with the new climate, UK insurers have sought to limit the impact of any type of catastrophic event by introducing single event limits that will cap the overall claim value.

This limit is typically around £100m, but can sometimes be less than £10m.

Overall, the level of event limits available can vary significantly depending on the existing risk profile for a specific provider.

There is also an alternative way to deal with risk.

This is to split the cover between more than one insurer.

By doing so, employers are more likely to be able to get cover for their whole workforce while at the same time taking the pressure off a single insurer in the event of a disaster.

"There is certainly an increase in the number of schemes which have their insurance split across two, three or even four insurers. This trend is likely to continue as insurers and reinsurers will continue to be very nervous of accepting very large risks in a concentrated location," says Stevens.

While this may be the only way for a company to gain complete cover, splitting schemes also adds to the complexity for distributors and clients alike.

"As well as administering a number of schemes instead of one, there are issues around different terms and conditions, provision of medical evidence to multi-insurers, claim settlement from multi-insurers and payment of multiinvoices," adds Stevens.

Innovative solutions Another issue that should not be forgotten is the fact that the majority of UK insurers tend to use the same reinsurers.

GE Insurance Solutions, Swiss Re and Munich Re typically insure most providers.

This could mean that while a scheme is divided between a number of insurers, essentially they could all be backed by the same reinsurer.

Effectively, this could have disastrous effects.

"The big issue is therefore for the reinsurer. They need to ensure that you use different reinsurers or otherwise too much of the risk could fall onto one of them," says Stuart Gray, managing director of Portus Consulting.

The market will also soon be facing more challenges as pending pension legislation, due to come into effect in April 2006, is likely to pose a number of problems for both insurers and employers.

The new rules are expected to remove the current cap on benefits provided under a group life scheme, which at present restricts the level of benefits available to employers, such as the four times' salary benefit.

However, providers do not believe that many employers will want to do this since, in many instances, it will increase their own cost.

"We expect most employers to set cover based on a multiple of salary, but for higher multiple of salaries to be offered instead of provision for dependants pensions benefits because of tax benefits," Stevens says.

Looking ahead, Stevens thinks most employers will try to leave their schemes as they currently stand for as long as they can.

"Initially, we expect that there will be a number of schemes which will continue to operate on exactly the same basis as they do now, maybe even introducing their own scheme specific 'earnings cap' to ensure that the level of benefits provided, and cost incurred, continue to remain within manageable levels," he says.

Marginal growth The added cost for employers also means that they could be more likely to consider shifting towards flexible benefit schemes.

"There will be a lot of product developments post April next year, and the new rules may increase the demands for more flexible benefit schemes. We are therefore gearing up our flexible benefit proposals," says Laming.

However, regardless of what may lie ahead, a wait and see attitude currently prevails among employers, and until the final draft of the pension legislation has been revealed, most companies seem to prefer to sit on the fence.

Whatever the outcome, in reality it will have little effect on growth in the group life market.

This is because the real problem facing the sector is not whether distribution costs could be cut or whether you can find innovative solutions to the catastrophe risk issue, but the fact that the market is more or less saturated, and therefore is unlikely to experience anything but marginal growth.

"In terms of market growth, I don't actually think there are any particular hurdles or obstacles. After all, the group life sector is a very straightforward market. You are either dead or you're not. However, the market is mature and that's why you wouldn't expect any quick growth," argues Gray.

Intermediaries shouldn't despair however.

While the group life assurance market may lack any real business opportunities, the simplicity of the product makes it an easy product to advice on and should therefore always be recommended alongside other offerings.

After all, for employers who still haven't set up a life assurance scheme for its workforce, it is the perfect employee benefit and one of the few protection products that are bought rather than sold.