In a seemingly indifferent group life market, with insurers failing to live up to expectations, will this sector ever succeed to impress? Lucy Quinton reports Click here to download pdf
There are two expressions that spring to mind when examining the group life market over the past year; 'apathetic' and 'in desperate need of revival'. Contrary to popular belief, the market has failed to impress over the last 12 months, despite industry experts hoping it was going to witness a much needed revival.
Following Swiss Re's acquisition of GE Insurance Solutions last year, the two companies have decided to combine their annual research statistics, which are due out next month. At the time of going to press, Swiss Re was unable to provide any insight into what those figures are likely to be, but judging by the state of the downward decline over the past few years, it is more than possible that this is set to continue.
Sue Elliott, principal consultant at Watson Wyatt, says the real indicator of how the market has performed will only be clear when the statistics are available.
However, Simon Bailey, head of marketing, employee benefits at Aegon Scottish Equitable, is more concrete in his analysis of the market, saying sales have decreased slightly over the past 12 months because of the end of "the Swiss Life effect" and market uncertainty over how to approach A-Day and age discrimination.
Agreeing with Bailey, Dave Kay, commercial product manager at UnumProvident, expects a dip in the sales figures for 2006, after increased sales figures for 2005 because of ex-Swiss Life business that caused an increase to other providers. "If you look at the overall numbers, it is a fairly saturated market. There are 50,000 schemes in the market. However, in terms of absolute numbers, if one used the potential provided by smaller employers, there is a lot of potential – so there are plenty of opportunities for IFAs."
Bailey, on the other hand, insists that, rather than defining the market as "saturated", it is possible to see the market as "mature" as the number of schemes has been relatively static over the past few years. "Premium growth has mainly come from wage inflation. However, only 30% to 40% of UK firms with over 10 employees have group life, so there is scope for possible market growth," he says.
Additionally, the cover is not particularly expensive, Kay says.
Despite this, Bailey says over the past year there has been no significant movement in the market.
Lee Lovett, head of risk and product management at Bupa, believes this area of the market is "reasonably flat" and says sales have not increased more than 5%.
However, he considers last year to have been "another good year for us, mainly through rebroking". He says: "There has been lots of talk about the protection gap but, in reality, employers don't provide group life cover. This has been the case for many years now."
However, contrary to his stance that the market is reasonably flat, he believes the market is "not saturated", saying it has "massive potential".
Lovett says: "Last year, every firm had limited resources and last year served as a distraction from getting out there and finding new customers. This year may give the refocus to have a look at growing the market."
Group life has, by its very nature, a much higher concentration of risk, whereas risk for individual policies is usually more spread out. This is because group life schemes are granted after having looked at the postcode in which members of the scheme work, while, in contrast to this, individual life policies are taken on board after gathering information on where the policyholder lives.
As Lovett suggests, there could be a number of reasons employers do not provide group life cover – such as the risk factor. This is an apathetic area of the market as it is often overlooked.
The risk that would be involved in obtaining cover in, for example, certain areas of London like Canary Wharf, is considered prohibitive since the terrorist attacks of 9/11. The attacks in New York irrevocably changed the landscape of this sector of the market.
Formerly a successful market, the effects of terrorism on the group life sector had far wider reaching consequences than initially anticipated, as many areas became virtually impossible to insure due to the risk factor involved.
Kay agrees: "The biggest thing in this sector is capacity. There are catastrophe limitations due to the restrictions of reinsurance. For example, EC postcodes, city centres – anything that can be regarded as a potential terrorist target – will find it difficult, if not nigh on impossible, to find cover."
Reality
Insurers and reinsurers want to be able to offer the cover their clients require but, at the same time, they have to proceed with caution in case they promise something their books are not strong enough to support. So as to protect themselves against unsustainable levels of risk, the group life sector measures the risk factor in each particular area they wish to cover.
An area can therefore go from being low-risk to high-risk and then back to low-risk again, depending on how many schemes an insurer has there.
However, many UK city centres, in areas such as Birmingham, Manchester and London are still seen as high-risk areas due to the sheer density, with many high-rise buildings next to each other.
For insurers, this means they are required to keep abreast of how many lives they cover in different locations.
Employers, in effect, can therefore find themselves unable to obtain protection from some providers for the simple reason that they are already offering a group scheme to another firm in the same building or within the same postcode.
Other changes in the market that were predicted to have generated a surge in activity also failed to impress.
Last year presented two pieces of legislation that were meant to have a lasting effect on the medium-term stability of the sector. They were the new pension simplification legislation and age discrimination.
Expectations
A-Day was expected to give advisers an opportunity to cross-sell protection products to employers while re-examining their pension allocation. However, Lovett seems to be unimpressed by the effect of A-Day on the market: "A lot of the work was moving schemes around. It didn't really change the market. There was no great sea change, but perhaps there may be one over the next few years."
In addition to A-Day, age discrimination legislation that came into effect on 10 October 2006 was also predicted to cause waves in the group life market.
The increasing number of people that are now continuing to work for longer is likely to mean that employers could be set to take out life cover instead of continuing down the traditional path of relying on self-insurance.
Currently, the mandatory retirement age is 60 for women and 65 for men, but this could be extended to allow older people to continue working until they want to retire.
While this could be construed as a positive move for the group life market, in reality, as Lovett says, this just means older people are "covered under group schemes". Elliott says that, with regard to age discrimination, the key thing employers will have to consider is whether or not to cover the higher retirement age, as premiums are considerably higher the older a person becomes.
Looking ahead, Lovett says: "The group life market is not a dynamic market so I would be hard pushed to see any dramatic changes in the near future. According to market statistics that are available, there has been no underlying growth over the past five to 10 years."
However, Lovett sums up the sense of apathy in the market by saying that the developments have "not grown the market but just reshaped it".
There are also new players that potentially could enter the arena.
Elliott says there is room for other new players in the market but she is not aware of any new players in this area.
She adds: "There are a lot of schemes being moved around but not a lot of increases in new business."
All this serves to demonstrate the sense of apathy in this sector of the market. Overall, the opinion is that sales have decreased over the past year, which acts as an indicator that the market is moving away and, perhaps, not recognising the importance of group life.
The challenges it faces appear to have deflated the enthusiasm for this area and the activity over the past year that should have generated some interest, such as legislation, appears to have had the opposite effect and it now appears as deflated as a week old helium-filled balloon.
