Peter Carvill discusses how the group income protection markets are likely to fare over the next year Click here to download pdf (PDF, 3.8MB)
There are too many hard-luck stories at the moment, especially in the protection market with its continual squeezes and declines, so it is a small, good thing to be able to look at a product gaining in popularity.
That product is group income protection (IP) which has been steadily increasing in take-up. That is according to the statistics gleaned from Swiss Re's 'Group Watch 2009' which reports almost continual rises in the number of lives covered by the product: 1,556,829 in 2004, 1,684,030 in 2005, 1,731,138 in 2006, 1,723,961 in 2007 and then 1,757,365 in 2008. Overall, between 2007 and 2008, there was an increase of 2% in the number of lives covered.
Not only were the numbers of lives covered increasing, but so were the value of in-force premiums. According to the report's authors: "Overall, in 2008, in-force premiums for group IP totalled £648,902,366, an increase of 1.2% compared with 2007."
'Group Watch 2009' further looked at the benefits of group IP products: "In-force annual benefits were reported as £42,986,079,140, an increase of 4.7%. The slower growth in premiums compared with benefits echoes the 2007 result and reflects more competitive pricing, together with a very small move towards switching cover to a limited benefit term as a way to reduce costs."
However, the Association of British Insurers reports a drop in the value of new premiums across 2007 and 2008. According to its figures, the value of new premiums for group IP across 2007 started at £41m, then dropped steadily to £39m, £30m and £28m across the following three quarters. The 2008 figures were equally down: £34m in Q1, followed by £36m, £27m and £22m in Q2, Q3 and Q4. Similar figures were seen in the number of new contracts which likewise showed much higher figures for 2007 (10,000, Q1; 10,000, Q2; 11,000, Q3; 4,000, Q4) than for 2008 (3,000, Q1; 8,000, Q2; 4,000, Q3; 2,000, Q4).
"One of the things that I think, with market," says Nick Homer, group risk development manager at Zurich, "is that it is a well established market - new business is relatively light and, on that basis, I think it fares well in tough times because it's not going to lose a significant inflow of new business because it doesn't have that at the moment."
Glenn Laming, sales director for group protection at Legal & General, takes a similar view: "The market in general is holding up okay. We've been focusing on a proposition that appeals to more employers, alongside some innovation in the market. I think it is important that group IP meets the needs of employers."
Anti-discrimination
There does seem to be, apart from the recession, issues around anti-discrimination legislation. Homer says: "At the moment, the market is strong but you won't see the growth because it is being tempered by the sheer volume of anti-discrimination legislation, which places doubts around benefits because no one knows where it's all going to end. I think, however, that logic is going to prevail. In the context of insurance, everyone supports discrimination legislation in principle but we have to make sure the market doesn't fall foul to its indirect consequences. I hope legislation does not become a barrier to providing employee benefits because the easiest solution in that context for employers is not to supply them at all."
He adds: "We do know employers are increasingly under increased obligation with employment and duty of care to employees, and group IP can help there in the context of disability claims. We know final salary pension schemes are diminishing and that leaves a huge gap in disability benefits."
Laming thinks that one of the weaknesses that the group IP market has, is that it does not sell itself well to the man, or employer, on the street and so therefore is anonymous in the marketplace. In fact, looked at objectively, group IP suffers from the same problems as its sister product, IP - no one really knows much about it, and this is evidenced by the number of new contracts which reported that just 2,000 were entered into in Q4 2008. That is 2,000 firms out of the entire British workforce - not a comforting statistic.
Laming says: "I think that there is more we can do as an industry to get the man on the shop-floor or in the street, when you talk to them about what's important in an employee benefits package, to get them talking about the importance of group IP. Employees should be aware that there are all types of therapies available along with specialist access when being diagnosed with cancer or other serious illnesses. These are valuable benefits but employees are not aware of them. So the challenges going forward are working as an industry to promote group IP."
Mark McLeod, group risk and healthcare manager at Towry Law, says that one issue is in the processes used by the providers: "I think there is still some way for the market to go in terms of administration. That's not one or two providers but a range of providers. I don't want to criticise the market in terms of services but if you look at service in relation to pensions, there has been a lot of online administration. Hopefully with Bupa's online quotes facility and CLASS from Canada Life, we should see more of that."
As far as Swiss Re's 'Group Watch 2009' is concerned, the outlook for this year and beyond is decidedly downbeat: "Twelve months ago, opinions were polarised on whether group IP would increase or decrease in 2008, with 14 respondents expecting an increase during 2008 and 20 anticipating a reduction. This was less positive than two years ago, and largely reflects the increased uncertainty about how the retirement age in employment regulations might impact the product. Given the current climate, expectations this year are disappointing but hardly surprising. We asked respondents whether they believed that the group IP market will increase or decrease in 2009 and 2010. Out of 42 responses, four expect the market to increase, with the remaining 38 anticipating that it will fall."
Laming refutes the downcast forecast, aligning himself with the four who said "increase": "There will be a lot of people who say it will go down but I don't really share that view. I think there is a great opportunity with the development of the improved propositions on the flexible benefits side. Group IP is a real benefit to many employers and is very different from what they would have known 10 to 15 years ago. I do, however, believe that significant growth is unlikely and will be linked to the economic climate. There are people who have been predicting that many schemes are going to start to close but our analysis is not seeing that."
Homer is also positive about the future: "I think that the current climate clearly makes it a challenge for the whole market but I have to say that given the value of these employee benefits, I think they are going to ride out the recession relatively well. I don't have any particular expectations about the market growing but I think it will weather the storm. At the highest level, group IP products are still massively valued."
The final word rests with McLeod, who advises that it should be the quality of the product that advisers sell on, in particular how it benefits those who need it most: "I think there is a huge opportunity to talk to clients about employee benefits in general. And when looking at employee benefits, it is important to look at which ones will get you the greatest level of employee engagement. With everything that is going on in the economy, the protection of people is key."
NOTES TO TABLE 1
Legal & General - Maximum benefit termination age cannot exceed the earlier of the normal retirement age fixed by the employer and the individual's 65th birthday. We will consider offering a benefit termination age (and maximum eligibility age of 70) where the normal retirement age for the company is also 70.
NOTES TO TABLE 2
Legal & General - Benefit escalation rate: rates of up to 10% subject to an RPI limitation, however, RPI limitation can be removed on request.
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