As the group critical illness market fails to make any headway, Peter Madigan asks what can be done to boost sales Click here to download pdf
While most protection products have experienced disappointingly stagnant sales over the last four years critical illness (CI) products have surged ahead. The picture for the sector as a whole is very healthy, but there is concern that group CI remains a peripheral protection option with a very small share of the employee benefits market.
Although growth in the group sector has been steady, it has been far from stunning. Figures from the GE Insurance Solutions Group Risk Market Survey 2004, show that 235 new schemes were established in 2003 bringing the total in force to just 1,866. When these figures are weighed against the 54,000 group life and 21,000 group income protection (IP) schemes in force at the end of 2003, some perspective is gained on just how small the group CI market actually is. The obvious explanation for this discrepancy is the runaway success of the individual sector.
Financial justification
"Critical illness outsells private medical insurance and income protection by a massive margin in the individual sector," says Simon Bailey, head of marketing at Scottish Equitable Employee Benefits. "Employers cannot see the value in offering critical illness to their staff if many of their employees already have it in place."
Group CI schemes differ from corporate life and IP schemes in the way they are funded. The vast majority of schemes sold are part of a flexible benefits package that includes CI as a voluntary option. Although administered by the employer and deducted from salaries, it is up to the individual whether or not they take it out.
"I would say that somewhere in the region of 70% of all group critical illness business comes from employees buying into voluntary schemes," says Jane Dale, director for group risk at Legal & General. In fact, the prevalence of voluntary schemes is so great that company-funded CI plans are something of a rarity.
"We really only sell employer-paid critical illness at the small business end of the market. This is when an employer wants to give his staff an exceptionally good benefits package," says Dave Kay, group product marketing manager at UnumProvident.
In the last four years, the number of schemes has remained steady, hovering between 200-300 new policies every year. This figure remained constant despite the withdrawal of Swiss Life from the group CI market. The rush to snap up the potential switch business it left behind has given providers in the market plenty to smile about in the last 12 months.
UnumProvident estimates it wrote approximately 25%-35% of all ex-Swiss Life business available in 2004, a year that saw new business grow by 70%. "But it has to be said this growth was heavily dependent upon former Swiss Life business," says Kay.
Similarly, Scottish Equitable and Canada Life have reported an increase in new contracts through switch business while Legal & General estimates that former Swiss Life contracts accounted for a little under half of all its new business signed in 2004. Yet while intermediaries were busy writing this business, the number of new clients entering the market was similar to previous years. Although this appears good news on the surface, it could indicate that the 'new' business entering the market is not as heavily intermediated as it could be.
"Some of the biggest employee benefits consultants do not like critical illness as a product so they do not recommend it to their clients," claims Kay. With regulation stipulating that intermediaries advise their clients on the product that is best for them, it is hardly surprising that brokers are cynical about the worth of CI. While other protection products have absence management capabilities, CI does not – it is the single biggest obstacle facing the group CI market.
"Critical illness comes further down the pecking order of employee benefits, after private medical insurance and group income protection, as it is difficult for employers to see the financial justification," says Kay.
Dale agrees: "The problem is that the product is an employee perk rather than an employer management tool. As long as it remains that way it will never truly fit into an employer's plan."
The fact that the majority of group CI policies are part of an integrated flexible benefits package is quite telling. Offering it as a voluntary option for staff that has little cost for the business is the reason behind the product's growth, since it is unlikely that any cost conscious employer would pay for a benefit that has no benefit for the company itself. Indeed, in a worse-case scenario, far from bringing an employee back to work, a windfall payout could encourage the employee to not return at all.
While most providers seem resigned to the current meagre market share of the product, they remain remarkably upbeat about the short-to-medium-term prospects for CI, claiming that a strong future for flexible benefits equates to a bright future for CI.
Product innovation
"Flexible benefits packages are still in their early stages and there is huge potential in this field," says Dale. This optimism can be found throughout the market but some providers are cautious to rely too heavily on a single sales route and have suggested that product innovation is essential to open up new revenue streams.
"One option that is still very much on the drawing board is a form of budget critical illness that covers fewer conditions but then allows us to keep costs down accordingly," suggests Kay. "Another could be to change the claims process to eliminate windfall payments. For example, if a person has a heart attack they could receive 10% or 20% of their lump sum immediately and then, depending on the severity of the cardiac arrest and whether they are off work for a long time, they would receive the remainder of the payout," he adds.
These plans are feasible, and certainly work as a means of managing costs, but it is hard to imagine how cutting premiums will lead to greater take-up for the simple fact that employers are less likely to select CI than a more expensive, but feasibly beneficial alternative.
Even if providers are resigned to the tame growth of the group CI market, another threat that could stop the sector in its tracks is annual premium increases. GE Insurance Solutions states that between 2001 and 2002 the average scheme premium rose by 23%. By the end of 2002 it had increased a further 14%. Meanwhile premiums per life have fluctuated by 15-20% in the same period.
"The rising premiums are in part due to the size of the group critical illness market, it is too small to accurately identify trends in claims experience," says Bailey.
Premium inflation has also been blamed on the withdrawal of Swiss Life from the market. Its ethos of self-insuring meant premiums were far lower than those of other providers who use reinsurers. There is growing disquiet within the market that these increases will soon put paid to already meagre growth.
"The rises we have seen in the last few years are not sustainable in the long-term and if they continue we will see people deciding to purchase other protection products," says Kevin Newman, senior consultant at Watson Wyatt.
Prices are also going up due to reinsurers concerns about new medical advances and the effects these could have on increasing claims. Such advances may not be such a bad thing, however. "The ability to recognise illnesses earlier also provides the opportunity to remove potential high risks, thereby reducing the risk on the remainder of the scheme. This could mean a reduction in scheme premiums," suggests Ian Williams, group marketing manager at Canada Life.
Intermediaries seem to be in an impossible position. Group CI is a product seeing sharp price increases, little market penetration and an abject lack of interest from employers. The market is currently being sustained by including the product in flexible benefits packages and the best ideas regarding product innovation involve simply cutting costs and restricting cover.
The truth is that the biggest problem facing group CI is the nature of the product itself. The success of CI in the individual market can be attributed to people looking out for themselves. Those employers who do offer PMI and IP are also looking out for the interests of their business. CI simply does not work as a corporate benefit and as such its future looks destined to remain as a voluntary employee benefit offering. Although it would be easy to imagine intermediaries getting frustrated by their apparent powerlessness to sell CI in greater numbers, most seem resigned to the fact that the sector is performing the best it can.
The last of Swiss Life's old book will be exhausted by the middle of this year and it will be interesting to see how 2005 pans out after the dust settles. But one thing is for sure: in a market that sees just 200 new schemes every year, there can be little room for complacency.
