Paul Avis says its time to rethink the state benefit link on group income protection policies.
In his first all Conservative budget the Chancellor announced that from 6th April 2017 applicants for Employment and Support Allowance (ESA) that are assessed as unfit for work but capable of work related activity will receive a lower level of State Benefit, equivalent to Job Seekers Allowance.
This means that the annualised value of benefits will fall from £5,312 p.a. to £3,801 p.a.
This is perhaps the first wave of anticipated welfare cuts and a simple way of reducing disability welfare costs, estimated in a report issued by the Association British Insurers (ABI) as £36bn annually.
The savings are estimated to be in the region of £100m in its first year, rising to £640m in 2020-21.
This should provide advisers with the opportunity to re-confirm to employers that, as the State Benefits get smaller and more difficult to obtain, they should be considering Group Income Protection (GIP).
Employee absence is stressful for the individual and costly, in terms of lost productivity and support provision, for the employer but the market is under penetrated.
With only 17,119 schemes and 2.08m people covered in the UK, our industry has never really succeeded in getting over the message that GIP provides security and, as a significant employee benefit, can influence staff attraction and retention. Is now the time to think about GIP?
Even where a scheme is in place there is still an immediate need for consultation, as it affords us the opportunity to bring GIP scheme benefit design into the 21st century, reflecting the changing State Benefit offering.
In my view, advisers should start to consider de-linking GIP benefits from any relationship to State Benefits, as this will ensure benefit clarity and certainty.
Historically, many GIP policies have a benefit basis that contains a deductible based upon the value of State Benefits e.g. 75% Salary less the basic level of Employment and Support Allowance and the Work Related Activity Component (ESA and WRAC).
Obviously, if the value of the deductible reduces then the insured benefit will increase and inevitably this will lead to higher premiums. Just to put this into perspective, the ESA is reducing by over 28%.
As a result, GIP benefits that include an ESA deduction will have to increase by over 28%. The premiums charged to provide this benefit will need to take this into account, remembering that it is not just a one off payment.
The higher annual benefit will continue to be paid for the duration of the claim. In the case of a long-term claim for a severe disability the benefit could be payable for 30+ years. Amongst other things, the premium rate has to take into account of the possible duration of claim payments.
Most GIP policies, certainly those with 20 or more members, are priced using a unit rate basis i.e. the premium charged is a percentage of an organisation's salary roll.
Usually in these cases the rate is guaranteed for a period of time, at least 2 years and sometimes 3 years.
This means that insurers can't wait until April 2017 to consider price increases. Rates now being offered will still be in place when State Benefits reduce, so need to take account of the fact that insured benefits will be higher.
In addition to increased premiums, employers with GIP schemes set up on this benefit basis should ensure they fully understand the definition.
Exactly when is the state benefit deduction used to calculate benefits set? For Canada Life policies the State deduction used to calculate a benefit is set at the date of incapacity.
Some insurers fix the State deduction at the accounting date before the date of incapacity.
As the State Benefit for any individual will usually be calculated after 28 weeks absence, there could be a gap between expectation and insurance i.e. the insured benefit could deduct a higher level of State Benefit than the amount actually payable.
Advisers need to establish which approach is used and include this detail when explaining ESA and WRAC changes to their customers.
Some employers will probably opt to leave the current benefit definitions intact and absorb the higher premium payments or tweak their benefit definitions to minimise premium increase.
However, there is a more straightforward option - simply choose a benefit expressed only as a percentage of salary i.e. instead of 75% salary less State Benefits, change to a flat 70% salary.
Admittedly any changes to employee employment terms have to go through a consultation exercise but de-linking GIP benefits from State Benefits enables employers and employees to be clear on the insured benefits provided when long-term absence leads to a claim.
It also offers protection from further Welfare Reform changes impacted on GIP cover. To me, it's an obvious choice - a simple benefit definition with no potential for misunderstanding at the point of claim.
Paul Avis is marketing director at Canada Life
