As the sector takes on more risk Lee Lovett gives an insight into factors affecting the underwriting of group business.
The group risk market is going through significant change at the moment having been relatively stagnant for several years. A number of these changes are positive, but is the market being realistic in the way it is pricing business?
The underwriting process for group schemes has undergone significant change recently aimed at improving the quality of the initial underwriting assessment, which enables future benefit increases to be made without additional underwriting. These changes are welcome.
The best example of this has been the move to scrap "forward underwriting bars" and move to an approach where highly paid group scheme members are underwritten just once (when they enter the scheme or cover exceeds the free cover level for the first time). The member is then fully covered for any future increases (subject to an overriding maximum limit). In addition, this approach has been extended to lives that are accepted on substandard terms (i.e. with a rating included) whereas insurers typically only allowed forward underwriting bars to standard lives under the previous approach.
Group medical underwriting has remained too much of a paper based process with traditional "non medical" limits that link the amount of evidence required to the age of the employee and amount of cover being underwritten. Employee application/declarations now ask more explicit and detailed questions about the employee's health and tele-interviewing is being introduced to supplement the employee's written disclosures and gain more insight into any particular health problems.
Some insurers are using traditional medical evidence much less than before. It is now requested where it is really needed providing better quality evidence, reducing medical evidence costs for the insurer and reducing time spent attending routine insurance medicals for busy Chief Executives/CFO's/etc. The result - less hassle for the employee benefit consultant and good news for everyone as these underwriting improvements should make the pricing of group risk scheme benefits more accurate too.
The amount of cover that insurers can provide for catastrophe type events can also be a key factor for placing group life cover. Following the events of 9/11, the UK market quite quickly moved to a market norm of a £100m maximum payout per scheme for any form of catastrophe - terrorism risks obviously being the key driver for this.
The imposition of this limit has most impact for City based firms (primarily in London) where the total sums assured are relatively high and the £100m maximum for any terror based claims could leave a significant shortfall in a worst case scenario. Whilst experts would argue that the terror risk remains fairly constant, insurers are now starting to offer higher catastrophe limits for certain schemes, but without any explicit adjustment to the cost. Offering more cover for clients is great - but logic would suggest there must be a price for this? On a similar note what about Swine Flu? Only time will tell if this is going to be a mountain or a molehill.
Both history and logic suggest that recessions are bad news for Group income protection schemes. Firstly there can be an increase in the number of claims, particularly for stress related and subjective disorders; secondly existing claimants might be less inclined to return to work if their employer is struggling, hence increasing the cost of the claim to insurers.
Whilst the claims management capabilities of the major insurers have no doubt improved since the last recession, the combination of these issues means insurers could see worse experience. In addition interest rates are at an all time low, meaning the cost of funding the future cost of claims is higher than the last few years... but how many insurers have increased their rates to reflect this?
Add all of these issues together and the result is the group risk market is taking on greater risk than it has for some time. At the same time average premium rates appear to be on a downward spiral. How can that be? Surely more risk equals higher premiums? One answer might be that there are delays in passing on the mortality improvements that have already been seen in the individual protection market; whilst some offices may be running more efficiently and can reduce their expense margins.
However, commercial pressures are greater than ever and maybe this is one of the key drivers of rate reductions at the moment, rather than any underlying improvements in experience. It will be interesting to see how the market develops during the year - the endless balancing act between new business and profitability looks set to take centre stage as reality sets in, perhaps sooner rather than later?
Finally, a quick mention for GRiD (Group Risk Development), after many years of good work behind the scenes, this industry body is now raising both its own profile and that of the whole sector of the market. This initiative should hopefully be well timed so as to remind employers and other interested parties of the value of the group risk market (so that they hopefully aim their cost cutting exercises elsewhere) and in due course could pay dividends when the market starts to pick up and growth opportunities arise for genuinely expanding the market.
Lee Lovett is head of group reinsurance at Munich Re UK Life.
