The group risk market must modernise or miss out in the 21st century. John Ritchie outlines the pitfalls ahead
At heart, the group risk industry does something very worthwhile, providing invaluable financial assistance to thousands of employees and their families who suffer illness, disability and loss.
Group risk cover has generally been adopted by employers as a core part of their staff benefits package, and its significance will only grow as State spending - not least on benefits - is cut.
But, in spite of all this, the sort of headlines group risk tends to attract are nearly all negative. Its reputation is made up of an unimpressive mix of poor service, slow and inaccurate quotes and a distinct lack of user-friendliness.
In a recent entry in his blog for this magazine, consultant Kevin Carr, managing director of Kevin Carr Consulting, speculated that in the individual protection market "we might be left with just five providers in the market offering poorer service and vanilla products, with new entrants put off by the scale of the competition and small margins."
Replace the word ‘individual' with ‘group' and you have a fair description of how the group risk market already looks and some of the main problems it faces. The bulk of business is written by a small number of insurers, through a not much larger number of specialist intermediaries.
Originally, group life cover was provided as an integral part of defined benefit pension schemes, offered by a good number of providers. However, it was very much a secondary benefit and the focus of pensions offices was to maximise investment returns and thereby minimise the cost of providing promised retirement benefits. A few offices, whose expertise veered more towards managing mortality risk, saw that by separating out the death in service benefit they could offer it to companies at a much reduced price.
Natural expansion
Some of these offices saw adding other group risk benefits - group income protection and group critical illness cover - as a natural way to expand their businesses, while one or two offices actually started out as group income protection specialists and so entered the market from a different angle.
Whichever route they came in, the number of companies actively promoting themselves as group risk insurers has never been large and, over time, it has become smaller as a result of both mergers and withdrawals from the market. Today, there are around six or seven active players.
Despite the small number of providers, price competition has remained fierce. In fact, one of the key reasons group risk has lagged behind in terms of service is prices have been driven so low as to make it very difficult for companies to invest in improving their service or systems.
The continual downward pressure on prices is exacerbated by the common practice within the industry for intermediaries to go back to the holding office at the end of a rate of review to see if the holding office will match the best rate obtained in the market.
More often than not they DO match, but that begs several questions. If the holding office can afford to write the business at the final price, why is its opening offer often so much higher? Or is it the case that rates are matched in the knowledge that they will lead to a loss unless good luck (i.e. no claims or fewer than expected) intervenes until the next rate review? Either way, there is clearly little incentive for the holding office to issue a quote promptly if it knows it will get a final chance to match the other quotes in the market. Similarly, as the process ensures price is paramount regardless of the mediocrity of the offer, there is little motivation to improve service standards.
The way rate reviews are typically conducted heavily favours the holding office, but gives them little reason to improve the quality of service on offer and no margin to do so even if they did feel the need. Their competitors also feel constrained to focus their attention on price for much the same reasons.
The small number of active players in the market is also a reflection of how scale plays such a big part in the shape of the market, particularly for intermediaries. Unlike individual protection business, where advisers have in the past been remunerated via initial commission that equates to a few years' worth of premiums, often paid on an indemnity basis, the standard commission across the group risk market is 4% of premiums for group life business and 12% for group income protection and group critical illness cover.
Leap of faith
These rates can be more than adequate for large schemes, but it is hard for advisers looking after SMEs to cover their costs. For instance, group life cover costing £2,000 per year would generate commission of only £80 each year. Consequently, it is even harder for advisers to enter the market than it is for providers. The large schemes that generate sufficient levels of income require an investment in resources to service that business, but putting that investment in requires a real leap of faith.
So, with the few active providers having little incentive to improve service while price is so dominant and high barriers to more advisers getting involved, how does the group risk market move ahead?
What is needed to attract more advisers - which in turn may attract more providers - is a different model, particularly for SME business. The vast majority of advisers are themselves SMEs and require a proposition that allows them to add value through providing advice and expertise rather than taking the role of scheme administrators. Although the shape of the group risk market can act as an indicator of things to come in the individual market, there is one crucial way in which the group market has lagged behind: the use of technology.
There have been attempts to introduce modern, web-based systems to the market, but they have been limited in terms of scope and still rely on old-style, back office systems once schemes have been established. A fully automated group risk system should allow: faster turnaround times for quotes, scheme renewals and member underwriting; automated upload of data and download of policy documentation; as well as integration with the platforms that have developed to handle all types of employee benefits, particularly in connection with flex schemes.
Empowering the user
The beauty of web-based systems is that, if designed intelligently, they empower the user (who is able to obtain instant turnarounds), while at the same time allowing the system-provider to handle all sizes of scheme on the same cost basis and with minimum manual input.
However, along with the adoption of new technology must come the adoption of more slick ways of handling business. It should no longer be acceptable for scheme accounts to appear months after the dates to which they relate. Renewal and rate review processes should aim to deliver the right information, including the price appropriate to the risk, first time. We should no longer put trustees in the position of unintended self-insurance of benefits for senior executives just because medical underwriting processes are so cumbersome to navigate.
As it stands, however, the group risk industry is set up more to disappoint than deliver. Bad habits, unnecessary bureaucracy and unsustainable pricing have all conspired to frustrate advisers and ultimately impede provider profitability and performance.
But there are grounds for optimism. Rather than wait for the providers to adopt new technology, some intermediaries have developed systems of their own and are capturing business on the back of them. Some are even starting to demand that providers offer their best price up front instead of holding back until they have seen what the opposition is quoting.
The move towards flexible or universal benefits programmes is encouraging clients to put service ahead of price and the industry body, GRiD, is also developing much-needed minimum service standards.
The group risk industry has a lot to offer, but needs to get the basics right. By moving towards a service- rather cost-centric model and investing in latest technology the industry can - and then will - finally get the full credit it deserves.
John Ritchie is CEO of Ellipse
