As they evolve for today's markets, group products are set to sell well, but should group risk advisers focus on income protection or critical illness? Paul Avis makes the case for a balance of both
Times are tough and employers, just like UK Ltd, are looking to cut costs. When considering employee benefits there are difficult choices ahead but employers should be encouraged to think twice before immediately axing them.
Group Death in Service benefits (Group DIS) are often a first choice for many employers. Employers have traditionally seen death in service benefits as an inexpensive benefit to offer with a high perceived value by staff - and should therefore remain as they are.
But what about Group Income Protection (Group IP) and Group Critical Illness (Group CI)? Are these products the poor relation in comparison, and will they suffer going forward? Compared to Group DIS benefits, the take-up rates for these products is woeful and there is significant room for growth in these markets.
With jobs for life a thing of the past, the ‘traditional' Group IP market, with benefits paid through to retirement, is subject to scrutiny and new schemes are few and far between. To address this, the industry has developed a range of limited term products with benefits typically paid for two, three or five years. It is also possible to insure a lump sum benefit payment at the end of the term. These products have proven popular and now account for around 10% of the Group IP market and are set to grow further.
So, does an employee need a further lump sum benefit in this scenario, such as one paid under a Group CI policy? Surely, it would simply be covering what has already been covered? You could make the case that both should be provided as they offer complementary but different employee assistance.
Group CI benefits are normally paid after 14 or 30 days survival so can help with the immediate issues and employee needs. Further down the line, the lump sum Group IP option (after a period of monthly benefits payments) can help an employer terminate the employment relationship, secure in the knowledge that they have supported the employee through a period of difficult transition.
Premiums for limited term Group IP products are significantly cheaper than the traditional model. A traditional plan paying benefits through to retirement has historically cost upwards of 1% of payroll. A two-year limited term product can typically be 65% cheaper than this and a five-year limited payment term can cost up to 45% less. All of these options are designed to provide cover without ‘breaking the bank'.
While in the past employers may have made a Group IP claim and employees have received payments for the remainder of their working lives, with the advent of pro-active claims management, the emphasis is now on getting employees back to work and helping them with the management of their illness or disability.
Benefits for all
Perhaps we should look at Group IP as a different way of achieving this with the primary function being to facilitate a return to work - and the added bonus of a degree of financial protection while the employee is on the road to recovery. In effect, Group IP can be viewed as both an employer and an employee benefit.
Group CI in the UK has yet to achieve the dizzy heights that were forecast for it a few years ago. Although unlike Group DIS and Group IP, the market did increase in 2009 by 6.6%, fuelled mainly by the increase in popularity of flexible benefit arrangements. But where is this market going?
In flexible benefits plans, employees often have access to Group DIS, Group IP and Group CI. In most cases they will have a basic level of benefit which they can then choose to increase. The choices they make reflect the different priorities that different employees have.
For married employees with families, providing support for their families if anything happens to them is likely to be the first priority, so Group DIS followed by Group IP are probably the first choices. However, for employees without financial dependants, ‘living benefits' are likely to be most important, so Group CI and Group IP are likely to be their first choices.
Group CI is often seen as a cheap alternative to a traditional Group IP arrangement - with the CI plan typically costing upwards of 0.3-0.5% of payroll. Viewing the Group CI benefit as an alternative is failing to appreciate that only 20-30% of IP claims are paid due to conditions that are covered by Group CI. For example, Group CI does not cover mental health problems, including stress related conditions or musculoskeletal ailments, including back and mobility problems, which are two key causes of IP claims. So what are the relative merits of each arrangement and can they sit alongside each other as part of an employee's reward package?
Even though a critical illness can be very serious, it is still possible that the employee can make a full or partial recovery, which will enable them to return to work either in a full-time or reduced capacity. The Group CI benefits are paid as a lump sum regardless of whether an employee's ability to work is affected and the length of their recovery.
As Group IP benefits do not usually start until the employee has been unable to work for at least 26 weeks, with the improvements in medical science it is quite possible, even after the employee has suffered a serious critical illness, for them to return to work before a Group IP benefit is paid. But claims management services can help in an employee's recovery, whether a Group IP benefit is paid or not, demonstrating the complimentary nature of the two products.
Encouraging return to work
The benefit level of Group CI does not have to be high - six figure benefits might encourage a recovering employee to leave and so smaller amounts of benefit for example, £30-50,000, could be the best way to retain staff, post diagnosis. In turn, this minimises cost. Group IP does this as a reduced income to encourage a return to work. While at first glance there may appear to be a significant overlap, the two products sit neatly side by side and as part of a benefits package can be used effectively to recruit and retain staff.
Pensions, death in service and medical insurance are generally higher up the pecking order but Group IP is needed to enable the employee to be kept in service. This requirement is made even easier by insurers covering employer pension and national insurance contributions - even for limited benefit payment plans. As a result, Group CI is lower down in the pecking order than Group IP when considering employee benefits, but still should not be forgotten.
It is not a question of picking between these two benefits now. A limited term Group IP arrangement provided by the employer can sit comfortably beside a Group CI product offered as part of a flexible benefits arrangement where benefits are selected by the employee.
This combination provides the necessary protection for both parties. The employer will benefit from the services of a rehabilitation team, but with the added bonus of financial protection in the form of an income payment in the event of an employee being absent for a prolonged period. The employee will benefit from financial protection in the event of contracting a critical illness, allowing them and their dependants to adjust to new circumstances, feeling grateful that their employer has afforded them the chance to do so.
Even in these hard times it is possible to be seen and to do the right thing for employees - especially when these benefits cost so little when formatted in the right way.
Paul Avis is sales and marketing director at Canada Life Group Insurance
