On paper, group income protection is the perfect employee benefit - a great perk for staff and an important tool for businesses. So why are sales slow? Rachel Williams finds out
Despite its many benefits, employers are still not buying into group income protection (IP). According to the most recent research from GE Frankona Re, by the end of 2002 almost 48,500 more people were covered than the year before, but the number of schemes had actually fallen - from 22,077 in 2001 to 21,879 in 2002.
"The market is relatively static at the moment - there has been no great growth, despite the opportunities," explains Nick Homer, product marketing manager of IP at Norwich Union Healthcare. "Most of the business is 'churn' - there is very little new business out there."
Indeed, the nature of the market is no more clearly illustrated than by the number of providers pulling out of group IP - the most recent being Swiss Life, which closed its UK operations last year. "It's a tough market: we've lost five players in the last two to three years. And these are decisions that were most likely made because it's not a big money-earner," adds Homer.
This in turn has an impact on advisers, says Phil Naylor, director of group risk at Legal & General. "IFAs are slightly nervous about the lack of players," he says.
A few years back, the market was convinced that the move away from final-salary to money-purchase schemes would kickstart group IP, as it can insure against the shortfalls in funds for ill health early retirement that have arisen as a result of the shift.
Is it worth having?
But despite the number of final salary schemes closing, there has been no group IP explosion - as the GE Frankona Re figures show. It seems either that the message isn't getting through to IFAs and employers - or that the product is not quite as attractive as it initially appears.
It is true to say that insurers have been working with a model that has remained relatively unchanged over the years. The only real modification has been a shift in focus towards the rehabilitation of claimants. But views on whether it is the right model or not are mixed.
Homer seems to think slow sales are the result of poor communication."The message isn't reaching employers yet. It puzzles me - there are so many reasons why it's sensible," he says. And it's not just providers extolling their confidence in group IP. "The product does what it says on the tin. Some providers do it better than others, but it's difficult to see how they could improve it," says David Bowen, a financial consultant at Towry Law.
Not everyone agrees, however. Phil Dickson, an employee benefits consultant for Charcol Holden Meehan, believes insurers do need to have a rethink. "The product needs to be modernised," he says.
New developments
UnumProvident is one insurer that has taken steps to innovate group IP. "The current product is good - it's been around for a long time and customers are happy with it. But an enormous amount of employers don't have it. That says we don't have the right product mix for them," explains Eugene McCormack, director of marketing at UnumProvident. Last year, UnumProvident launched a new group IP policy - Capital Option - which it says better suits many employers seeking to fill the black hole created by the shift away from final-salary schemes.
McCormack says: "Employers would usually look for surpluses in the pension fund to release sick staff, but today there are no surpluses. A conventional mind would say group IP is the solution, but we didn't see it like that.
"Our plan has a short benefit period of two, three or five years. If the employee is still ill or disabled, we will offer a capital sum for the employer to pass on as an ex gratia payment or to purchase an annuity."
UnumProvident is not unique in its approach - but while some providers may only appear to have a standard offering, it is happy to tailor schemes to meet the individual needs of each employer.
"No one scheme would fit 80%-90% of cases," says Naylor."Employers are looking for something to replicate final-salary schemes, but with an insurance solution. They are saying they don't necessarily want to rehabilitate staff, but they do want to care for them."
In these instances, employers want schemes with cut-off points - as they would have with final-salary schemes - at which claimants take their cash and retire after an agreed period. "They need a snap decision at a given point. But on standard income protection, staff would stay on the payroll, with ongoing rehabilitation," explains Naylor.
Limited term payments followed by lump sums are just one of the deviations the insurer is often asked to provide. "Some don't look like standard schemes at all," Naylor says.
But group IP is not just about filling the pensions gap. Pitching the product as an absence management tool - with rehabilitation at the centre of its proposition - is where many insurers are focusing their attention. As Homer states, "rehabilitation continues to be at the forefront of claims management." And the vast majority of providers are making use of doctors, nurses, psychiatrists and claims visitors to help put their claimants back on the road to recovery.
Rehabilitation, though, is still only offered on an ad hoc basis - in other words, only when there is a genuine chance of preventing or reducing the length of claim. "We want to invest our money where it will be wisely spent - for example, on those that are keen to return to work," says Homer.
Managing absence
Whether or not rehabilitation is involved, insurers are also pushing their ability to help employers manage absence - something Homer says can provide a great deal of comfort to employers. "Employers need the expertise insurers can provide in terms of validating long-term absence. An insurance solution passes that decision onto a third party."
This ensures all staff are treated equally and fairly. McCormack says: "Some employers will say they don't want staff back, but it's not as simple as that and they may be treading on difficult ground if they don't understand their obligations under the Disability Discrimination Act."
An important tool for managing absence is an employee assistance programme (EAP), now a common feature of the IP package. The idea behind EAPs is that if absent staff are offered support straightaway, some claims will be prevented.
And the good news is that the benefits of these bolt-ons are now well recognised among buyers of group IP, according to Bowen: "Employee assistance schemes have a lot of potential and we have certainly found that, at the re-broking stage, companies are willing to pay a higher premium for a better package."
Awareness
Whether or not providers are offering a product that is spot-on or not, there is no doubt that too many employers are simply not aware of group IP - or indeed just how much absence costs a business. This is an issue both providers and IFAs will have to address if sales are to grow.
According to research from UnumProvident, 78% of small to medium-sized firms have never worked out how much absence costs them, and remain unaware that it costs UK businesses £11 billion a year and as much as 16% of payroll. When you put it like that, investing just 1.5% of payroll to address these problems by setting up a group IP scheme seems a sensible investment.
Despite the market remaining static, providers and IFAs still believe that, in time, the challenges facing group IP will be overcome - so confident are they in the product's benefits. And alongside the changing nature of pension provision and an increasing need to manage absence, employee benefit consultants are sure that demand from employees will also be a key driver of growth.
Dickson says: "Income protection is an important part of the employee benefits package. The pension is obviously the biggest concern, but health-related benefits are very high on the wish-list."
He thinks growth has been stifled by the state of economy, and says that, now the economy has turned a corner, employers will start thinking about benefits again: "The employee benefit market reflects what is happening in the economy and there are purse strings to be considered. There aren't huge volumes at the moment, but that will change as the recovery cycle bites."
But if group IP is to achieve its potential, cost will have to remain at the forefront of providers' minds. As Homer says: "The market will grow at a reasonable rate. It's a benefit to employees and it reduces the risk of employers falling foul of the Disability Discrimination Act. We just need to keep it affordable."
Rachel Williams is a freelance journalist
COVER notes
oOo-#149; Group IP has yet to reach its full potential. The number of new schemes taken out actually fell between 2001 and 2002.
oOo-#149; Employers view group IP as a way to replicate final-salary schemes.
oOo-#149; IFAs and insurers need to communicate the benefits of IP more effectively to employers if the market is to move forward.