New age discrimination legislation becomes law in October 2006. Kirstie Redford looks at the effects the resultant older workforce may have on employers' group insurance schemes
In October 2006 new legislation comes into force making it illegal for employers to discriminate against staff because of their age. Two of the main changes this will bring is that employers will be unable to force staff to retire before they reach 65, and that all employees will have the right to request working beyond 65.
Draft rules for the legislation suggest that employers will also be expected to keep providing the same benefits for staff, regardless of their age. So if an employee has enjoyed the benefits of group private medical insurance (PMI), critical illness (CI), income protection (IP) or life cover, the rules may mean that employers will be unable to stop providing cover just because staff turn 65.
Insurance headache
These rules are causing headaches for insurers. Age has huge weighting when pricing schemes - the older you are, the higher claims rates tend to be. If employers are to demand products with no age limits, how will the already price-sensitive market absorb the extra risk?
The outcome of the legislation consultation, which ended on 17 October, is still unknown. However, insurers are pinning their hopes on clarifying some of the small print included in the draft rules.
They are presuming that group IP falls within the definition of a 'work-related invalidity benefit scheme' which is given an exemption in the rules, allowing employers to fix the age for 'entitlement' to benefits. This means that employers should be able to continue to impose an age limit on group IP benefits. But it is not 100% clear that 'entitlement' can be interpreted as an upper age limit. Even if this is the case, group CI, life and PMI will not benefit from the exemption as the rules stand.
"We need clarification on what 'entitlement' really means," says Nick Homer, product and technical manager at Norwich Union Healthcare. "If IP is included, we also want to get the exemption extended to PMI, CI and life cover."
Nicola Smith, communications manager, group risk, at BUPA, says the government needs to better understand the implications of the new rules on employee benefits. "BUPA, like other insurers, is currently in consultation with the Department of Trade and Industry (DTI) about what the exemption will mean. We're hoping the outcome will solve the problem, but the DTI is not as clued up on group risk as it could be. The legislation is coming in soon and a lot of details still need to be thrashed out," she says.
In the meantime, insurers are already preparing contingency plans to make sure their products will continue to meet the needs of employers, should the final legislation make it difficult to impose age caps.
Glen Laming, sales and marketing director of group risk at Legal & General, says: "We are looking into this very closely, but it is too early to say how we may amend products. There are practical considerations, such as cost. Premiums need to continue to be competitive and affordable. If you insure an employee's life aged 90, it's not going to be cost-effective. We have to determine what employers are looking for and whether this means amending current packages to include older employees or providing alternative benefits for those past 65."
Legal consequences
Joanne Hindle is corporate services director at UnumProvident. She says her team is still trying to work out what the consequences of the new law will be. One of the main considerations is that just because employees are allowed to work for longer, it doesn't mean very many people will. So one solution to keep group schemes affordable could be to provide individual cover for older staff if and when they need it.
She says: "If someone works beyond the cut-off age, cover can be provided on an individual basis - this would mean the group can still be covered up to 65 only. If you try and insure the whole group with no age limit, the cost will go through the roof. It's still very early in the ideas process, but we will see some progress over the next few months."
According to Vicky Bolton, health policy adviser at the Association of British Insurers, clarification of the draft rules could make it legal for employers to offer an alternative benefit to older employees instead of having to extend cover. "As I understand the draft rules, employers may be allowed to offer an equivalent benefit, such as cash, to employees over the cut-off age. The rules should allow employers to treat staff differently, as long as it is for a good reason," she says.
Homer says providing an alternative cash benefit could be complicated because there will be tax implications to consider. He thinks it is more likely that employers will choose to go down the 'flex' route. "Flexible benefits allow you to fix a monetary limit, allowing employers to cap financial liability," he says.
For group PMI schemes priced annually according to claims experience, covering older employees may not have an immediate effect on premiums. But if covering older staff leads to higher claims in the long-term, premiums are likely to increase. Kevin Dewhurst, head of client development at AXA PPP healthcare, says schemes that focus on prevention will be key. "PMI schemes that provide benefits encouraging wellbeing and early intervention will help keep claims low and become more important as the workforce ages," he says.
Reduced cover
One logical way for employers to help contain costs if providing cover for older employees is to reduce the level of cover available. "Employers may well be forced to downgrade levels of benefits if extending cover to older employees," says Homer.
"However, in a market where sales are already hindered by cost, it could be the final straw for employers and cause them to withdraw benefits altogether. These are not compulsory benefits and are still regarded by many firms as perks that have no great benefits to employers. Group IP and PMI may help manage absence, but employers are already finding it hard to justify paying for benefits.
"This could very easily result in withdrawals from the market."
Bolton says the new legislation could end up penalising employers for providing cover for staff. "There is definitely a risk that an unintended consequence of the rules will mean employers are forced to withdraw benefits of this kind," she says.
Smith says making the legislation less prohibitive so employers can continue to afford to provide health benefits for staff should appeal to the government, as it could save money on State provision. "Employers will only shift the risk onto the State if they can't insure," she says.
John Cowell, principal at Mercer HR Consulting, says employers are not deterred so much by cost, more by the terms that insurers are offering when underwriting older employers. "Insurers are being very stringent on the terms under which they will accept older employees, and in my view being unduly prudent. In some cases insurers want to medically underwrite every employee over 65 for group life cover. There needs to be more flexibility," he says.
However, the hard fact is that the older you get the more likely you are to suffer a serious illness or die. "The prognosis for conditions such as cancer, heart attack and stroke, which see the highest claims on CI policies, increases significantly when you reach 65, as do premiums. It will be hard for employers to meet this increased cost, meaning there will potentially be more opt outs," adds Cowell.
With premiums set to soar and terms likely to tighten if age limits disappear, is this the end of the road for current group offerings? Homer thinks so. He says insurers will have to come up with new products if the legislation is imposed. "We will see products and services broaden, because relying on traditional core products will not be viable. Our ability to shape existing products is becoming more restrictive, while the needs of employers are constantly changing," he says.
Laming agrees that providing indefinite terms for protection products will not be viable. "We will have to have a cut-off point or design new products altogether. We have to continue to provide value for money."
New products
If new products are being developed, insurers are holding their cards close to their chests. Some may well also wait to see what their competitors do before overhauling products. "We will have our proposition in place in time for the new legislation. However, it may be that we make initial changes and then identify new opportunities further down the line," says Laming.
Hindle says that with the industry failing to discuss product options openly, only time will tell which direction the market takes. "At the moment, each insurer is keeping their ideas to themselves. But this is only the start of the journey and is definitely one to watch," she adds.
If the final rules do mean employers have to get rid of age caps on benefits, they will be faced with one of four options: extend cover to include older staff and incur a higher premium; extend cover to include older staff but downgrade benefits to contain costs; self-insure; or withdraw benefits altogether due to cost. Unless insurers come up with new solutions, employers may have to make some difficult decisions over the next year.
COVER notes
In October 2006 new legislation comes into force making it illegal for employers to discriminate against staff because of their age.
One of the main changes will mean employers will be unable to force staff to retire before they reach 65 and all employees will have the right to request working beyond 65.
