Despite tough times and extra risk, the outlook for the group protection landscape looks brighter, says Lee Lovett
Realistic pricing plans
Additional risk combined with reducing margins is not an attractive combination, so it seems only logical that insurers must start to price on a more realistic basis.
The last few months have also seen the ‘threat’ of the Default Retirement Age removal finally disappear as insured business secured an exemption following a detailed representation from Grid.
This, in effect, removed a massive cloud that had been hovering over the future of group IP business, in particular, where large price increases had been flagged as one potential outcome of this legislation.
The market remains focused among a few specialist insurers, with the top four insurers alone holding more than 86% of business in force. While the last two years have seen the arrival of new entrants (Zurich and Ellipse), Aegon has exited while the integration of Bupa and Friends Life during 2011 will also see the disappearance of another insurer.
As we look to the future, however, there are two potentially significant opportunities just over the horizon. Either of these could be the catalyst that fundamentally changes the group market by generating significant genuine new business growth, which in turn may be the trigger for more new entrants to this market.
First, we have the requirement for employers to provide a pension arrangement (that meets certain minimum requirements) for all qualifying employees through auto-enrolment. The default is the National Employment Savings Trust, but there might also be a number of similar schemes on offer from other organisations.
Initial contributions are only 1% from the employer, with a matching contribution from the employee. But this will increase over subsequent years until the employer is paying 3%, the employee 4% with a further 1% coming via tax relief (so 8% in total) by 2017.
But from a group risk perspective, why the interest in this new pensions initiative? The answer potentially lies in Australia, where a similar initiative was launched in the early 1990s and, as the market developed, insurers gradually included an element of protection – group life initially, but then extending to group disability.
This has now evolved into a mature and rapidly growing group risk market where the various superannuation providers compete on the protection cover that is funded from the compulsory pension contributions (which incidentally are now at 9%, up from an initial 3% in 1992, and potentially increasing to 12% soon!).
So once the various UK providers have competed on management fees and investment options, will the addition of an element of basic protection be the next strand of competition? Let’s hope so.
Finally, a few words on the welfare reform agenda. Lord Freud, Minister of Welfare Reform, spoke at a recent ABI event about the potential for significant growth in the group IP market as one potential solution to the review of welfare reform.
Could this create a scenario where employers are financially incentivised to take out group IP schemes and some of the Welfare State burden is transferred from the public to private sector? This may prove to be a compelling business case for the government.
Lee Lovett is head of business development at Munich Re
