Group protection is under significant price pressure. Paul Avis explains why and offers a few suggestions to support clients who may be shocked by the cost.
For group IP, medical advances mean there may be fewer terminations for death. Of course that is a positive message but it will affect the payment of claims, meaning they may be payable for longer.
However, perhaps the most pressing issue for many group products is the impact that interest rates have on pricing. The Bank of England base rate has been at a historically low level of 0.5% since March 2009 and as a result the 10 year government bond yields have decreased since early 2010.
Some feel that we may not see an increase until 2015. The interest rate assumption is a significant factor for group products with a medium to long term benefit payment period.
In simple terms, the lower the interest rate, the higher the amount of investment needed to secure the continued payment of benefits. In summary, higher interest rates help to make some products cheaper – the longer for which the benefit is payable, the more impact interest rates have on price.
The price
So what does all this really mean for the price of group risk products? The good news is, for lump sum death benefit products the impact is minimal. Insurers do not need to invest large sums to pay future claims because the benefit is settled in a single payment and all claims must be reported promptly, usually within two years.
For group IP benefits and death in service pensions (DISP), however, the story is different. The reserves needed to back the long term payment obligations are not sitting idle – they are invested, so that they increase with time. When interest rates are high, more investment income is earned so less money needs to be held now to ensure those future benefit payments can be paid.
Lower interest rates, on the other hand, mean that a larger investment is needed now. This factor is one of the main causes of the higher prices in the current group IP and DISP markets. These products rely on interest rates to underpin the investment returns needed to back long term products.
The adviser’s role
Against this background of anticipated high insurer costs what can an adviser do to mitigate issues? There are some quick wins, specifically based around group IP where additional benefit provided can help reduce current employer costs.
Reviewing your clients EAP provision is a good start. Ensuring that the provider offers a fully communicated EAP service to all employees, not just those insured, and provides meaningful, statistical reports to back this up, can save the employer the cost of a directly contracted service.
It is worth understanding the legal support services that your client has too, as these may be reduced by insurers’ online and telephone legal support services. In effect the embedded legal service becomes a legal triage. And what about second medical opinion services that may be included in the insurance?
We have undertaken case studies that show how maximising the second opinion services can have a beneficial effect on mitigating increasing private medical costs by offering other options and refining the diagnosis or treatment paths. There are plenty of additional consulting opportunities to consider.
A further very simple quick win is to ensure your client involves the insurer in the early stages of potential group IP claims. Too many employers leave claim form submission until just before the end of the deferred period, when the “damage” may already be done.
Our ability to support the employer in getting an absent employee back to work is inhibited by late notification, as we believe there is a direct link between the point at which a claim is notified and its duration. Claim management helps to control absence costs and keep the claims experience (another factor in group IP rates) in check.
In summary, unless we all start talking about price in the right way, clients will not thank us for lumbering them with unplanned costs that they will find hard to justify. Talking value, partnership and sustainable group risk pricing should put us all in much better stead to defend our industry.
Paul Avis is marketing director at Canada Life
