Pension reforms are driving the most prominent changes in group life. Fiona Murphy takes a look at market developments.
If you ask anyone in the group life industry about market developments over the past year, they tend to scratch their heads.
The sector may not be innovating, and change is thin on the ground in terms of schemes and propositions, but the number of lives covered has continually grown in recent years.
Swiss Re's Group Watch 2013 found that group death benefit premiums increased by 9.8%, with excepted group life premiums increasing by 14.8%.
This was driven by premium increases - 80% of industry respondents to Group Watch's qualitative survey reported hardening rates in the group death benefits sector. However, improvements in the market were also supported by a positive increase in the number of lives and number of schemes in the market.
But these results do not reflect auto-enrolment, which commentators say has impacted the market to mixed degrees.
David Williams, director of group protection at Friends Life, says: "There hasn't been anything fundamental changing that we've seen. We're still seeing some increase in take-up off the back of auto-enrolment. It's not consistent, but people are extending the life benefits out to their employees."
James Walker, technical manager, group protection at Legal & General, agrees - he has seen an increase in people covered by life assurance as a result of AE. He explains: "Most employers only provide life assurance cover to those in the pension scheme, or give higher amounts of cover to those in the scheme [compared with] those who aren't. Those who join become eligible for higher levels of cover. Less than 10% have opted out of AE."
However, Walker warns that this trend may not continue, as the smaller firms reach their staging dates. "Whether we will carry on seeing greater coverage remains to be seen," he says. "Perhaps the bigger employers can afford to let that happen while the smaller ones might have limited budgets to spend on benefits, so we might see these firms cutting back their life insurance spend. We haven't seen that as yet, but it could happen. Hopefully not.
"What will be interesting to see is when staging moves to the smaller organisations, and whether we see an increase in benefit take-up. [It will also be interesting to see] whether the employee benefit consultants and intermediaries take the opportunity to raise awareness or whether they will focus on the pension for now."
The decline of DIS
Swiss Re's Group Watch also found the number of lives covered under widows' and dependants' death-in-service (DIS) pensions fell by 3.1%, with a 2.5% decrease in the number of schemes.
The reinsurer's report said: "This is largely attributable to the low interest rate environment, which has resulted in the provision of lump sum cover becoming more attractive."
Is DIS still on its last legs or are we seeing employers stick with this long-held benefit? "Clients are still talking about DIS and talking about moving that over to lump sum cover," says Williams. "I was with a client this week - as they rationalise their benefit, they are moving it over. It is a cost driver due to the uncertainty of costs - a lump sum provides more certainty.
"I suspect if interest rates start increasing we might see an increase from DIS to lump sum as costs of annuities become more uncertain. We haven't seen a shift in pricing recently."
Fixed Protection
While auto-enrolment is set to introduce hordes of people - particularly lower earners - to pensions and benefits for the first time, higher earners will see pensions affect their life assurance coverage.
Swiss Re said: "Further reductions in annual allowance and lifetime allowance from April 2014 may increase demand for non-pension linked death benefits, accelerating a trend which is already being seen in the growth of excepted group life cover."
The lifetime allowance (LTA) on pensions - the maximum pension fund allowed free of tax - is set to decrease from £1.5m to £1.25m from 6 April 2014. Members will have to pay a lifetime allowance tax charge on any amounts above this, unless they have fixed protection.
This allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge, although the ability to accrue future benefits is limited.
"We are seeing the impact of the reduction of the pensions LTS," says Walker. "A lot more people, particularly higher earners, are applying for fixed protection. They can't join new registered pension schemes. Group life is a registered pension scheme, under a quirk of the law.
"We're seeing advisers looking at other ways to cover the life assurance. They're tending to put them in excepted group life policies. It wouldn't surprise me if we double the amount of people in excepted life. It's a different legal structure - we do not charge higher premiums than on registered group life schemes and it's not difficult for us to administer."
Spouse coverage
Howard Rayner, group legislation manager at Canada Life, says a key question has centred on same-sex marriages and benefit entitlement: "The only thing people have been asking is around same-sex marriages. Civil partnerships will no longer be taking place, but those should be covered under dependants insurance. That's a question that has arisen recently, as the law is changing at the end of the month. It won't affect it - people wonder whether it will, but it won't. Couples will be covered."
Williams adds that spouse coverage is becoming more common in group life arrangements, particularly flex schemes.
Meanwhile, we have seen some incremental changes to group life administration and terms and conditions. Last November, Ellipse dropped its ‘actively at work' conditions on its group life scheme.
Instead, it asked employers to tell their insurer which employees had a history of taking significant chunks of time off work - at least four or more whole weeks, whether in one go or in weeks at a time - in the year prior to the cover starting.
However, in March of this year, Ellipse revised its approach on absentee disclosure in group life, following adviser feedback. It now asks for details of current absentees, with the length of ‘significant' absence varying by size of scheme.
In a statement, Ellipse chief executive John Ritchie told COVER: "We hold our hands up - the change we made in November wasn't popular. Our motive was to get rid of the uncertainty and potential gaps in cover that exist when ‘actively at work' conditions are applied. At the same time we changed the absence definition for disclosure on new and switching schemes.
"We still think actively-at-work exclusions as a protection for the insurer should be consigned to the past, as the effect can be to leave risk - even if only temporarily - with the small business and its employees, who are in no position to carry it.
"We have come up with a new disclosure requirement that asks for details of current absentees with the length of absence varying by size of scheme."
This is a clear sign that the insurer is ready to engage and discuss with the adviser market any steps it takes, a real positive for the group life market.
In another positive development, in November Friends Life removed the need to see the original death certificate to verify group life claims, in a bid to improve and quicken group life claim payouts.
But despite such provider engagement and renewed interest in group life following pensions reform, the protection gap still remains. Recent research from Friends Life found one in five UK employees do not understand what wellbeing benefits they are entitled to.
In addition, less than half of UK workers (45%) say communication of benefits by their employer is effective, the Friends Life poll identified.
Rayner concludes: "Group life is still a good-value product. The government and industry are still very aware that people do not take out protection insurance.
"Swiss Re research found that group life represents about 40% of all insured death benefits in the UK. While that is quite significant, there is still a big protection gap in people taking out life cover. Those are the main messages - people still aren't buying it and it's a very important, low-cost product."
