Greater competition and the development of shorter-term schemes are making group income protection more cost-effective, says Sam Barrett
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What is group income protection?
Group income protection (GIP) provides an income for employees who are unable to work as a result of long-term illness or injury. It is paid after a deferred period, typically 26 weeks, and is generally paid until the employee returns to work or retires. Alternative products that have a limited payment term contract have been designed to pay out over a set period of up to five years.
What are the origins of group income protection?
The first form of income protection, the Holloway scheme, was launched by a friendly society in the 1800s. These were individual policies that paid out benefits to sick employees. The plans then evolved, especially in more industrial sectors where accidents and work-related ill-health were more prevalent, to give employers a means to finance occupational sick pay.
Where can employers get more information and advice on group income protection?
More information can be obtained from industry body Group Risk Development (Grid). The group comprises insurers, reinsurers and intermediaries, and its website (www.grouprisk.org.uk) contains information on GIP and other group risk products.
Consultants can steer employers round the GIP maze, and www.unbiased.co.uk lists advisers
Articles, research and case studies on GIP are available at www.employeebenefits.co.uk/benefits/group-risk
What are the costs involved?
How much employers pay depends on the cover they buy. Limiting payment terms and reducing benefits cuts the cost.
For a scheme paying benefits until normal retirement age, employers can expect to pay about 1% of payroll.
What are the legal implications?
There is no mandatory requirement to offer group income protection (GIP), but many employers include it in contracts of employment and therefore have to honour this promise.
Age discrimination legislation is an issue for employers that offer group income protection schemes. Insurers can extend cover to age 65 and some, such as Friends Provident, go to age 70. But some employers prefer to self-insure at this point because costs can be prohibitive.
GIP insurers can provide support and advice on an employer’s responsibilities as far as age discrimination legislation is concerned. They can also help employers comply with legislation relating to ill health, for example, the Disability Discrimination Act and the Health & Safety at Work Act.
What are the tax issues?
Benefits are paid to the employer, which forwards them to the employee through payroll, so income tax and national insurance are deducted.
Employers can receive corporation tax relief on premiums.
Nuts and bolts:
What is the annual spend on group income protection?
About £650m was spent on group income protection in 2008, according to figures from Swiss Re.
Which group income protection providers have the biggest market share?
The largest provider is Unum with about 50% of the market, and Canada Life is in second place. Other providers include Aegon Scottish Equitable, Bupa, Generali, Friends Provident, Legal & General and Norwich Union.
Which group income protection providers increased their share the most over the past year?
The group income protection market tends to be fairly static, with insurers keeping their sales figures a closely guarded secret. But with new players such as Zurich Corporate Risk entering the market, there is likely to be more of a tussle for share in the next 12 months.
Gloomy economic conditions are putting a squeeze on many employee benefits, but in the group income protection (GIP) sector, competition is keen and product development teams are racking up overtime designing cost-effective features. It is a buyer’s market.
The arrival of new player Zurich Corporate Risk this year is partly responsible for the shake-up in the market. Drawing on the experience of team members from other group income protection insurers, the provider has big ambitions. Nick Homer, group risk development manager, says: “We are phasing our roll-out to the market, but we are aiming to be a top five player by 2012.”
Zurich’s fighting talk is expected to fire up greater competition. Paul White, principal at Aon Consulting, expects to see at least one more new player enter the market by the end of the year. He says welfare reforms are making it harder for people to get state benefits, which creates opportunities for the insurance sector.
The Welfare Reform Act, introduced in October, replaced incapacity benefits with an employment and support allowance, which involves claimants’ capabilities being assessed and support given to get as many back to work as possible.
“On top of this, insurers can make money from group income protection as long as they get their product offering right,” says White.
But getting it right in today’s tough conditions is testing insurers and many are looking at ways to make the cover more affordable. Wojciech Dochan, head of commercial marketing at Unum, says: “We need to come up with more modern solutions that are cost-effective.
“Employers that haven’t already taken out group income protection often don’t want a plan that pays until age 65. No one expects a job for life any more.”
This has led to the development of shorter-term schemes, which, after a claim has been made, pay out benefits to an employee for between two and five years, as opposed to until they retire. “Most people do return to work within the first two years, so this enables the employer to support them for this period,” says Dochan.
Another advantage of limited-term GIP products is that they don’t cause problems from an age discrimination perspective. All staff are offered exactly the same benefit, so there are no issues about the age at which cover ends.
However, there are potential problems with limited-term plans, says Declan White, group risk marketing manager at Friends Provident. “If you’re moving from a full-term plan to a limited-term one, you must check the contract of employment to make sure you are not breaking any promises,” he says. “You can make changes – and employees are more receptive to cuts as a necessary means to retain jobs – but you must do this formally.”
Another way insurers can make group income protection appeal to employers with tight budgets is to offer plans that can be topped up by the employee. For instance, Legal & General offers a scheme that enables the employer to provide a core benefit worth 40% of salary for a two-year payment term. The employee can then decide whether to pay for extra cover up to a maximum of 75% of salary, to be paid until retirement.
Glenn Laming, group protection sales director at Legal & General, says: “As well as cutting costs, this will help to educate employees about income protection. Employers face a struggle trying to get employees to value this part of their benefits package.”
Existing GIP customers are also putting pressure on the insurers. Although contractual requirements might prevent them from moving to a limited-term or reduced-payment plan, they are still keen to curb increases in premium. David Manning, a principal at Mercer, says: “Clients are considering ways to reduce and contain premiums, such as changing the benefit escalation level and reviewing the definition of disability.”
More work is also being done on guaranteeing premiums. Premiums are usually guaranteed for two years, but Unum recently introduced a three-year guarantee. “We have had lots of requests for this,” says Dochan. “Employers need more certainty over budgets in the current climate.”
Insurers also have to look at how policies are affected by the strategies firms use to survive the downturn. Temporary halts in production, shorter working hours and pay cuts can all have ramifications for group income protection. Graham Clark, director of group risk at Bupa, reports many enquiries on this subject. “We consider each case on its merits, but it is important we are made aware of any changes, because this could affect the policy,” he says.
Insurers are also looking at ways to extend the scope of the support they offer, to give employers value for money. Traditionally, policies have been fairly invisible unless there is a claim, but new bolt-on support services, such as employee assistance programmes, vocational rehabilitation and second medical opinion services, are helping employers to manage absence more proactively and reduce claims. Colin Micklewright, head of income protection business development at Canada Life, says: “There is also more focus on early intervention – bringing in rehabilitation services to get people back to work as quickly as possible.”
Many insurers are keen to promote their early intervention services. For example, Legal & General offers groups of 250 or more an early notification bonus of 5% of the annual premium if it is notified of an employee’s absence before the end of the sixth week.
Such flexibility is likely to feature strongly in the next 12 months. With little new business expected, insurers are keen to retain their existing business by keeping their premiums and services competitive.