ProtectionApr 21 2016

Group risk schemes see record rise

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Group risk schemes see record rise

Swiss Re’s tenth study on group risk in the UK paints a picture of significant growth potential for industry players operating in the arena.

The reinsurer’s Group Watch 2016 report found almost 310,000 more people became members of group risk schemes in 2015 than in 2014 – with the number of individuals covered standing at more than 11.5m.

What is more, group risk insurance premiums amounted to more than £2bn last year – the highest figure recorded to date.

Ron Wheatcroft, technical manager at Swiss Re, said: “There is no better time for the group risk market to work with others to develop products and services which meet the needs of employers and employees, and bring together State and private coverage into a model which dovetails together.”

Richard Ross, director of Norfolk-based Chadwicks, said: “The advent of auto-enrolment (AE) has been a large contributor to the increases. For employers, taking out some form of group risk scheme during the AE process is a cheap way of enhancing workplace benefits at a time where they may be reducing benefits elsewhere.”

Death benefit

The report highlights the increase in the amount of group life cover written under Excepted Group Life Policies (EGLP) as the standout statistic of the 24-page dossier.

The number of individuals insured under these arrangements increased by more than a quarter to 491,000 from 391,000 in 2014. Mr Wheatcroft said the statistic was unsurprising given the reductions in the lifetime pension allowance.

Critical illness is sometimes more difficult for the employees to see as a benefit

For the first time, there are more members of EGLP than members of insured death in service pensions (DISP).

DISP benefits declined by 14 per cent in 2015 to 399,000, while premiums fell by almost 9 per cent. In all, the benefits have decreased by just less than 30 per cent after its 2008 peak of more than £6.3bn.

An unnamed employee benefit consultant who took part in the study said: “I expect the move away from providing DISP benefits to continue during 2016. This will reduce the overall benefits insured, as lump sum replacements are unlikely to be as generous as the capitalised DISP value.”

The report said that EGL coverage had increased despite uncertainty around possible periodic entry and exit charges under discretionary trusts set up to hold EGL policies.

Industry advisers and providers involved in the report called for greater clarity on the tax treatment on group death benefit policies where the potential liability to tax is based on a set of events largely outside the control of the employer or the trustees and where the possible tax liability is unknown and difficult to plan ahead for.

Respondents also claimed that automatic enrolment was a boon to group risk coverage, which is likely to result in a hike in employer-funded death benefit coverage rather than disability-related cover.

Daren O’Brien, independent financial adviser at London-based Aurora Financial Solutions, said: “We deal with a lot of small and medium enterprises and we have found a lot of them have put in place some sort of group risk scheme, be it group life or group critical illness, while sorting out their auto-enrolment scheme.

Key points

The group risk insurance market amounted to more than £2bn last year.

Auto-enrolment is a boon to group risk coverage.

Many respondents claim master trusts will appeal more to the smaller employer.

“Setting up a group scheme is a direct benefit to employers. Some employers will take out group life or critical illness schemes because it works out cheaper for them this way because of economy of scale.”

When it comes to long-term disability income (LTDI), in-force benefit amounts grew by 4.2 per cent and premiums by more than 2 per cent in 2015 – which the report attributes to the increase in shorter benefit payment periods.

Some of the employee benefits consultants involved in the study cited the pressure on employers to control operating costs as having an effect on the scope of benefits provided. An ageing workforce was also identified as a notable contributing factor.

Mr Ross said: “It is down to affordability. People take the view that it is better to have something rather than nothing.”

Last year also saw growth in the group critical illness market. While the number of people covered by the schemes was up 15 per cent from 475,000 in 2014, there was a 29.5 per cent increase in people covered in voluntary/flex rather than in employer-paid arrangements – which saw a more modest percentage growth of 1.4 per cent.

According to the study, the slowdown in employer-paid schemes may be a function of the P11D tax charge on the member. The P11D informs HMRC how much an employer needs to pay in National Insurance on all the expenses and benefits they have provided.

Tom Binstead, executive consultant at Gloucester-based Kellands Ltd said: “Critical illness is sometimes more difficult for the employees to see as a benefit as it is taxed as a P11D, unlike group life/Income protection. The products work – it is the taxation that employees may not understand.”

The report also brings master trusts into the spotlight, with many respondents claiming they will appeal more to the smaller employer and those with no issues relating to lifetime allowance and who just want a simple benefits solution.

Mr O’Brien said: “Anything that looks like a simple and inexpensive solution will appeal to employers. An auto-enrolment master trust scheme will appeal because it is easier and more cost-effective for staging firms to piggy back off someone else’s trust than to set up their own.”

The study concludes that while there have been significant developments in the group risk market, it does not necessarily lead to the conclusion that employers should provide death or disability benefits if there is no demand to do so.

One of the employee benefit consultants quoted in the report suggested that an increased focus on flex/alternative benefit offerings at the expense of insured benefits was likely to better cater to the demands of millennial generation employees by facilitating their access to financial advice and guidance.

The report said: “Recommendation 12 in the Final Report on the Financial Advice Market Review recommends that the Financial Advice Working Group (FAWG) should work with employers to develop and promote a guide to ways to support employees’ financial health.

“There is an opportunity here for the group risk market to work with the FAWG to ensure that awareness of employer-sponsored risk benefits is an integral part of that work.”

A number of respondents also felt “strongly” that greater market engagement with employers would only happen if the industry could demonstrate better the commercial value of group risk to the employer, as well as the employee.

According to Mr O’Brien, companies can no longer afford to ignore employee benefits as they are an important facet when it comes to attracting new talent. He said: “It is not just about the salary any more. People look at the wider package when deciding who they want to be employed by. Also, companies can appear larger than they are if they offer employee benefits.”

Myron Jobson is a features writer at Financial Adviser