The risk and rewards of group risk policies

And for many employees, a group protection policy, whether life cover, critical illness, private medical insurance or income protection provided through the workplace, can be the bedrock of their financial plan.

They can access the cover cost-effectively and easily, and the inclusive nature of group protection means that some may be able to get cover when they would otherwise be priced out. 

It is not without risk, though. The nature of group protection means that it is often temporary and liable to change at the whim of the employer.

Also, employees may become complacent about their protection needs and the proportion of claims denied could be cause for concern.

The most important benefit

Employees consider financial support to be the most important of the four pillars of health and wellbeing — financial, physical, mental and social — according to a poll from group income protection group, Grid.

When it comes to deciding which company to work for, 76 per cent marked financial help if they were unable to work long-term or support for their dependents if they were to die as the most important. 

now people are considering their own situation more.Roy McLoughlin, Cavendish Ware

It ranked higher than mental health and wellbeing support at 63 per cent and benefits to help with physical health, such as access to non-NHS doctors, at 64 per cent.

“Group protection has undoubtedly risen in importance in recent times as a desired and valued employee benefit,” says Roy McLoughlin, partner at advice firm Cavendish Ware. “The pandemic has challenged the view of personal health and wellbeing as indestructible. 

“Very few of us were untouched by it, and now people are considering their own situation more.”

Employers also favour group protection. Grid found that 98 per cent of employers saw a “significantly positive impact” on their company after taking out a group risk policy.

Businesses highlighted some significant benefits. They stated:

• Protection had helped them manage absences
• They were more likely to succeed when their employees were fit and engaged in their work
• Having a policy in place was helpful, as potential clients were often interested in how well the company looked after its staff.

“Group protection can be a differentiator when recruiting and retaining workers,” says Ron Wheatcroft, technical manager at Swiss Re. But he says companies need to to more to spread the word.

He adds: “Communication of the benefits to employees is vital, as the perks that come with the insurance can contribute to a healthy workforce.”

What is it good for?

One major benefit of group protection is that it is a cheap way for employees to access cover, especially if they may not be able to afford their own policy.

Group protection is also inclusive. Each scheme will have a “free cover limit”, which is a certain amount of cover that they can access without being medically underwritten.

At larger companies, pre-existing conditions may be covered. Those with more employees can negotiate more favourable terms thanks to the fact that the risk of higher-than-expected claims is spread across a bigger group, so it is easier for the insurer to predict the likely claims numbers.

Wheatcroft explains: “Usually, very few employees need to be underwritten personally. This means that employees can be covered who may, otherwise, be declined or have their premium loaded if they were to apply for a personal policy.”

Group protection can also help clients or employees on a day-to-day basis, thanks to the rise of value added services, which are, in essence, everyday benefits provided by the insurer. 

As employees frequently change jobs, they may lose their coverage when switching employers.Jiten Varsani, mortgage and protection specialist

For example, Legal & General provides a virtual GP service, as well as access to a second medical opinion and resources like vocational rehabilitation. 

“More and more employers are increasingly interested in health and wellbeing solutions. This trend started well before Covid-19, but the pandemic has escalated this further,” says James Walker, head of product and proposition at Legal & General. 

AIG has Smart Health, a service which provides a GP, mental health counselling and nutrition and fitness programmes. Its policyholders found that 33 per cent were able to return to work more quickly after an illness thanks to the fact they had been able to quickly access a GP consultation.

The downsides

As group protection is a one-size-fits-all product, there are some needs it may not meet.

“It can be too generic to cover a wide range of employees,” says Jiten Varsani, a mortgage and protection adviser. “As a result, individual requirements may go unmet, leaving gaps in coverage.” 

Having group protection can also create a false sense of security for employees, who may believe that their workplace coverage is sufficient for their personal needs.

This can lead to workers being under-protected. For instance, their death-in-service benefit may not be enough to cover their mortgage if they were to die, and they therefore risk leaving their spouse with a large debt to deal with.

And by its nature, group protection is temporary — you are only covered if you remain with that employer, and your cover could be removed at any moment.

Varsani adds: “This is the most significant issue with these types of policies. They are subject to review and can be withdrawn by the employer in the future. Additionally, as employees frequently change jobs, they may lose their coverage when switching employers.”

While employees could always opt for their own personal cover if they were to change jobs or the benefit was to disappear, it may end up being more costly as they are now older and have health complications. They may even be uninsurable.

Does the insurer always pay out?

While a hefty sum was paid out in group protection claims last year (£2.21bn, according to Grid), the payout rates for group claims are lower than in the individual protection sector.

Nearly all (99.5 per cent) of group life assurance claims were paid, but this rate fell to 75.7 per cent for group income protection and 77.7 per cent for critical illness cover.

“These rates aren’t good enough,” according to Ian McKenna, chief executive of the Financial Technology Research Centre. “I just don’t see how an insurance sector can justify operating on a basis where one claim in four gets declined. Something has to change.”

McKenna suggests using technology to help employers underwrite each policyholder properly as a way to improve the proportion of claims that are paid.

While this may be more hassle for the employer in the short-term, he said there was “no worse scenario than telling your staff that they are insured and then, when they need to claim, the insurer does not pay”.

While insurers often publish their individual protection payout rates, the group protection sector publishes industry averages. This means you cannot tell which insurers pay claims more regularly.

I just don’t see how an insurance sector can justify operating on a basis where one claim in four gets declined.Ian McKenna, F&TRC

Moxham says that 100 per cent of genuine claims were paid, and that the reason for the lower claim rates was due to the fact the employer was the policyholder. 

This adds an extra layer of complexity, as it can be hard for the employer to be sure that each claim is genuine or valid under the policy, as they may not know the ins and outs of the employee’s health situations.

“From the adviser’s side, it’s really important that if you are recommending protection, you take into account any group protection your client may have — it can be a great asset,” adds McKenna.

“But by the same token, I would make sure that any medical conditions have been disclosed and that the terms and conditions of the policy are clear.

"You don’t want your client to be one of those one in four.”

Imogen Tew is a freelance financial journalist