Light at the end of the tunnel
The evidence shows that the group risk market is holding up well, despite the difficult economic conditions, says Ron Wheatcroft, senior technical manager, Swiss Re
Group Watch 2011, Swiss Re’s annual report on the group risk market, paints a picture of a market holding up well, despite the difficult business climate.
In-force premiums at the end of 2010 amounted to £1,485,845,166, a drop of 1.8 per cent compared with 2009. Death benefit premiums were up by 2.3 per cent, long-term disability income premiums down by 8.9 per cent and critical illness premiums up by 3.8 per cent.
The competitive nature of the market was seen with in-force sums assured growing faster than premiums across all product lines. Death benefit sums assured increased by 7 per cent, long-term disability income benefits by 1.4 per cent and critical illness sums assured by 7.6 per cent.
Examining death benefit premiums further, lump sum premiums increased by 4.6 per cent while widow’s and dependants’ death in service pensions (WDISP) premiums fell by 8.2 per cent. These figures continue a steady move away from taxable pension benefits to lump sum provision which, in most cases, is free of tax. Since 2006, WDISP benefits have increased by 1.2 per cent while lump sum death benefits in force have increased by 33.3 per cent
Almost 94 per cent of all lump sum death benefits are written in registered pension schemes where they count towards the lifetime allowance, with the remainder in non-pension excepted group life schemes. With the lifetime allowance dropping to £1.5m from April 2012 and likely to remain unchanged for a further five years, the number of individuals who will potentially be affected by it is expected to increase. As a consequence, we expect to see greater interest in using excepted schemes for death benefit provision in the future.
The good news that the government agreed in January 2011 to a default retirement age exception for insured group risk schemes could mean that the move to limited payment term schemes seen in the past two or three years begins to slow down, although some employers will see the limited payment model as more appropriate for the nature of their workforce. The data suggest that 10 per cent of all schemes and 21 per cent of all benefits are now written on a limited term basis.
Our parallel survey amongst leading product providers and intermediaries shows greater optimism about the group risk market than 12 months ago although with some caution that market growth would be modest. The impact of pensions auto-enrolment, beginning in late 2012, concerned a number of intermediaries. Is it a threat or opportunity for the group risk market? Time will tell. Potentially, the market could grow with some employers providing risk benefits for all pension scheme members. There is a risk that employers see cutting back or removing group risk cover as a way of funding pensions contributions.
The profile of group risk has grown and it is encouraging that government increasingly recognises the importance of these arrangements in delivering solutions that can reduce the burden on the state
There has been little evidence to date that employers are closing down schemes as a cost-cutting measure with a drop of only around 1 per cent in total schemes overall. This suggests that employers who own the product value it. The more difficult challenge is bringing new schemes to the market. If, as predicted, the RDR stimulates more interest in the protection sector, group risk solutions should be a natural part of the proposition. This could potentially widen access points to employers, whether for employer-paid or voluntary arrangements.
The government’s welfare reform proposals and messages about greater self-responsibility present a huge opportunity for the group risk market to work closely with government in relieving the burden on the welfare state, although the products and services may not replicate what we offer today. The employer will be a vital stakeholder in the successful implementation of the reforms and many of the early intervention and claims management skills we possess will have a natural part to play.
The profile of group risk has grown and it is encouraging that government increasingly recognises the importance of these arrangements in delivering solutions that can reduce the burden on the state. Solutions will require both personal and workplace involvement and we need to get to the point where group and individual solutions naturally sit side by side.
As HM Treasury opens up the debate about simple products, there could be a place for group risk products. It is very easy to get sidetracked into a discussion about how “simple” is defined and into the minutiae of specific product types but it is a moot point whether stimulating demand rather than creating a new suite of products might be a more important area to work upon.