Sleepwalking to catastrophe
It is time to review group life programs with catastrophes in mind, says John Ritchie, CEO, Ellipse
Catastrophe limits in group life insurances that underpin employee benefit programmes have been part of our lives since that truly tragic day in September 2001 that has become universally known as ’9/11’. Markets in risk may seem to move at a glacial pace, but they do have an inherent adaptability and have evolved in recent years. It is possible, right now, to deepen your cover for catastrophe, reduce your costs and improve the quality of your insurers in terms of financial strength. That sounds too good to be true but there have been several major schemes that have done just that in 2011.
Advisers have opportunities to do a dazzling job for clients or be caught asleep on the job. The latter can happen if the adviser assumes that the structure established in the two or three years after 9/11 cannot be improved due to capacity constraints.
Since 2001 the event limits applied by all group life offices have been a headache for advisers looking after major companies with high concentrations of employees in close proximity to one another. This is especially true for the so-called ’hotspots’ (not only because of the concentration of employees but also, often, their perceived susceptibility to terrorist attack) such as central London and Canary Wharf, where the problem is exacerbated by high rates of pay and, therefore, very substantial benefits.
Any shortfall would be the responsibility of the trustees to make good, which in practice would almost inevitably involve their financial ruin (and quite possibly the employer’s, too, as the trustees would look to them to make good the benefits they had promised) and still leave beneficiaries with shortfalls in the benefits they receive.
Our experience suggests that some advisers at least are unaware of how solutions to this problem have evolved in recent times. Where this is the case, clients could find themselves with less catastrophe cover than is available. To add insult to injury, their clients could also be paying more for their substandard cover than they would be with the optimum solution.
Advisers have opportunities to do a dazzling job for clients or be caught asleep on the job. The latter can happen if the adviser assumes that the structure established in the two or three years after 9/11 cannot be improved due to capacity constraints
The solutions available fall into three categories, with more than one used in some cases. Firstly, use the office with the highest event limits, splitting the risk between two or more insurers. Secondly, splitting the risk between two or more insurers, and finally obtaining specialist catastrophe cover, for example through the London market.
Catastrophe non-proportional cover - cat Excess of Loss -is expensive. Splitting cover between several insurers can create administrative headaches. If this route is followed, we have seen quotes at Ellipse that suggest some advisers split cover between insurers equally, not realising that this will not necessarily maximise the client’s catastrophe cover.
The split should be in proportion to what each insurer offers in terms of event limits relative to the aggregate event limits on offer from all of them; an equal share between each insurer will only maximise the aggregate catastrophe cover if they all happen to offer the same event limits.
Ideally, cover would sit with just one office, but the limit of £100 million per postcode applied in many cases is way short of what’s required for some clients. Advisers who feel this is as much as they can achieve should think again! It is now possible to secure limits as high as £500 million, even in postcodes considered to be ’hotspots’.
Naturally, using an office with such generous event limits is only going to be a viable solution if the premiums remain competitive - it’s hard for employers to swallow having cover for a hypothetical situation if it’s accompanied by a hike in their real premiums - but obtaining higher catastrophe cover should not automatically mean a hike in premiums. If there is a cat XL that can be designed out of the program the savings can be substantial. In some cases, it is even possible to achieve a double whammy by deepening the cover and reducing the cost.
Switched on advisers will not only seek the optimal solutions for their clients affected by these issues, but will also find new clients on the prospect of being able to secure them higher event limits for less cost. The corollary, of course, is that lightly slumbering advisers could be the ones finding themselves with ex-clients!