Pulling demand through from the end consumer is the way to grow the group risk market, said delegates at last month’s Welfare Reform and Group Risk round table. But should there also be a rebalancing away from life to income protection, asks Edmund Tirbutt
On receiving a copy upon arrival of the Demos report Of Mutual Benefit, attendees at the Corporate Adviser Welfare Reform and Group Risk round table were left in no doubt about the plight of the average British citizen with regard to both State and private disability cover provision. The report, commissioned by Unum, showed that the UK was beaten in terms of generosity of combined employer and State incapacity benefits by the USA, Canada, France, the Netherlands and Scandinavian countries. For State incapacity insurance our showing was even poorer, with the UK coming 11th out of 12 OECD countries ranked by Demos in terms of State incapacity benefit.
Delegates said the report highlighted the fact that the main challenge facing the income protection sector is an educational one. In the UK, where only around one in 10 people have income protection, most people simply don’t realise that they are three times more likely to become disabled during their working lives than to die, and without insurance they stand little chance of ever recovering from the financial consequences. So, in order to reach a situation like that in the US, where 27 per cent of people have income protection, it was clear that employees had to be educated as well as employers, said delegates.
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, said: “The demand bit is key, and in the SME world employers don’t know anything about what’s going on with regard to the welfare state and they couldn’t care less because they are too busy keeping their heads above water. Too many intermediaries sell at a corporate level but don’t communicate what benefits mean at a personal level, but when they do so employees love it.
“If we can create demand from the bottom up, we will see it filtering through to employers and up to advisers. Once they start getting demand from employees then employers will start holding up their hands and saying yes we’ve got it and yes its good.”
“The workplace is now the only effective distribution mechanism because IFAs are only really interested in talking to wealthy people nowadays”
Delegates highlighted a number of barriers an educational process would need to overcome to be successful. Income protection was perceived as costing too much, and neither employees nor talent being interviewed ever asked whether an employer had the product or indicated that they preferred a competitor that did, said Marco Forato, chief marketing officer at Unum. Employers had serious reservations about the idea of keeping sick employees on the payroll right up until retirement, and there was widespread ignorance about the true paucity of UK State benefits.
Forato added that employees were always hearing about the ’Daily Mail single mum’ who was earning around £35,000 a year in benefits from the government. But they never seemed to hear about the typical average middle-class family earning a combined income of £50,000 to £60,000 who would only receive around £5,000 in benefits if one of them becomes too ill to work.
News that Unum was about to embark upon a major educational campaign aimed at the public was therefore inevitably well received. Forato explained that feedback from focus groups interviewed ahead of the insurer’s marketing campaign, to be launched this summer, had made it clear that consumers didn’t want this to be a scary campaign but one that conveyed the message in a polite and balanced way. Consumers had also wanted things to be kept simple, so the task of explaining the real detail would be left to intermediaries. He said: “The workplace is now the only effective distribution mechanism because IFAs are only really interested in talking to wealthy people nowadays. We are also hoping the UK government will invest in advertising and educate people about what’s really happening with people claiming benefits.
“We need intermediaries on board and when you are having conversations with HR you could ask whether they have seen the educational campaign and perhaps suggest that you should talk about the matter with them. I would like the rest of the industry to join in and I would love it if my competitors started advertising. This is an issue awareness campaign not a brand awareness campaign, said Forato.
“It’s not about lump sum versus income protection, it’s about death-inservice benefits in total versus income protection”
Unum is also in early talks with the UK government in an attempt to secure National Insurance (NI) rebates for employers who offer group income protection schemes. The Demos report commissioned by Unum shows if the UK could move towards the type of take-up rates evident in the US it could save the government £3 billion a year. This could be facilitated through a £1bn rebate in NI for those employers that do the right thing by their employees when it comes to long-term sickness cover. In a poll of intermediaries taken at the event 67 per cent felt that the introduction of an NI rebate of £150 per employee covered would result in a significant increase in the amount of income protection bought by employers.
Forato produced the biggest collective gasp of the day when recounting an anecdote which summed up the educational challenge. Because none of the four advertising agencies it had invited to pitch for the campaign knew anything about Unum or income protection, they had to do significant initial research. After finding out just how useful group income protection was, the staff from one agency stormed into their CEO’s office demanding to know why they didn’t have the cover for themselves. The CEO replied that they did have it, and it was provided by Unum.
Carlos Correia, senior consultant, risk benefits consulting, at LCP, said: “I welcome all of this and it’s quite a change because none of the providers with enough capital to make a difference have ever tried to step forward in this way before. I have always thought an educational programme was lacking, and if you could get the government to participate it would be great, but politically it could be difficult.
“I think the other insurers are likely to watch how it goes and, if it goes well, I can see them copying Unum, but how quickly I don’t know. The biggest barrier to others replicating Unum’s overall package is the way it is selling this direct to people in the workplace, so the others might have to get some other organisation or intermediary to do it. If more than one insurer is offering something similar it will be more indicative that it’s the right thing to do for employers, and employers will feel they have more flexibility in the future as opposed to feeling committed to just one company. “
“In the SME world employers don’t know anything about what’s going on with regard to the welfare state, and they couldn’t care less because they are too busy keeping their heads above water”
John Pascoe, healthcare and risk consultant at JLT, said: “It is interesting to see that Unum is bringing its US model over here and it’s a good thing that it has been proven to have worked before. The conversations I’ve had with clients have been extremely positive so, if it works and starts flying, the others will really start to take notice of what’s going on.”
Attendees also debated whether advisers should be looking to rebalance ratios of life and income protection cover to unlock more money for income protection. Forato made it clear that many intermediaries his company talks to say that there is no way that their clients are going to increase their overall expenditure on benefits, and he saw merit in employers possibly offering one times salary life cover and allowing employees to top up, switching part of the spend to income protection. He also stressed that people don’t necessarily need RPI-linked income protection that pays out 75 per cent of salary until retirement and other bells and whistles, because a no-frills 60 per cent of salary basis without RPI linkage is much better than nothing and can cost only half the price.
Correia questioned the wisdom in rebalancing life cover and income protection ratios as he would personally want both four times salary and income protection, and would shy away from cutting back on life cover unless it was exceptionally generous.
But Angela Jones, senior group risk consultant at Lorica Consulting, stressed that she felt much depended on individual circumstances, with employees who are single with no dependants probably being more interested in income protection but those with families probably attaching more value to life cover.
Interestingly, Amanda Gill, consultant at Bluefin, pointed out that when flex clients are given the option to flex life cover up to eight or 10 times salary or back down again to two times salary most do not take advantage of the opportunity and just remain at four times salary. But she couldn’t be sure that this wasn’t simply the result of complacency.
Jamie Winter, senior consultant at Towers Watson, felt that the most expensive part of life assurance benefits is dependant’s death-in-service pension and that since A-Day there certainly seems to have been interest in removing this and replacing it with lump sum life cover, which could perhaps free up cash for income protection.
“It is interesting to see that Unum is bringing its US model over here and it’s a good thing that it has been proven to have worked before. If it works and starts flying, the others will really start to take notice of what’s going on”
He said: “In my opinion it’s not about lump sum versus income protection, it’s about death-in-service benefits in total versus income protection. I think you have far more leeway there.”
In response to the revelation that only one in seven employees whose employers offer income protection actually have the cover, Jones pointed out that rebalancing could also be achieved by providing lower-value income protection cover to a higher percentage of the workforce. Lorica had in fact just done an exercise with a client with 340 employees which had previously restricted income protection only to its directors. Offering all employees limited term cover of up to 50 per cent of salary actually cost less than offering full cover just for the directors.
Herbert felt there was a very good case for rebalancing pensions versus group risk rather than life cover versus income protection. He felt this was a more viable option as most companies put the lion’s share of their budget into pensions. But Pascoe felt the driver behind public pension provision was governmental statutory provision, and he reasoned that, because group risk benefits are only a “nice to have”, this was always likely to have great implications for where the money gets spent.
But Forato said he “couldn’t agree more” with Herbert’s comments about rebalancing pensions and group risk and felt that we should be going even further and rebalancing the employee benefits package as a whole, looking at company cars, free bikes, free gym membership and even discounted wine.
Attendees were also acutely aware that the focus on pensions in the build up to the RDR and auto-enrolment could reduce the amount of money available for income protection. But it was felt that a successful educational campaign could counteract this.
Gill spoke for many when she expressed the view that auto-enrolment represented merely yet another cost to add to a long list, and that many smaller companies would probably not even be looking at the matter until next year or the year after. By then, reasoned Unum’s Marco Forato, the income protection market should be growing again.