Group risk rates are hardening for a number of reasons. Can the industry take these increases in its stride? Edmund Tirbutt reports
Evidence of hardening in group risk rates now extends well beyond the anecdotal. Intermediaries report big increases from some providers, and in some cases providers are not even prepared to offer terms at all. So what is driving the trend and why is it only limited to some providers?
Unum started raising both group life and group income protection rates in the second half of 2010 and Canada Life followed suit in August 2011. Legal & General and Friends Life have also been asking for some significant premium rises.
Sean McSweeney, principal consultant at AWD Chase de Vere, says: “We’ve seen 20 per cent to 30 per cent rises at renewal from Unum and Canada Life and sometimes also a distinct lack of appetite for cases. Recently I tried to rebroke a closed group income protection scheme with 300 members, and three out of the six major players I approached didn’t want to quote. “
But whether this will result in average premium rates rising for the industry as a whole is quite a different matter because there are still plenty of other players willing to substantially undercut holding insurers. Among those to state that they have not hardened rates at all during the last 12 months are Zurich Corporate Risk, Aviva, Risk Assurance Management and Sagicor.
Lutine Assurance Services also reports its rates to have been “broadly level”, although it did reduce them in some areas and raise them in others at last year’s rate review.
John Dean, head of health and protection at Punter Southall, says: “We are not actually seeing rate increases being put through at anything like the level people are talking about. If a client has a difficult scheme to place and nobody else is willing to take it on then it will agree to 20 to 30 per cent premium rises, as it has no choice. But probably only about a fifth of the market falls into this category.”
Unlike with individual protection, rate increases rarely have much to do with reinsurance. Major group risk insurers tend to retain most of the risk and reinsure only
But the insurers themselves have become increasingly conscious of a range of worrying scenarios. The economic downturn has exacerbated stress-related claims and resulted in poor investment returns because yields on gilts and corporate bonds - which insurers invest in heavily to pay income protection claims and dependants’ pensions - have been adversely affected by low interest rates.
Recently I tried to rebroke a closed group income protection scheme with 300 members, and three out of the six major players I approached didn’t want to quote
The workforce is also ageing as legislative change has made it hard to discriminate against older workers, lack of savings and poor annuity rates are preventing people from retiring and employers are recruiting less young blood. According to Canada Life, the average age of a scheme member has increased by about one year since 2008.
But, perhaps most importantly of all, premium rates have simply been too low for too long say some and something simply had to give. Indeed, Tim Johnson, managing director of Gallagher Risk & Reward, goes so far as to say that all the other reasons volunteered are just an excuse for this situation - which insurers are loathe to admit to.
Simon Derby, director of i2 Healthcare, says: “I’ve been saying for five or six years that rates cannot continue to experience double digit reductions year-on-year as insurers fight over business. There had to be an increase and the main insurers obviously had to go first. Their large books require bigger reserves whereas the smaller players who have fewer legacy issues can last out longer.”
But not all the larger players agree that returns on reserves are the major issue. Paul Avis, sales and marketing director at Canada Life, argues that economies of scale enable his company to maintain a low expense ratio and that having a larger book has made it more aware of market trends and given it the ability to rapidly adapt its pricing strategy.
James Walker, group risk technical manager at Legal & General, points out that, because group risk rates are rebroked every two years, macro-economic factors have less impact than they do on other products like annuities and that underwriting decisions and controlling costs are more important considerations.
Steve Bridger, head of group risk at Aviva UK Health, agrees that investment returns “contribute to income but don’t drive it” and argues that having to hold large reserves can be a positive influence if you can demonstrate good early intervention, and therefore free up capital held for claims.
Opinions also differ with regard to the extent to which other players are likely to follow those who have hardened rates. Some commentators feel that most will realise they have been picking up unprofitable business and will harden within the next 18 months, although Lloyd’s players may leave their pricing unchanged as they tended not to quote unsustainable rates in the first place. Others stress that there is always going to be at least one player intent on undercutting and that the costs of pensions auto-enrolment will ensure continued downward pressure on rates.
The possible impact of Solvency II is also highlighted as being a big unknown factor but, thanks to clarification issued by the Treasury in December 2011, we can at least be certain that group risk rates won’t be affected by the Gender Directive.
Rebekah Haymes, senior consultant at Towers Watson, is expecting to see a shift towards self-insurance, particularly on the group life side with schemes of 3,000 to 5,000 lives. She says: “Selfinsurance used to be popular with large companies but many were attracted to very competitive insurance premium rates during the last couple of years. It’s not happening yet, but clients are starting to discuss it.”
Nobody is indicating that rate hardening is likely to put the future of any group risk products in jeopardy. After all, those who find income protection rates too steep can always consider alternative formats such as limited-term or US-style cost sharing, and life cover should continue to seem good value to most employers even if all players harden rates significantly. Group risk professionals believe employers value the protection they have and are prepared to take on board any increases coming down the line.
Chris Ford, director of group risk at Jelf Employee Benefits, says: “Group life prices are basically returning to where they were three years ago and the cover would still seem cheap if all rates went up by 30 per cent, so I don’t see the rises as being a nail in the coffin. These increases will restore some sanity and the market will deal with it. I can’t see existing provision being taken away.”
Jury still out on solvency II
The Solvency II Directive, which requires a fundamental review of the capital adequacy regime for the European insurance industry, could significantly impact on the levels of reserves that different group risk players are required to hold - and therefore potentially on their premium rates.
Last October it was confirmed that implementation of the EU directive had been delayed for a year until January 1st, 2014, and part of the problem with assessing its potential impact is that the final guidelines have still to be released.
But complying will clearly be expensive for insurer and there is general feeling that those players with a spread of risk extending beyond protection business should benefit as they will be required to hold less reserves.
Insurers who only offer group risk products, on the other hand, argue that the composites may have to put aside even more reserves to protect their other elements of business.
Paul White, client director at Enrich, says: “It’s not yet clear who will be most impacted by Solvency II as the non-protection parts of those insurers enjoying a better spread of risk will be subject to more scrutiny. The single line providers all say the composites will be worse off and the composites are all saying the single line providers will be worse off. The jury is still out.”
What the figures say
Group risk rates have never hardened on average since Swiss Re started publishing its annual Group Watch reports in 2006, and the data over these years confirms the widely reported pattern of rate reductions.
The easiest way to quantify premium rate movements is to compare the survey’s figures for lump sum death benefit premiums with those for lump sum death benefit sums assured. Over the last five years the former have gone up by around 12 per cent and the latter by 33 per cent.
The pattern was still very much in evidence during Group Watch 2011, which shows that lump sum death benefit premiums in 2010 rose by 4.6 per cent over 2009 premiums but that sums assured rose by 9.2 per cent.
Ron Wheatcroft, technical manager at Swiss Re Life & Health, is not anticipating any major change to this pattern when the Group Watch 2012 figures are released this April - although he can’t rule out a slight narrowing.
He says: “It is, however, possible that we could see a hardening of rates in Group Watch 2013. Research we carried out for our Insurance Report published last November showed that, although employers were very much feeling the pinch, group risk benefits already in place were really quite valued.
Only 4 per cent of employers said they would consider removing group risk cover to pay for auto-enrolment, which suggests they could be prepared to pay higher premiums.”