Incapacity inquiry - the new rules examined
There's nothing like being optimistic! 63 per cent of delegate's at Corporate Adviser's first Group Risk Adviser Forum (GRAF) held this July expected an increase in business as a result of the changes to State Incapacity Benefit being introduced on October 27th this year as part of the Welfare Reform Act 2007.
But despite advisers' positive view of the opportunities that the changes could bring there is now a general acknowledgement by group risk insurers that their impact is unlikely to be anything like as dramatic as they had originally predicted. Indeed, some of the arguments they had been pedalling to persuade intermediaries to stimulate discussions about group risk solutions have failed to stack up since the minutiae of the changes were unveiled.
By placing the emphasis on what people can do in the workplace as opposed to what they can't do, the Incapacity Benefit changes have been considered likely to increase employer interest in occupational health and other wellbeing solutions. But the primary call to arms centred around an increased need for income protection, based on the assumption that the State's new Employment and Support Allowance (ESA) would be significantly less generous than the Incapacity Benefit that it replaces for new claims this October. This is supposed to make employers more conscious of the need to provide private insurance against incapacity.
The introduction of ESA has also been predicted to necessitate tweaks to income protection schemes, many of which deduct Single Person's Long-term State Incapacity Benefit (LTIB) from their benefit pay-outs. Because the amount of the deductible appeared destined to change, this seemed to provide yet another pretext for intermediaries to contact existing clients and arrange meetings at which broader group risk solutions could eventually be discussed.
Unfortunately, however, the State failed to read the script before unveiling its ESA rates. Depending on the outcome of a Work Capability Assessment, those identified as capable of taking part in some work-related activity will normally to be entitled to £84.50 a week - exactly the same rate as under LTIB. Those considered unable to take part in any work-related activity will receive a minimum of £89.50 a week, and the poorest will get £102.10 a week.
The most seriously incapacitated will therefore be actually better off than under the old system and many of the remainder are no worse off. There is also no need to tweak income protection schemes because the amount of the deductible remains the same.
Those who argue that the changes have significant immediate implications for group income protection point out that the new benefit rate is marginally lower on average because people will no longer be entitled to additional allowances in respect of age or dependants, and some people will not qualify for the work-related ESA top-up. Most importantly of all, there should also be a lot more benefit applicants declined altogether.
But such an argument seems tenuous in the light of the huge question-marks currently overhanging the government's ability to resource the new system. As the insurance industry clearly struggles to get the right quality of case manager and rehabilitation professional how can we expect the State to succeed in doing so? Opponents of this view argue that it's all very well boasting a successful pilot scheme but this was far less labour intensive than the real thing. And we should not forget also that the change from Invalidity Benefit to Incapacity Benefit in 1995 was supposed to have a major impact on getting people back to work but failed lamentably.
Consequently, insurers suggest there is not necessarily a strong case for intermediaries to arrange an additional client meeting just to discuss the benefit changes, especially as some clients may have already become a little weary of being invited to meetings on the back of the 'A-Day' and Age Regulations changes. Helene Gullen, commercial marketing manager at Unum, says "It is all something that can be covered off at a normal meeting with other things and I am not sure if it warrants an extra meeting.
"But advisers shouldn't be ignorant of the changes and should let employers know about them, perhaps sending them information sheets on the subject. Some intermediaries have also been holding seminars at which they have invited a number of employees together." n
Intermediaries will find no shortage of information for these purposes available from insurers, who have been busy issuing employer and intermediary guides about welfare reform and providing dedicated websites equipped with Q&A sections.
Legal & General is going further than most to help pro-active intermediaries. Although there is no reason why the matter shouldn't wait until renewal, it is asking existing income protection clients to give it signed permission to make minor wording adjustments to reflect the deduction of ESA as opposed to LTIB. The relevant mailings are distributed via the intermediaries, therefore providing them with an opening for the purposes of stimulating broader group risk discussions.
Nevertheless, specialist intermediaries tend to stress that the most plausible excuse to arrange a client meeting is likely to be on the back of scheme design changes that have resulted only indirectly from the October changes, in particular, when trying to second guess the changes insurers had questioned the need to deduct LTIB from scheme benefit payments.
Such deductions have traditionally been made to ensure claimants had a sufficient incentive to return to work but, with so much focus now on early intervention and rehabilitation, this is no longer considered such an issue. Consequently insurers now commonly offer the chance to have a maximum benefit of either 70 per cent or 75 per cent of salary without any deduction for LTIB. Unum even offers 80 per cent with no deductible and Friends Provident is looking at doing so.
Mark McLeod, risk benefits manager at national private and corporate wealth advisers Towry Law Financial Services, says "I believe the one really positive thing to come out of the changes is that you can now obtain 80 per cent with no deductible. It can be attractive to some employers and if they are concerned about cost they can possibly consider offsetting it by taking a 41 week deferred period, a further option to have resulted from recent scheme redesign."
Justin Crossland, head of health and risk consulting at national employee benefit consultants Towers Perrin, says "The deductible issue is certainly something intermediaries could use to talk to clients about but clients' views about the State offset are polarised and they also generally don't want change. We find that, although they will normally consider changing, ultimately if they have the opportunity to stay the same they often will."
Jamie Winter, head of healthcare and risk consulting at national employee benefit consultants Watson Wyatt, feels that products with no deductible are likely to prove most popular with employers of white-collar types who have traditionally received very generous employee benefit packages. But he is also predicting a lot of interest in fully integrated income protection schemes - which deduct the entire State benefit received.
He says "Fully integrated schemes were quite common prior to 1995 when Incapacity Benefit was introduced. One of the reasons they can be better than no-deductible schemes is that insurers are less edgy about over-provision of benefit at lower salary levels. The overall income to the individual is therefore more consistent across the workforce."
Keeping clients informed about such options and about the details of the October changes as a whole could certainly pay off in the future by contributing to the maintenance of good relationships. But those intermediaries thinking of stimulating additional meetings for the purpose should not lose sight of the fact that, whilst clients normally want to be educated in what's going on, they do not want to feel unduly hassled.
Advisers' view: The wider debate
Paul White, head of risk benefit consulting at national employee benefit consultants Aon Consulting, acknowledges that there is nothing for intermediaries to sell directly off the back of the October State Incapacity Benefit changes. He feels that the immediate potential impact of the changes has been overdone but that their long-term implications have, on the other hand, not been covered enough.
He says "The wider debate is about who will fill the void when the State cuts back on benefits. The question is whether the responsibility is falling on the employer or the employee. Ultimately employers need to be in a position where they understand what's going on and can protect themselves or their employees in this environment.
"The Welfare Reform Act won't force change but it will be a catalyst for debate following on from Carol Black's review and the subsequent government paper. Employers need to understand that in this changing environment they will get legislation and industrial tribunals working against them and that private agencies will increasingly be used to police and enforce legislation."
These agents will work with benefit claimants to help them back to the workplace but White points out there is a danger that they could potentially be motivated more by the financial rewards of hitting return-to-work targets than by the welfare of the claimants - as under the old State system. "The idea that work is good for you could get overdone" he warns.