Focus on facts
What is group income protection?
It insures employers against the cost of employee absence. Policies pay employees who are unable to work because of injury or long-term illness, covering the income and benefits to which they are entitled under their contract for as long as they are incapacitated, or for a limited, predefined period.
What are the origins of group income protection?
GIP as we know it dates back to the 1950s or 1960s. It has traditionally been provided by employers as part of a benefits package for recruitment and retention purposes.
Where can employers get more information and advice on group income protection?
Contact industry body Group Risk Development (Grid) on 020 7933 3822 or The Chartered Institute of Personnel and Development (CIPD) on 020 8612 6200.
Nuts and bolts
What are the costs involved?
GIP typically costs in the region of 1% of payroll, although this can be as low as 0.25%, depending on how the policy is designed.
What are the legal implications?
Employers have a legal duty to make reasonable adjustments to the role and/or working environment of an employee who is absent because of illness or injury, to enable them to work or continue working if they are able to do so. This may involve a reallocation of duties, an alteration to their working hours, and training.
What are the tax issues?
Contributions are normally allowable as a business expense for corporate tax relief, reducing the net cost.
What is the annual spend on GIP?
In-force premiums in the UK totalled £517.3 million at 31 December 2010, down 8.9% on 2009, according to Swiss Re’s Group watch 2011 report published in April last year.
Which GIP providers have the biggest market share?
Canada Life and Unum are thought to be the market leaders. Unum is to withdraw from the individual group income protection market, focusing on employer-paid policies. Other key players include Aviva, Friends Life, Legal and General, and MetLife.
Which providers increased their share the most over the past year?
Zurich Corporate Risk and Friends Life have increased their market share in recent years.
With benefits budgets under pressure, employers have been seeking ways to reduce the cost of providing group income protection but they still recognise its value, says Clare Bettelley
Group income protection (GIP) is an insurance policy that covers employers for the cost of employee absence. Policies typically cover gross salary, overtime, commission, bonuses and pension contributions for employees unable to work because of injury or long-term illness.
Policy premiums are calculated using a range of variables, including an employee’s age, gender, occupation and claims history, as well as definitions of incapacity. A standard policy typically pays an employee between 75% and 80% of annual salary after a predefined period of 26 weeks after they first become absent. Insurers pay the employer or, where stipulated in a policy contract, the employee, a level of income sufficient to cover these entitlements.
GIP policies will stop either at the end of the incapacity, in the event of the death of the employee or after their resignation. Limited-term policies are also available which stop after a predefined period of time.
Traditionally, GIP policies have been fixed- term and have paid out indefinitely, from the end of the deferred period to an employee’s retirement. This has proved costly in the event of a long-term absence, which is why GIP has historically been considered a nice-to-have, rather than a core, benefit.
Limited-term policies have been mooted as an option for employers seeking to offer GIP without the hefty price tag. These offer cover for, typically, two to five years followed by a lump sum if an employee remains incapacitated.
Stephen Hackett, head of employee benefits at Bluefin, says about 15% of its client base – which comprises employers with between 250 and 10,000 staff – have introduced a limited-term policy, resulting in an overall premium cost reduction of 25% to 35%. One employer with 1,200 staff has made a saving of 31% or £700,000 by opting for a limited-term policy.
But Hackett questions whether limited-term policies will prove as popular as some providers suggest. “If you reduce policies to a five-year limited term, there is a fear that when it comes to a genuine case, employers will feel morally bound to continue with the cover, which means they would have to self-insure, which wipes out the cost savings of the GIP policy,” he says.
Some providers have introduced policies that enable employers to split the cost of the premium with their employees. Unum’s Select Income Protection policy is one example. Tom Dupuis, vice president head of products at Unum, says the policy is taken up by between 30% and 40% of its employer clients, which pay an average of £5 to £10 per employee.
Personal Group, meanwhile, provides a voluntary income protection product.
With employers under pressure to reduce costs, it is no surprise benefits advisers and providers have received requests to review their GIP policies. But policy reviews may be as much to do with intermediaries pitching lower prices to employers as a way to win market share, says Steve Bridger, head of group risk at Aviva UK.
Hackett and Bridger claim few employers have gone so far as to terminate their GIP policies because of the greater cost of operating without cover. “They all realise that reduced cover is not worth the hassle,” says Bridger.
One area where employers may have seen increased claims is in relation to psychological issues. This may be driven partly by financial-induced anxiety and stress. Consequently, there has been a rise in the number of employee assistance programmes included in GIP products.
Dupuis says most claims received by Unum are now triggered firstly by psychological and mental health issues, followed by heart, back and cancer-related claims.
Mental health issues
Nevertheless, GIP underwriting is increasingly challenging because of the difficulty of diagnosing mental health issues. Moxham says: “It is blurred in terms of what is a reasonable point at which an employee will return to work.”
This is compounded by the fact that the nature of work is changing, with flexible working and portfolio roles becoming the norm in many sectors, so the traditionally rigid underwriting definitions for occupations and incapacity will need to change, too.
A change in employees’ working lives in recent years is also to blame. Aviva’s fifth Health of the workplace report, published last July, found 30% of staff claimed to work longer hours, averaging one and a half hours extra each day. In the survey, which involved 2,000 employees and 2,000 employers from a range of market sectors, 27% of employees said they felt tired all the time and 23% said they felt really stressed.†
This may contribute to poor diet and increased alcohol consumption, which can increase the likelihood of absence occurring. However, just one in 10 employers are protected by group risk benefits, such as GIP. Rising premiums are proving a major deterrent to new GIP business. Hackett says. “For five years, providers have been pretty aggressive in chasing market share and are now under threat as profit margins have suffered.”
But he adds increased claims, particularly for psychologically-related absences, are as much to blame.
Prior to the removal of the default retirement age, there was concern among providers that this would have catastrophic consequences for GIP take-up if the cost of provision soared as employees’ working lives lengthened.
But this has not materialised because of an exemption for GIP-insured protection products that enables employers to stop providing cover at the current state retirement age. Katharine Moxham, spokesperson at industry body Group Risk Development, says: “It is a pragmatic way of providing cover for the majority of employees.”
Some observers think GIP will move further down employers’ benefits food chain because of the costs associated with pensions auto-enrolment, which is due to come into effect from October this year. Peter Fenner, communications manager at Ellipse, says: “The impact on employers’ thinking is that if they are introducing a pension for the first time, they will have to consider cost cuts in other areas. Conversely, others may be looking to expand their product offering, and GIP may be seen as more affordable than increasing pay.”
One thing providers agree on is the lack of absence reporting systems among employers. This tends to result in staff being absent for longer than if the employer had intervened at an early stage, so increasing the need for GIP.
Raised awareness about the need for preventative healthcare among employees in the form of television advertising campaigns, such as those by Aviva and Unum, is expected to increase pressure on employers to provide GIP.
Unum’s Dupuis says: “There is a need to raise the profile of the product and the need for cover. People are three times more likely to fall ill than die during their working life, so it is about providing them with this benefit.”
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