Feature – Products buyer’s guide: Group risk

Clear thinking is required for group critical illness and income protection cover ahead of incoming age discrimination legislation, says Stephanie Spicer

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It has been a busy time of late for group risk providers with the advent of pensions simplification. Much of the focus on pensions had inherent implications for group life assurance.

The critical illness and income protection markets by comparison have been relatively quiet, but employers will need to give some real thought to the provision of these two perks ahead of age discrimination legislation taking effect later in the year.

Sue Sneddon, employee benefits technical manager at Scottish Equitable, says: “Group life used to be very simple and is now as complicated as you want it to be. “The options now are registered group life, which used to be [called] approved life, and will be used, for example, by employers providing benefits under an occupational pension scheme. Non-registered life, previously unapproved benefits, is now split into different types. Excepted group life is a new legislative thing that came in in 2003, which is almost as tax advantageous as registered group life contract. We have varieties of that – one for employees only and one for equity-partners only.”

The latter provides lump sum death benefits for beneficiaries or dependents of equity partners. An excepted group life policy gives an alternative tax-efficient way of providing lump sum death benefits for employees. It does not count towards the lifetime allowance or have any knock-on effect on a registered scheme.

Paul Stevens, business development manager, group risk at Norwich Union, says: “The main implication of A-Day has been the potential to remove the earnings cap. A lot of our approved schemes would have [had] members whose benefits were restricted to the earnings cap levels. Under a registered group life scheme those limits can now be removed and it is possible to have as much life cover as you can pay for under that group scheme. “The only thing to impact on that payout is the lifetime allowance so, if that person dies, anything above £1.5m would be subject to a tax charge. A number of approved schemes would have had an unapproved scheme running alongside it to cover benefits above the earnings cap.” This previously stood at £108,600 a year. A single registration Many employers may now be considering whether they need to keep two schemes running or if they should combine all their benefits under one single registered scheme. “If a member has benefits under an accepted group life policy they fall outside of the lifetime allowance.

So in theory, a new member in a scheme today could have £1.5m insured under a registered scheme tax free and then another £2m, £3m, £4m or £5m sum assured under an accepted group life policy. If the person dies, both of those benefits can be paid tax free. “For any member who has applied for enhanced protection status the accepted policy could be a useful vehicle for them to have life insurance benefits going forward, because any benefits they have under the accepted policy wouldn’t put their enhanced protection status at risk,” adds Stevens.

Lee Lovatt, head of risk and product management at Bupa, anticipates a gradual reshaping of group life arrangements over the coming months and years. This is largely due to the default option that has been placed on a number of schemes, which means that the earnings cap will stay in place until 2011. “Employers have a number of years to decide how to change the arrangements. The knock-on effect for us is that because advisers have been advising employers on that, they haven’t spent a lot of time looking at annual group risk product reviews and provider reviews.

The market has actually been reasonably quiet over the last few months,” says Lovatt. While the income protection market is not really affected by A-day, age discrimination legislation due to take effect in October will have an impact, although it is still unclear as to exactly what employers should do. Bob Cheesewright, group risk marketing manager at Friends Provident, asks: “Is it discriminatory to provide benefits that cost the same irrespective of age, or should employers provide the same benefits for everyone, and in which case pay more for older employees? “What is of real concern is that some employers may decide to avoid the charge of discrimination by simply providing no insurance benefits.”

A key issue for critical illness providers stems from guidelines which were published in April by the Association of British Insurers on critical illness insurance terminology which aims to make things clearer for those buying such insurance. “But it is such a medically-related product [the guidelines] try and make it more understandable from the client’s viewpoint,” says Scottish Equitable’s Sneddon. While the core products for income protection and critical illness cover have remained unchanged in the last 12 months, there has been an increased focus on claims management tools for income protection. “A lot of organisations are investing to put related services in place, such as telephone helplines, employee assistance programmes, individual case management links and absence management facilities.

It means employers can proactively manage those cases, which should get employees back to work quicker and, in due course, employers should see an improvement in claims experience. This, of course, should have a beneficial effect on premiums for employers as well,” says Lovatt.

The Facts What is group risk? Group risk insurance comprises group life assurance, group critical illness and group income protection schemes. Group life provides a lump sum on the death of the member, income protection provides income for when someone is unable to work and critical illness provides a lump sum when an individual suffers a critical or terminal condition.

What are the origins of group risk? Group life and group income protection have been around since the 1970s, group life the most established being the cheapest benefit employers could offer the group workforce. Critical illness became established in the early/mid 1990s.

Where can employers get more information and advice on group risk? The Association of British Insurers can provide information on group risk issues. Visit www.abi.org.uk or telephone 0207 600 3333. BIBA can also direct employers to an adviser. Visit www.biba.org.uk or telephone 0870 950 1790.

In Practice What is the annual spend on group risk? The total revenue spend on group life in 2005 was £864,880,371, on critical illness it was £28,191,708 and on income protection it was £594,412,792, according to GE Insurance Solutions Group Risk Survey 2006.

Which group risk providers have the biggest market share? Market share figures are a closely kept secret but Unum Provident has the market share in income protection. Other key players in the life and income protection market are Norwich Union and Legal & General, Bupa, Canada Life and AIG. Key players on the critical illness side are Scottish Equitable, Bupa, Legal & General, Norwich Union and Unum Provident.

Which group risk providers increased their share most over the past year? Again there is much secrecy around which companies have increased their market share, however, most of the key players mentioned above maintain that they have held their position. The life market has been quieter on the new business side as companies have been focused on pensions simplification issues.

Nitty gritty What are the costs involved? Group life cover is cheaper for individuals than if they took out their own cover. The cost of critical illness cover increases depending on the number of conditions covered and for income protection the cost of premiums is affected by the waiting time before benefits are paid and the length of time they are paid for.

What are the legal implications?

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discrimination legislation due to take affect in October leaves the way forward unclear for employers, with issues around whether they must or can provide the same benefits to employees regardless of age.

What are the tax issues?

The premium paid by employers on income protection is regarded as a business expense so they save corporation tax. When a claim is made, the benefit is paid to the employee through salary, so the employee is taxed but for the employer it is tax neutral. The premiums for group life can also be offset against corporation tax and the employee is taxed at 55% for anything paid out above the lifetime allowance. Critical illness is tax deductible as far as the employer is concerned. However, it is considered a benefit-in-kind so employees will be taxed on the premium paid on their behalf, although benefits paid to the employee are tax-free.