Buyer’s guide to group income protection (April 2010)

Focus on facts

What is group income protection?
GIP is a form of insurance that provides a salary for staff who are off work with long-term illness or injury. It can also cover the drop in income for those who can only return to a lower-paid post. Traditionally, it is paid after a deferred period, usually 26 weeks, until an employee returns to work or retires, but schemes can be set up with a fixed payment term.

What are the origins of group income protection?
GIP evolved from schemes that covered individuals, to fill a need for employers to finance sick pay.

Where can employers get more information and advice?
The industry body Group Risk Development (Grid) is a good source of information at:
in practice


In practice

What is the annual spend on GIP?
According to Swiss Re’s Group Watch 2009 report, 2008 in-force market premiums totalled £648.9 million.

Which providers have the biggest market share?
Unum is the leader with about half the market share, while Canada Life is in second place. Other providers include Aviva, Bupa, Friends Provident, and Legal and General.

Which providers increased their share the most over the past year?
Figures are not known, but Aegon’s exit and Zurich’s arrival will have affected the market.
nuts and bolts


Nuts and bolts

What are the costs involved?
GIP costs about 1% of payroll. How much employers spend depends on the level of cover.

What are the legal implications?
If GIP is included in terms of employment, amendments require staff consultation. Relevant legislative changes include welfare reform and reform of the sick-note system.

What are the tax issues?
The insurer pays benefits to the employer, which pays staff through payroll, so income tax and NI are deducted. Employers can receive corporation tax relief on premiums.

The Welfare Reform Act has caused changes in the group income protection market, and strong competition among providers is throwing up good deals for employers, says Helen Sandler

Group income protection (GIP) helps organisations to cover the financial and moral problem of looking after staff when they are on long-term sick leave. But there is more to it than that. A good insurer will often help prevent long-term sickness in the first place by providing interventions. For example, Legal and General and Aviva are among the providers that ask to be notified in the first few weeks of an employee’s absence in order to provide medical help.

Glenn Laming, sales director, group protection at Legal and General, says: “For stress, we offer one-to-one cognitive behavioural therapy and we have success in getting people back to work. For musculoskeletal conditions, we offer a physical evaluation and physiotherapy.”

Given that vocational rehabilitation is a primary feature of most policies, the market is well placed to support the requirements of the Welfare Reform Act which came into play in 2008. Katharine Moxham, spokesperson for the industry body Group Risk Development (Grid), says: “An employer with a GIP policy is able to assess an employee’s level of incapacity and start a return-to-work programme long before any assessment for employment and support allowance is even due to commence.”

Complete change in the market

Andrew Stephenson, group risk national sales manager at Aviva, says there has been a complete change in the market. “The impact of welfare reform means more focus on capability to work, getting people off incapacity benefits and into the workplace, but employers have not felt the full impact yet. A long, ongoing awareness campaign needs to be done.”

The potential or partial closure of defined benefit pension plans could also have an impact and drive market growth. Paul Avis, sales and marketing director at Canada Life Group Insurance, says: “Self-insured death benefits and spouse’s benefits, and replacement of ill-health early retirement funding with group income protection may all be needed.”

The industry is also abuzz with the problems that could be caused by the proposed scrapping of the default retirement age. Costing a GIP product to a higher age proved expensive when the retirement age last went up. So if the default age were abolished outright, the costs could become prohibitive.

But Grid is optimistic that a solution is in sight. It has submitted a response to the government’s call for evidence, pushing for an age, date or event at which it will be legally possible for an employer to stop the benefits, for instance at the state pension age.

Limited-term benefit

Employers setting up a new scheme from scratch may plump for a limited-term benefit. This limits the length of time a policy will pay out – usually two, three or five years – making it much cheaper for employers to offer and avoiding the legal minefields around retirement age. In some cases, this can reduce the cost of policies by 40% to 50%. Declan White, group risk marketing manager at Friends Provident, says: “It is more cost-effective than it has ever been. Pricing has got very aggressive.”

Even employers with existing schemes can make this switch if they can stand the employee consultation required. “Last year saw significant increases in the number of employers putting that change in place,” says Laming.

Competitive pricing has been more crucial than ever during the downturn. Some employers have even scrapped their schemes, but this should be a last resort. “For an employer looking for something that benefits staff and contributes to wellbeing, GIP is as relevant as ever,” says White. “Like other insurers, we have increased the free cover levels on the product.”

This has seen some good deals up for grabs by employers, as many have sought to rebroke insurance benefits to save costs.

Increased competitiveness

The entry of insurer Zurich into the market is one factor in the increased competitiveness. Nick Homer, group risk development manager at Zurich Corporate Risk, says the company started writing business in spring 2009 after a decade away from the market. “It is quite commoditised and we knew that,” he adds. “The group risk market is not renowned for good service and we made an effort to make a service-led proposition.”

That includes promises on claims management and rehabilitation. “Delivery can be quite light,” says Homer. “We want to make it strong.”

Now Ellipse, part of the Munich Re group, is about to introduce various group policies, with GIP coming onto the market in the fourth quarter of this year. “We will probably focus on small and medium-sized businesses,” says chief executive John Ritchie.

The firm’s big idea is to link the absence management process more closely with the insurance. “We want to kick over established orthodoxies, such as the idea that the line manager should always manage absence, because they do not,” says Ritchie. “They are ill-equipped and there is a phenomenon of under-reporting.”

Absence data triggers an alert

He advocates a system in which certain patterns in absence data trigger an alert to a healthcare professional without the line manager needing to be on the ball.

Ellipse also plans to tailor its product to the requirements of smaller businesses, such as the need to pay an extra salary to an interim if a key employee is off sick for any length of time.

Another way insurers are looking to grow the GIP market is to offer a similar benefit on a voluntary basis to grey- and blue-collar workers, says to Jamie Winter, a senior consultant at Towers Watson.

Personal Group already provides a voluntary product and last year signed a deal with Bupa to underwrite its voluntary GIP. Through the scheme, staff fund premiums via salary sacrifice, creating tax and national insurance savings, plus NI savings for employers. Premium rates are, on average, 30% to 40% cheaper than if staff sourced income protection themselves.

Free employee assistance programme

Another change in the last year in response to legislative shifts was Unum’s inclusion of a free employee assistance programme (EAP) in its GIP product. Wojciech Dochan, head of commercial marketing at Unum, says: “We aim to get at least two out of three people back into work within a shorter period.”

As new insurers have begun to enter the market, the last year also saw the departure of Aegon, but other insurers look likely to stay put. “Aegon left because of scale. The parent company decided money invested in long-term insurance could be better invested elsewhere in the business,” says Dochan.

But he is happy about the entry of new players. “Competition is good for the marketplace and stops complacency,” he adds.

Currently, it is a buyer’s market. Rates are down and brokers are advising employers to take an early review to gain from the lower prices. Homer hopes such factors will cause the market to grow. He says: “The drivers for buying have never been more compelling: the moral and legal responsibilities, running a business effectively, optimising performance and retaining talent.”

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