Life cover, critical illness insurance and income protection are just some of the products that can be included within a flexible benefits scheme, but buyers need to be aware of the differing expectations that providers have, says Edmund Tirbutt
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Case study: Nationwide
Technological advances have now made offering a flexible benefits scheme a viable option for many small and medium-sized organisations. Some intermediaries, however, are reporting rumblings of discontent from this end of the market with regard to the lack of flexibility afforded by insurers.
Income protection and life assurance are the main bones of contention. Even with large flex schemes these offer at least an element of employer-paid core cover while also providing employees with the ability to flex cover up or down.
Life cover, for example, often offers core cover of two-to-four times salary with the ability for staff to flex up to 10 times salary or down to one times salary. And income protection can offer a core cover of two-thirds of salary with the option to flex up to 75% or down to 40%.
When schemes are for less than 1,000 people, however, insurers can be reluctant to allow employees the flexible elements.
Gissings Advisory Services reports that this has become a big issue during the last six months. To date, three of its clients have complained that their employees are either not being allowed to flex at all or are only being allowed to flex up – and not down. John Scott & Partners is another employee benefits consultant which has detected such a trend.
Darrell Parsons, employee benefits director at John Scott & Partners, says: "You could argue that insurers have something of a stranglehold at this end of the market, because they only see flex as a growth area if their benefits can be core benefits. The old adage across the band of protection is that those employees who take the cover are the ones most likely to claim, so offering voluntary cover is perceived as involving a significant adverse selection risk.
"But some insurers are worse than others. Scottish Equitable and Legal & General are not normally too bad but other players with smaller schemes like AIG and Norwich Union can be reluctant to consider providing a benefit that includes a flexible element."
With critical illness cover, on the other hand, there tends to be less of an issue because pre-existing condition exclusions protect against adverse selection, and cover is normally offered as a voluntary benefit with flexible options.
Private medical insurance (PMI) is also largely peripheral to the debate because, although there is a trend towards offering this as a core rather than voluntary benefit, it is one that is being driven by employers rather than insurers – although insurers are obviously not complaining about getting a better spread of risk.
Traditionally, private medical insurance (PMI) has tended to be a core benefit for senior staff and offered flexibly to junior staff. But employers are increasingly offering it as a core benefit to all staff, while cutting out cover for dependents, as they focus on broadly-based absence management programmes.
Insurers inevitably defend any stranglehold they may be perceived as having on flexible benefits schemes on the grounds that their stance is very much in employers’ interests. They argue that costs could easily get out of control if employees enjoy too much flexibility.
Providing cover as a core benefit, for example, greatly increases take-up rates and enables employees to benefit from free cover levels – that insurers will grant up to certain limits without asking for medical evidence. This, in turn, increases take-up further because the requirement to be individually underwritten can be enough to stop some people opting for cover.
Simon Bailey, head of marketing at Scottish Equitable Employee Benefits, says: "Flex is a very different environment with a far bigger degree of choice than the standard group market and, because the concept is too new for any meaningful data to have become available, the assumption is that claims experience is likely to be higher.
"It is therefore important to ensure that benefits packages are sustainable, because if prices [skyrocket], it’s no good to anyone. Insurers are still finding their feet and I don’t believe the restrictions they are imposing are halting the growth of the flex market."
Bailey believes that the administration and communication of flex are far more pressing issues and points out that the restrictions on flexibility clearly help in the latter respect. After all, communicating the main flexible benefits package is quite challenging enough without each product having too many of its own inner considerations.
"Insurers would be wise to stick to offering elements of flexibility that really make a difference, although some will inevitably provide largely cosmetic ones for shorter-term competitive advantage. Some players are, for example, already understood to be looking at allowing employees to alter deferred periods and escalation rates on income protection," he adds.
It is noticeable that some intermediaries clearly agree with insurers on these points. Towers Perrin and Towry Law are among those to express the view that insurers don’t have a stranglehold. Even intermediaries which take the opposite view do not suggest that the inconvenience suffered is sufficient to stop employers from wanting to continue offering flexible benefits schemes.
Perhaps most telling of all is the fact that Legal & General, which is unusual in being prepared to offer a voluntary group life scheme, has so far never had a single employer requesting this for a flex plan.
Justin Crossland, senior consultant at Towers Perrin, says: "Given the right profile of client, other insurers might also consider offering purely voluntary life cover for flex schemes, but the fact is that few employers would want it. Employers need to have a minimum benefit level to recruit people and most also feel they have a moral responsibility to provide certain [levels of] cover." He adds that he has not yet come across any employers that want to remove this cover.
"Indeed they are increasingly valuing income protection as a core benefit because of its ability to fit in with integrated healthcare and absence management programmes. Those that have moved from defined benefit to defined contribution pension schemes are also showing a growing appreciation of income protection as a means of providing an alternative to ill health early retirement [benefits] in the event of disability."
Furthermore, although the majority of benefits offered via flexible benefits schemes are still insurance and investment based, (see box) more lifestyle-orientated options such as buying and selling annual leave and childcare vouchers have also grown rapidly in popularity.
The increasing number of benefits, which can be offered tax-efficiently, meanwhile, offers one possible solution to employers which may be experiencing problems with insurers. Salary sacrifice arrangements, for example, provide an additional vehicle for organisations that wish to offer employees some flexibility without implementing full flexible benefits schemes.
Overall, stranglehold would seem too strong a word to be used to describe the influence that insurers have over flexible benefits schemes, although at the smaller end of the market there is clearly the odd employer experiencing some mild choking.
Most included benefits
Buy/sell some annual holiday leave 84%
Dental insurance 82%
Private medical insurance 81%
Life insurance for employee 73%
Childcare vouchers 69%
Critical illness for employee only 69%
Health screening for employee 56%
Critical illness for partners of staff 53%
Travel insurance 50%
Healthcare cash plan 50%
Pension: additional voluntary contributions 49%
Computers for staff 44%
Give-as-you-earn/payroll giving 42%
Case Study: Nationwide
Nationwide Building Society’s flexible benefits scheme Choices, which is offered to its 15,500 employees, includes private medical insurance, healthcare cash plans and dental insurance among its 12 benefits. But no-one can accuse insurers of enjoying a stranglehold.
Its private medical insurance (PMI), administered by Cigna Healthcare, is the only insurance product to involve a core element, but this has been introduced in response to the wishes of the employer as opposed to the insurer.
PMI is potentially available to all employees and, although 6,500 don’t have a core entitlement to it, they can still apply for core cover and even for additional cover to protect their partners and families.
Evan Davidge, rewards consultant at Nationwide, says: "Any complaints from employees tend to be around our own eligibility criteria, which is based on seniority and job level within the company and has nothing to do with insurers.
"We have very constructive discussions with all our insurers about premium rates, and the key to these are the loss ratios. So far the subject of having to make any elements of cover compulsory simply hasn’t arisen."