Group risk schemes are a type of employee benefit (although it is also possible for the individuals other than employees to belong to some group risk schemes). Employees benefits are anything that employees are entitled to, over and above their contractual pay, as a result of working for their employer. Benefits can include tangible objects such as company cars, but are more often intangible things such as holidays, pension schemes membership, private medical insurance and so on.
Group Risk Scheme
editGroup risk schemes are a type of employee benefit and are used for a variety of reasons:
- Attract and retain staff
- Effective way to manage the financial risk involved in employee absence, illness and death
- Relative value
- Tax efficiency
There are three types of group risk schemes
- Group life – provides benefit in the event of a member’s death
- Group income protection – provides an income in the event of a member’s absence from work due to long term illness or injury
- Group critical illness – provides a lump sum payment in the event of a member suffering a pre-defined serious illness.
Group Life
editOriginally group life assurance was a product feature of group pension schemes and the cover provided by pension providers. The skills required for running a good pension scheme – obtaining good returns on investments – are very different to those to manage group life assurance – underwriting and risk management – and over time there was a split between providers of pensions and those of group life assurance and specialist group life insurers emerged.
Group life schemes are still governed by pension scheme legislation and underwent their most radically change in April 2006 with the introduction of the Pension Act 2004 which removed a number of restrictions on the level of death in service benefits – the maximum lump sum of 4 x salary and maximum dependent’s pension of 4/9ths salary – and introduced the concept of a life time allowance (£1.75m for the tax year 2009/10) against which only the lump sum benefit and any employee pension benefits are compared when assessing the maximum that can be paid before punitive tax becomes payable – any dependent’s death in service pension is not included.
Group Income Protection
editUnlike group life, group income protection is not government regulated. As a result group income protection has experienced much more product development than the other group risk products, including the introduction of non insurance services such as advice and counselling telephone help lines for employees and other employee wellbeing services.
In recent years group income protection insurers have experienced a large increase in the number of subjective claims such as mental health and musculoskeletal issues (now accounting for 50% of all claims) resulting in a general increase in claims costs. To combat this, the insurers have strengthened the claims management capabilities focusing on rehabilitation and re-integration techniques.
Traditionally benefit payments have been made until the individual returns to work or reaches their normal retirement age and with the general deterioration in claims experiences costs have increased significantly. Limited payment periods of between 2 & 5 years have been introduced to reduce costs and the option to have a lump sum payment at the end of the limited payment period is also available.
This year saw the introduction of the UK government’s Welfare Reform Act which changed the way in which the long term sick claim and qualify for incapacity benefits and may impact the number of individuals who do qualify. The impact that this will have on the group income protection market has yet to be seen although there has been some minor changes to the benefit designs available from insurers.
Group Critical Illness
editGroup critical illness was first introduced in the UK in 1991 as a result of the successful introduction of individual critical illness from the South African market, however its growth has been modest and currently accounts for only about 1% of the group risk market.
Critical illness as a whole has be subject to criticism for the number of declined claims due to poor policy wordings including the definitions of a qualifying illness. As a result the Association of British Insurers produced a statement of best practise which included precise definitions of illness and other policy terms which have been adopted by all group critical illness providers and is expected to reduce declinature rates and improve the overall perception of this benefit.