Broking reportGroup Risk Benefits

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Overview

The group risk market is currently in a positive place, with statistics demonstrating growth, both in terms of in-force premium and in the overall number of insured members*. While the opportunity for growth in 2014 continues to look strong (for example on the back of pensions auto-enrolment) the market also faces a number of challenges. For a long time many insurers have talked about unsustainable pricing and this, together with economic and market factors, has made price re-alignment inevitable.

Our data demonstrates that in 2013 we have witnessed a hardening of the market across all three major product lines: Group Life Assurance, Death in Service Pension and Group Income Protection.

Clients are also increasingly reviewing their benefit spend in the health and protection area, considering what strategies they need to implement to get best value from their budget and also how they can effectively manage their employee health risk to mitigate future premium increases.

This report has been prepared by Aon’s Health & Benefits Broking Centre and is designed to give a rate trends overview for 2013, detail some of our key developments and outline some of the main legislative and market issues many employers will need to consider in 2014 and beyond.

While the hardening of the market was extremely modest, we anticipate that economic factors, such as ongoing low interest rates and lower investment yields, will continue to be relevant throughout 2014. Additionally, market issues (such as an increased group income protection claims incidence; on average, higher value benefits in payment; on average, increased claims duration; and an ageing workforce) will also continue to cause price pressure.

When it comes to a broking exercise, making the insurance market understand the employer’s risk profile, in particular what processes and procedures they have in place to manage their employee health risks, will be key in terms of mitigating future price increases.

Rate trends – Group Income Protection

Economic and market factors put increasing pressure on Group Income Protection rates in 2013. For the first time in a number of years we have witnessed a real hardening of the market, whereby on average the rate offered by the recommended insurer was higher than the expiring rate.

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2013 GIP Rate Summary

Average proposed increase by the holding insurer

Final rate for recommended insurer compared to the expiring rate

40%

30%

20%

10%

0%

-10%Q1 Q2 Q3 Q4 Overall

*Swiss Re Group Watch 2013

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Rate trends – Death in Service

Despite a competitive market, in 2013 the lump sum rate offered by the recommended insurer compared to the expiring rate was nearly 10% higher.

To put this into some context, the lump sum premium rates available over previous years have been extremely competitive, albeit on an upward trend, and 2013 could be viewed as the market pricing more accurately to reflect the risks presented to them.

One notable positive in 2013 was the availability of more capacity with some insurers, particularly in ‘hot spot’ areas. In a number of cases, employers or trustees were prepared to pay a slightly higher premium to secure additional cover in the event of a catastrophic event.

The biggest pricing challenge in 2013 was in respect of death in service pension benefits. A limited number of insurers prepared to offer terms, together with the well documented economic challenges, resulted in average premium increases of just over 50% when comparing the expiring rate with the recommended insurer’s final rate.

As a consequence of this, and the fact that many employers no longer consider a death in service pension benefit to be a contemporary benefit, we have worked with a number of employers on benefit re-design options and we expect this to continue throughout 2014.

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2013 GLA Rate Summary

Average proposed increase by the holding insurer

Final rate for recommended insurer compared to the expiring rate

30%

25%

20%

15%

10%

5%

0%Q1 Q2 Q3 Q4 Overall

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Client buying behaviour

The objective of Aon Hewitt’s broking approach is to find the best insurer for each insured scheme. We know that each client has their own specific requirements and as a result we do not adopt the traditional norm of approaching the market with the generic objective of ‘securing the most competitive premium and policy terms’ without properly understanding what this actually means.

This is particularly relevant for Group Income Protection benefits, where employers should focus on price in conjunction with a potential insurer’s overall proposition offering, which could include claims management, policy terms, administration capability and other added value services.

For 2013 reviews the table to the left demonstrates the ‘pricing factor‘ when employers buy Group Income Protection cover. What is evident is that the more insured members a scheme has, the greater the chance the employer, and potentially the employee, will engage with the insurer and utilise both their core and value add services. If the insurer is able to demonstrate value through this engagement, the likelihood is that the pricing factor will reduce at the next review. Indeed, when compared to 2012 the average overall price weighting score has reduced by 5%.

This scoring approach, and the way it has evolved, is generally welcomed by insurers as it supports investment in their proposition.

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Group Income Protection: Client Buying Price

750+

101-750

1-100

Average

65% 70% 75% 80% 85%

73%

78%

83%

79%

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New insurance solutions

A Structured Portfolio Solution (SPS) is an insurance solution that is substantially pre-negotiated and pre-structured to meet the needs of a group of clients with a defined set of characteristics. Using this approach, Aon is able to present risks to the market in a more effective way and agree portfolio terms for individual clients.

During 2013 we have extended our SPS capability to meet the ongoing needs of employers in the mid-market and also of employers who are looking for a low-cost life assurance option for employees who are being auto-enrolled into a pension scheme, which could possibly be the employee’s first experience of having savings and protection benefits.

Our mid-market solution, Trio, is designed primarily for employers with between 101 and 750 insured members. Our data suggests that a typical employer in this segment is looking for competitively priced risk benefits while at the same time wanting access to the best possible policy terms and the best possible overall proposition offering, all of which is underwritten by an insurer who ranks highly in Aon’s objective scoring metrics.

Our low-cost life assurance SPS is linked to Aon’s ‘A to Z’ pensions auto-enrolment solution. With a fixed benefit of £25,000, this proposition has been designed as a simple solution for employers and trustees who are looking to provide competitively priced (fixed price) life cover to employees who are being auto-enrolled to a pension scheme. We have agreed terms whereby cover is not subject to any medical underwriting or actively-at-work requirements.

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Looking ahead

There will be a number of legislative and market issues that are potentially relevant to the group risk market over the next 12 months, including:

Reduction in the Lifetime Allowance and ProtectionThe standard Lifetime Allowance (‘LTA’) is reducing again from 6 April 2014, from £1.5m to £1.25m. This is the lowest level ever since an LTA was introduced at £1.5m on 6 April 2006. Two new forms of corresponding Protection will be available from 6 April 2014: Fixed Protection 2014 (FP14) and Individual Protection 2014 (IP14).

These developments could have an impact on death in service benefits and it is important that employers and trustees fully understand the issues and options available, in terms of scheme design and benefit provision, mitigating any risks and ongoing governance requirements.

Pensions Auto-enrolmentPensions auto-enrolment is designed to encourage people to save for their retirement; the first staging date for larger employers was 1 October 2012. While auto-enrolment is primarily seen as a pension issue, there are a number of implications for other employee benefits, particularly death in service and income protection benefits if these benefits are linked to pension membership. Employers with a staging date in 2014 and beyond should ensure they take the appropriate action so they can:

• make a full consideration/assessment of any benefit design and provision issues and options

• understand any cost containment options

• mitigate associated risks

• consider successful communication and employee engagement

We recommend that all the relevant issues, together with the potential impact on an employer’s other employee benefits are considered without delay.

Proposed changes to State Pension Age

In the Autumn Statement 2013 the Government announced plans to significantly accelerate the increase in State Pension Age (SPA) to 68 and to regularly review the SPA going forward, which is expected to further increase the SPA to 69 and above as appropriate. Dates for when these intended changes will occur have yet to be announced and will then need to be included in legislation before becoming law.

In addition, the Government had also previously announced (in the Autumn Statement 2011) that the increase in SPA to 67 will be brought forward, ie to be phased in between 2026 and 2028, instead of between 2034 and 2036 as previously planned. Legislation including this change is currently going through Parliament.

It is important to ensure that the impact of these changes on employer-sponsored Group Risk benefits, in particular those which carry a potential long-term liability, such as Group Income Protection benefits, are considered fully.

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Benefit re-design – Death in Service PensionUnderlying market and economic conditions, such as ongoing low interest rates resulting in lower investment yields, have been adversely affecting the cost of insuring death in service pension benefits. As evidenced by this report, on average rate increases of more than 50% are being applied at the rate re-test date. We do not anticipate these conditions changing in the foreseeable future and consequently we do not expect the current pricing situation to improve. Coupled with a limited insurance market for this risk, we anticipate the numbers of clients looking at potential benefit re-design or alternative funding options to continue to increase.

Using our modelling tool, detailed consideration of the re-design options and the associated issues of each approach should be considered carefully with your Aon contact.

Benefit re-design – Group Income ProtectionFollowing the passing of the Welfare Reform Act 2012, one of Aon’s observations was that employers with an insured Group Income Protection scheme design that makes reference to a state benefit offset (for example the Employment & Support Allowance plus the Work Related Activity Component whether payable or not) should review this position as a matter of priority.

With fewer employees being able to claim state benefits and payments potentially only being in force for a limited period, the concept of having a scheme design that makes reference to state benefits is both outdated and potentially confusing.

Using our modelling tool, the underlying strategy employers apply to the provision of Group Income Protection benefits and the appropriateness of design, should be considered carefully with your Aon contact.

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Published by Aon Consulting Limited. Registered office Briarcliff House, Farnborough GU14 7TE.

©Copyright Aon Consulting Limited 2014. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder. Aon Consulting Limited is authorised and regulated by the Financial Conduct Authority.

Matthew Lawrence Head of Broking Health & Benefits UK +44(0)1252 768556

Errol Antao Risk Broking Lead +44(0)1252 768550

For more information contact:

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