Group risk markets have a bright future, but, says Lee Watson, risks of getting quotes and applications wrong are increasing.
Business and process reengineering was inevitable prior to the application of the Retail Distribution Review (RDR), but seems unabated, as profit margins continue to be put under extreme pressure following the withdrawal of indemnity group pension commission.
Group risk wasn’t subject to the RDR but this hasn’t stopped the industry being drawn in by its close association with group pensions.
If the application of the RDR wasn’t significant enough, auto-enrolment is all-consuming from a group pension perspective and will continue to be for a number of years yet, and, until such time as this slows down, will be the focus of investment and resource in order to help employers comply with the new legislation.
BIS (government Department for Business Innovation and Skills) estimated, in its 17 October 2012 report, that approximately 30,000 medium-sized employers will start staging from 1 April 2014 and approximately 4.7 million small employers from 1 June 2015.
Auto-enrolment also presents a fantastic income opportunity for group risk, and while the jury’s out as to whether this will materialise, surely our entrepreneurial spirit won’t stop us trying to take advantage of arguably the most opportunistic piece of legislation ever to be applied to the group protection industry.
One can only sympathise with intermediaries as they continually deliberate over really difficult decisions but ultimately the client will be compromised if group risk resource continues to be diverted away in the constant search for and maintenance of profit.
It should therefore be expected that these decisions may accelerate errors and omissions resulting from the lack of time, attention to detail and competency deterioration. It is imperative these risks are acknowledged and managed to make sure the employees of the client are fully covered for their maximum level of benefit.
The liability of getting group protection wrong is arguably more significant than group pensions and the answer to the constant challenge faced by intermediaries is standardisation.
Mitigating group risk liability starts with the quotation request and – considering this is an industry with many years of experience, some really talented individuals and more than a £1 billion of premiums remitted each year – surprisingly, a standardised Origo quote request format remains outstanding.
In addition, doing things like forwarding quote requests via email with a policy summary and attaching excel membership data to insurers in today’s technology-rich environment is simply embarrassing. Data could be sent electronically via XML, for example, as it was designed to do.
Adopting a standardised quotation request format and XML approach will have the following benefits:
• Mitigate competency based errors and omissions. • Help ensure employees are covered for their maximum level of benefit, and if that’s not possible, proactively communicate the shortfall and any remedial action. • Maintain a system which helps manage and distribute material information which is required by the client, employee and insurer. • Ensure there will be no ambiguity enabling insurers to forward an accurate quote first time. • Enable intermediaries to negotiate the most competitive premium possible for the client. • Avoid dual pricing, which could lead to uncomfortable conversations with the client where a competitor has been involved and undertaken more thorough research. • Help maintain consultancy and administrator competency.
From the insurer’s perspective, a standardised approach will enable them to focus on developing relationships and business opportunities as opposed to being drawn into reconciling problems which would typically lead to relationship deterioration and a difficult conversation with clients.
Standardisation will improve competency, allowing for a greater focus on the following areas – which are typically overlooked:
• Accurate cost of insurance
A client’s claim mitigation is rarely disclosed to the insurer which means the premium will typically be conservative. An intermediary’s position may be compromised if a competitor establishes claim mitigation with a client and the incumbent intermediary didn’t. The incumbent will probably have to rely on the strength of their relationship to recover the situation but is unlikely to receive another chance.
• Age discrimination
Group risk is exempt from age discrimination but employers are not. How this is broached by employers will ensure that the entry and termination age is set accurately. In most cases, there will not be a contractual retirement age and employers will need to determine a scheme termination age which best fits its workforce. Leaving this decision too late will certainly lead to discrimination and a worst-case scenario of no cover.
• Disclosure of material facts
Historical sums assured and claims information is vital to assess past activity. While this isn’t the deciding factor, it certainly influences the cost of insurance or even the insurers’ willingness to insure.
Medical underwriting also needs to be fully and accurately disclosed to the insurer irrespective of the employees desire to complete.
Temporary cover doesn’t mean the employee is covered for the maximum level of benefit while medical underwriting is being completed.
This is typically a finite period of 120 days and starts from first eligibility or a salary rise which increases the employee’s level of benefit. Temporary cover doesn’t include pre-existing conditions, and communication with the employee is vital to ensure the terms of cover are understood and accepted.
Employers must be aware that seconded employees (either temporary or permanent) have to be:
• in receipt of a contract of employment with the policy holder (or participating employer), and / or,
• classed as a relevant UK individual as per the HMRC definition.
Absence from the normal place of work is commonly overlooked when establishing or transferring cover.
Accurate information is not always available as its significance is rarely appreciated. Some employers may not have an absence policy or a simple way of recording and reporting absence.
Insurers always attempt to avoid anti-selection and get very nervous when clients “forget” to inform them of eligible membership changes. All excluded employees must be disclosed with a valid reason.
The way employers and intermediaries record details of eligible employees will determine those who are either approaching or have exceeded the lifetime allowance and therefore may choose to be excluded from the death benefit scheme.
Educating employers is important so that they appreciate death claims for employees who are either based or travel overseas will be subject to the UK’s guidelines on foreign travel as published by the Foreign & Commonwealth Office.
It is vital that employee data matches eligibility exactly but it often contains employees that are too young, too old or who are just simply not eligible. Employee validation is imperative before submitting a quotation request to the insurer.
• Data Protection
Information security will always be a prominent subject with our industry; the Information Commissioners office has the power enforce fines of up to £500,000. Browse options will remove the need to establish secure data transfer links (secure email links, TLS etc) which need maintaining, auditing and therefore inefficient.
• Management information
Like Data Protection, record keeping is another subject which generates many different opinions. Keeping accurate records in a single place enables management information to be readily available e.g. sales initiatives, peer checking or for compliance purposes etc.
Compliance can also help win business by helping to mitigate liability by auditing and approving a management system which enables our highly technical industry to be managed efficiently.
Adopting a standardised process will help sales, and compliance can be a part of this process by monitoring remotely. Clients will appreciate and be reassured by the Compliance Departments’ involvement.
Adopting a system, customised by the intermediary, that enables efficient access to either whole of market, limited panel or even tied agency will help improve efficiency via a consistent and standardised approach.
By consulting and administering group risk schemes on a clients’ behalf, the intermediary is expected to consult, be organised and mitigate shortfalls in cover as soon as possible.
The intermediary is ultimately liable for this advice and, even if it is right, the employer will always have the final decision.
With all this in mind, intermediaries and employer need to consider whether they are currently:
• Giving insurers accurate and complete information and data at all times.
• Maintaining a death benefit discretionary trust, ensuring that the trustee name is correct and that this represents current legislation.
• Liaising with the HMRC to ensure death benefits in the event of a claim will be paid free of inheritance tax.
• Mitigating shortfalls in employee cover by actively communicating with the client.
• Proactively maintain consultation and administration competency.
• Negotiating the best deal for the policy.
Standardisation via a consistent, intelligent, efficient and secure system will position the employer and intermediaries perfectly for auto-enrolment and the constant challenges.