Breaking New Ground in Group Risk

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1 Breaking New Ground in Group Risk December 2010 Reliable solutions for today and tomorrow

2 Table of Contents Breaking new ground 3 Oaks from acorns 4 New growth will take some bedding in 5 Seeding on rocky ground 6 Nurturing growth 7 A diversified crop 7 From smallholding to market farming 8 Planting for spring 8 2

3 Breaking New Ground in Group Risk Over 8 million workers are missing out on life insurance through their employer that could provide security for themselves and their family. Breaking new ground Group insurance through an employer is a cost efficient way to cover against the risks of death, illness, or loss of income. The UK market average premium is 123 per head. This would provide over 600bn of cover for these workers, contributing significantly to the bridging of the UK protection gap. aquila has recently conducted research into the group risk market to understand constraints to growth and how technology could help service this significant potential demand. 3

4 Oaks from acorns To illustrate the relative size of the Group Risk market, Resolution s recent purchase of Bupa Health Assurance (BHA) contributes less than 3% in additional premiums to the Friends Provident/Axa group, but more than doubles its presence in the market. Whilst the deal releases 65m of capital, other savings from the combined operation is limited by the relatively small total market size around 1,600m of premium. So generating future value will need to come from growth and cross selling opportunities. Resolution will still be a distant fifth in the market behind Unum, Canada Life, L&G and Aviva who collectively command almost 80% of the total market. According to aquila research, around 85% of policies that come up for renewal each year are awarded to the holding insurer which makes it difficult to take business from established competitors. However, there is significant potential to grow this market as there remain over 8 million employees who are not yet covered. Just reaching out to half of these employees would bring a further 500m of premium income. 4% 15% 26% 12% Market Share by Premiums Even after the BHA deal, Resolution will still be a distant fifth in the market 18% 25% - aquila research 4

5 New growth will take some bedding in Whilst per capita group insurance is cheaper than buying individual protection, there are significant factors that limit growth in the market. Across demand and supply business is skewed towards a dominant few making it an imperfect market: The largest employers dominate the demand side Serviced by a handful of insurers Advised primarily by the big four consultants aquila s view is that the top end of the market will still slowly churn and grow slowly. However, there are good crossselling opportunities in this sector for providers who can bring both group insurance and savings together as a cohesive proposition wrap style. But the sector of the market that offers greater prospects for direct growth is the SME market representing small and medium sized employers below 250 staff which is currently under-serviced. To tap into this sector requires different, more efficient approaches particularly in access to quotes and renewals. The remainder of this article takes a closer look at this sector. 5

6 Seeding on rocky ground Some insurers will not quote below a minimum number of employees because it is too expensive for them to take on the business. Bupa and Canada Life both offer streamlined quotes over the internet but this requires an adviser or employer to enter details into each website and comparisons are not easy as the terms and conditions differ considerably. A common basis for quoting is difficult in itself; insurers, for example, have their own approach to classifying occupations which is used as a basic criterion for underwriting and pricing. This particular market does not yet have quite the uniformity to easily support a confused.com style comparison site. The turnaround time on quotes is long (up to twenty days) and whilst this would be a problem in individual insurance sales, engagement in group business is different and there is little evidence from advisers that real time quotes or even turnaround within a couple of days would be a significant benefit. Typically when an adviser seeks a quote for an SME, the easiest approach for them is to collect details from the employer and send it in an to several insurers. It is then a manual process for the insurer to check the data, key it into a pricing system and produce a quote. The quotes process is also complicated by the wide range of loading factors which may vary between insurers. Factors can include current claims experience on the scheme, whether there have been medical refusals or how the scheme fits with their current book, for example, concentration by industry or geography, or the desire to land a big name client. The variation in price can be as much as 100% and the quotes are difficult to compare Finally, when an adviser receives a number of quotes, the variation in price can be as much as 100% and the quotes are difficult to compare because of variation in terms and conditions. Managing the process from collecting data from the client through to producing an evaluation of quotes either becomes a cost to the adviser or the employer. The largest insurers have a built-in advantage in quoting as they have the most extensive data on which to calculate risk. With the SME market heavily driven by price it is easy to conclude there are imperfections in the market and in turn understand the concentration of market share. The policy renewal process is also fraught with imperfections and inefficiencies. Throughout the term of the policy there are changes to staff joiners, leavers, salary changes and there are claims. For an insurer, the true cost of servicing a policy (operational expenses plus claims) may not be known and tracking risk may not be accurate which could mean tying up unnecessary capital to support the business. From the employer s perspective they cannot be confident that they are actually getting value for money from their premium. 6

7 Nurturing growth There is interest from across the industry to improve the quotes process and increase capacity in the market. However, finding a new model that is acceptable to all parties and which delivers clear benefits is not an easy feat. A starting point that has been considered is to have a common quotes form but this is inhibited by the variation amongst insurers. It would also require advisers to change the way they operate. Advisers are interested in improving the quotes process not just for pure efficiency but as part of an improved service to clients in order to grow and retain their revenue base. A way to achieve this is to look more holistically at electronic services to employers integrating HR and payroll systems potentially with flex systems. In a secure environment an employer could make their requirements available as part of a reverse auction process. A diversified crop There are wider opportunities for market innovation enabling employers to increase efficiency and maximise the value from their spend on employee benefits. Traditionally both savings and risk benefits have been combined through Defined Benefit (DB) schemes. The decline in DB has seen the separation of workplace savings and protection. A proposition that combines these elements transparently allows employers to improve their budgeting and potentially negotiate better pricing; this is not an uncommon practise in certain mainland European countries. A way to achieve this is to look more holistically at electronic services to employers The risk benefits purchased by an employer may not totally suit an individual s circumstances. As an employee goes through life changes they may want to obtain cover that is not within the standard terms of the employer s policy. Providing additional individual benefits through the workplace could be done more cost effectively and at a lower price point to the open market. The insurer who can offer this flexibility of cover could differentiate itself. 7

8 From smallholding to market farming Essential to all of these opportunities for an insurer is to be able to define and price risk accurately and efficiently as part of the quotes process. This is with a view to support a wide range of propositions composite with savings, standalone group or for individual incremental benefits. Such a quotes capability needs to be able to draw and validate data from numerous sources and present pricing readily online, allowing changes as part of what-if scenarios for different quotes. There should also be on-going accuracy between the risk and the premium through the life of the policy so optimising profitability. Moving away from annually costed premium to dynamic accounting and monthly costed premiums would allow insurers to sharpen pricing. Monthly premiums which are either smoothed or forecasted would also provide better value to employers and improve cash flow. Planting for spring aquila has been active with a number of insurers to show how a dynamic policy management approach is achievable and cost-effective through its group quotes and administration system solution. Whilst technology on its own does not guarantee competitive advantage, the ability to be creative and innovative can push a business into a leadership position. The means already exist to launch new group insurance propositions that will expand market capacity and there are over 8 million lives waiting for such propositions. The insurer who can offer this flexibility of cover could differentiate itself aquilaheywood aquila house 35 london road redhill surrey RH1 1NJ 8