 By Paul Avis, Marketing Director at Canada Life Group
There is no doubt that the UK population is getting older. There are currently 10.3 million people in the UK aged 65 and over, representing an 80% increase over six decades since 1951 . On the face of it, this is a good thing - advances in medical science mean life expectancy and longevity has never been higher. However, as the number of people over the age of 65 increases, so does the number of those who choose to stay in work during their sixties and beyond.
At Canada Life we cover 2.7 million employees and almost 21,000 employers, so we have undertaken detailed, regular reviews of trends in our client base and, throughout the economic downturn, we have seen the workforce age. Between Q1 2009 -Q1 2011 the average age increased by 0.8 of a year over a typical 2 year rate guarantee period. Although ageing is now occurring at a slower rate, it is still compounding the increases in previous periods and the “slowing down” rate is both business sector and scheme size specific.
So why exactly is the workforce getting older? Shine a spotlight on younger sections of society and, at a basic level, fewer younger people are being recruited. Although we are starting to see the shoots of recovery, the latest ONS statistics demonstrate over 1 million 16-24 year-olds are not in education, employment or training, which counts for 15.1% of all young people of working age in the UK . The absence of young people in the UK workforce inevitably leads to a higher average working age.
Combine this with the fact that the number of people of state pension age and above in employment has nearly doubled over the past two decades, going from 753,000 in 1993 to 1.4 million in 2011, and you begin to uncover the roots behind this problem. In addition, over a half (51 per cent) of older workers are in small organisations of fewer than 25 employees , so the small scheme segment is ageing at a greater rate than the larger segment, perhaps driven by a lack of recruitment and the need to retain more experienced staff.
The impact of an ageing population and workforce on pension provision, long-term care and health services has been widely documented. But how does this trend affect the group risk market?
In essence, an older workforce means that employees are generally more likely to have illnesses and medical problems. Although there are exceptions, for most ageing is associated with increased ill-health, and this is starting to become evident in the latest health predictions. For example, Macmillan Cancer Support recently released the gloomy prediction that almost half of the UK population will have or had cancer by 2020, with increased life expectancy cited as the major reason . With greater chance of illness comes greater claims incidences, particularly in terms of products such as Group Income Protection and Group Critical Illness Cover, and this in turn drives premiums upwards.
The conundrum doesn’t end there – as insurers, we have to question who were are covering and how long these benefits will have to be paid for. Of course, another by-product of our changing society is that people are living longer. Over the last 50 years, the average life span in England and Wales has increased by around ten years for a man and eight years for a woman . Around a third of babies born today can expect to celebrate their 100th birthday . Considering you could only expect to live until the age of 40 in the 1800s, it is clear that medical science has advanced dramatically in the 20th and 21st Centuries, working wonders to keep people alive! There is a belief that life expectancy will increase by about 20% each decade (and that we are now seeing a five or six hours per day increase in life expectancy ). Sounds like we’ll be leaving work younger than we were when we started!
Whatever the theory, people are definitely living longer and the total number of centenarians is projected to rise from 14,500 in 2012 to 110,000 in 2035, which shows just how different the world will become over the next 25 years . Naturally, from a general point of view this is great news (putting aside issues such as the quality of life one can expect to have aged 100). Yet from a Group Risk perspective, fewer deaths increase the payable length of benefits and claims. Death in Service Pension beneficiaries will also be receiving payments for longer, making things rather expensive for insurers.
Add low interest rates into the equation and we could have a real problem on our hands. The good news is the impact on lump sum death benefit products is minimal - insurers don't need to invest large sums to pay future claims because the benefit is settled in a single payment. The bad news is that when it comes to products such as Group Income Protection and Death in Service Pensions, the reserves needed to back long term payment obligations are not sitting idle. They are invested, with a view to increasing these reserves over time. When interest rates are high, more investment income is earned so less money needs to be held now to ensure those future benefit payments can be met. Lower interest rates, on the other hand, mean that a larger investment is needed now.
Unfortunately for insurers, the Bank of England base rate is at a historic low of 0.5%, and has been since March 2009. In the August Monetary Policy Committee, Governor of the Bank of England, Mark Carney, confirmed that this would not rise until 2015, unless the jobless rate falls below 7% or CPI inflation is judged to be 2.5% over an 18-24 month horizon . This means that insurers providing group risk products with a medium to long-term benefit period are having to find larger investments now, while simultaneously being faced with the prospect of paying these benefits for longer as the population ages.
Of course, the only way for insurers to mitigate these costs is to increase group risk premiums. This is a fact that has to be confronted – keeping the lines of communication open is the only way of making sure customers of these products are not faced with an unpleasant surprise. When group risk rates increase, if it is not planned and well communicated, it will not budgeted for. The customer may suffer the pain of having to consider cuts elsewhere to fund the group risk budget. So, it seems clear that we have to start getting the market ready for possible increases. It is widely acknowledged that we are no longer in a soft market, and we now need to look towards normalised group insurance pricing that is both sustainable and appropriate.
Employers that do not want to start paying higher premiums may be comforted by the fact that many group risk products contain added value components that can actually save them money. Thinking of Group Income Protection in particular, many insurers automatically include provision of an Employee Assistance Programme (EAP), saving an employer the cost of a directly contracted service. EAPs are a great way of engaging the workforce and maintaining the health and wellbeing of employees, with a whole host of services that support employees, helping them to identify and resolve personal concerns that may affect job performance e.g. health, marital relations, family, financial, alcohol, drugs, legal, emotional, stress, or other personal issues.
The most advanced offerings also have online and telephone legal support for employers, offering compliant documentation, legislative updates, advice on tax and health and safety issues, as well as case-by-case support for individual situations. This could slash the costs incurred from retained or out-sourced legal services and benefit organisations of all sizes.
We have already established that insurers want to ensure they limit exposure to the appropriate duration of claims payment. That’s why many providers, once receiving a Group Income Protection claim, will work with the employer to ideally achieve a return to work within a timescale that is both appropriate and mutually beneficial. Medically-trained Rehabilitation Consultants can help work through any issues with both employer and employee that may be preventing a return to work. By engaging with our rehabilitation services where applicable, employers ensure the most appropriate and suitable outcome for all involved and save on the cost of a diminished workforce or having to recruit a new staff member that may require training.
And what about second medical opinion services that may be included in the insurance? We have undertaken case studies that show how maximising the second opinion services can have a beneficial effect on mitigating increasing private medical costs by offering other options and refining the diagnosis or treatment paths.
With all these added-value components taken into account, hopefully employers will feel ready to accept increasing group risk premiums. As the population continues to age at a steady pace, rising prices are inevitable – who knows how long our grandchildren will be insured for! It is only by accepting these sociological changes, confronting them head on and preparing the market for sustainable, appropriate pricing that we can effectively tackle this change and evolve as an industry.
|
