Charles Darwin may not come to mind when thinking about group risk, but, in common with his theory of evolution, these products have adapted over time to remain competitive. It’s important to look at the history of group risk to understand its relevance in modern society.
“Employer-sponsored Life Assurance, Group Income Protection (GIP), and Group Critical Illness (GCI) joined the market at different times and have significantly changed since then.”
Employer-sponsored Life Assurance, which pays a benefit on an employee’s death, was originally a product feature of group pension schemes. The limits that can be provided under pension schemes with beneficial tax treatment, including death benefits, have been determined by HM Revenue & Customs (HMRC) and its predecessors since 1921 when the Finance Act introduced tax relief on pension contributions.
This product has been inextricably linked to pension legislation, trust law, and HMRC taxation rules ever since, which can impact innovation but also means that the product has constantly changed in line with pension evolutions - often to mitigate unintended knock-on effects to group life from legislation or taxation changes.
For example, the 1989 earnings cap to reduce tax-relieved pension benefits also impacted group life, triggering the introduction of ‘unapproved top-up’ schemes so that death benefits based on salary in excess of the earnings cap could be provided for high earners - albeit with a P11D tax charge for employer-paid premiums. This unapproved route also enabled the market to provide group life for trade bodies or affinity groups such as police federations.
From 2003, unapproved schemes progressed into ‘excepted group life’ policies, which further evolved following pensions tax simplification on the 6th April 2006, aka ‘A-Day’. This allowed high earners affected by the Lifetime Allowance, or who’d applied for protection for pre A-Day benefits, to maintain death benefit entitlement, free from inheritance tax or P11D charges and without restriction or loss of transitional pension protection.
“Excepted group life policies remain an appropriate solution for high earners following the most recent changes to the Lifetime Allowance tax charge, introduced from April 2023.”
Another unintended consequence was the removal of the default retirement age in 2011, which could’ve resulted in group risk providers being expected to cover customers indefinitely rather than up to a finite age – contra to their legal ability or appetite to do so. I’m pleased to say GRiD successfully lobbied to obtain an exemption which confirmed that it’s not unlawful discrimination for employers to cease offering insured benefits to employees over the age of 65 or State Pension Age (SPA).
Group Income Protection (GIP) was launched in the 1970s, originally called Permanent Health Insurance (PHI). There aren’t any prescriptive rules setting out how these policies should be structured so its evolution has been far more dramatic than for group life.
Fifty years ago, defined benefit pension schemes were much more prevalent, and many were in funding surplus, so PHI was effectively competing against the ill-health early retirement option under an employer’s pension scheme – even for younger employees.
“Employers took the view that they’d rather use excess surplus of funds under their pension scheme for early retirement than take on a new expense.”
The subsequent demise of pension scheme surpluses and defined benefit pension schemes, following Gordon Brown’s removal of dividend tax credits from pension funds in 1997, ultimately created a heightened need for PHI - which subsequently became known as GIP.
GIP transformed from a policy that employers dusted off after someone had been unable to work due to ill-health or injury for six months (with little expectation of returning to work) to a proactive back-to-work service, focused on effective interventions and overcoming barriers to the workplace.
The industry pioneered vocational rehabilitation in the UK, amongst the first to understand the bio-psycho-social model in the context of illness and disability. We recognised the need to move the focus away from incapacity to capability long before state provision progressed to do so.
“Today, we have a very different offering that focuses as much on prevention, mitigating risk, and offerring support as it does on paying claims.”
Medical underwriting has been revised to consider individuals’ attitudes towards managing their health and/or medical conditions, rather than actual state of health. This means far more employees with health conditions can be included.
Furthermore, we’ve witnessed changes in recent years that have allowed for more flexibility on the duration of payments for a fixed term of (for example) two, three, or five years, rather than the entirety of an employee’s expected working life.
Group Critical Illness (GCI) is the baby of group risk products, launched in 1991 following the success of individual CI policies. Where premiums are employer-paid, a P11D tax charge applies, which can result in employees asking to be removed from the arrangement. Therefore, many arrangements are set up on a voluntary basis or under a flexible benefit programme. This has helped protect 69% of the total number of employees covered by the market in 2023, according to Swiss Re's 'Group Watch' 2024 Report.
“It's a popular benefit since it can be used to supplement sick pay and/or to cover the cost of medical treatment such as chemotherapy and palliative care.”
Arguably, the greatest innovation, particularly for GIP & GCI, has been the addition of added-value support, designed to provide everyday value, mitigate claims to keep premiums affordable, and improve employees’ health. These embedded services often include access to vocational rehabilitation, fast-tracked counselling, physiotherapy, 24/7 GP, and Employee Assistance Programmes (EAPs). Additionally, support could include discount vouchers, financial education tools, debt consolidation services, or pay advance schemes to support financial wellbeing.
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