The UK group risk market posted record premiums over the past year as scheme and member numbers increased, but future growth is being threatened by double taxation of group income protection (GIP), according to Swiss Re.
The reinsurer’s Group Watch 2023 report revealed in-force market premiums exceeded £3bn for the first-time last year, increasing 8% to £3.1bn.
It also showed the number of in-force group risk schemes rose by 3.6% to 87,376 (up from 84,369 in 2021), and the number of people insured reached 14,421,387 by the end of 2022 – 2.2% higher than the previous year.
However, Swiss Re technical manager for life and health in UK and Ireland and co-author of the report Ron Wheatcroft (pictured), warned the latest HM Revenue & Customs (HMRC) update around salary sacrifice-based schemes was a concern for the sector.
Potential decline in take-up
Guidance issued in October 2019 by HMRC removed the risk of double taxation on income benefits received from GIP policies that had been funded by employee salary sacrifice under an optional remuneration arrangement (OpRA).
However, a December 2022 update of HMRC’s Employment Income Manual overturned that previous guidance, saying it was “incorrect” and that such benefits payments are taxable, with the correct position now included in Insurance Policyholder Taxation Manual – IPTM6120.
Wheatcroft warned the recent move to amend OpRA rules such that employees topping up their employer long-term disability insurance benefit through salary sacrifice will be taxed on both the contribution and the benefit could adversely affect future take-up.
“It doesn’t seem fair that people should have both contributions and benefits taxed when using salary sacrifice, and this could lead to a decline in future take-up of cover through workplace arrangements,” Wheatcroft said.
“With cost-of-living concerns only emphasising the importance and value of group risk benefits, a clear theme in this year’s report is the need for stronger recognition of what the market does and its impact on society.
“Our industry’s efforts, coupled with the government’s support in ensuring these products and services are as accessible and value-add as possible, should therefore be considered a key priority for the coming year.”
Wheatcroft’s warning echoes concerns raised by trade body Group Risk Development (Grid) which wrote to the chancellor about the double taxation issue late last month.
This followed consultancy Broadstone which at the start of the year revealed employers have until the end of the year to amend their processes around GIP policies and may need to consult their local tax inspector to comply with an update from HMRC.
Lifetime allowance changes
Wheatcroft added that changes to the lifetime allowance could trigger a change in the business mix moving forward.
“We welcomed the announcement that the lifetime allowance is to be abolished completely and believe that, over time, this will likely lead to some restructuring of the market,” he continued.
“This is because the need to set up separate arrangements outside pensions legislation will no longer apply.
“The onus will be on employers and their advisers to consider how they wish to respond to this change, but indications are that those running excepted group life policies and registered group life policies in parallel may reduce these into a single arrangement.
“We do expect some employers to continue to use excepted group life policies and, against this backdrop, we strongly encourage the industry to continue pressing for an exemption from the relevant property trust regime for all pure protection policies.”
Report breakdown
Breaking down the figures, Swiss Re’s Group Watch 2023 report showed the number of in-force death benefit schemes increased by 2.7%, with lump-sum death benefits covered and premiums coming in 8.8% and 9.1% higher respectively.
There was a 5.5% increase in the membership of excepted group life policies and a 0.7% increase in the membership of registered group life policies.
The number of people insured under group death policies rose 1.2% from 10,505,939 in 2021 to 10,631,009 as of the end of 2022. While 58.8% of this group were male, 41.2% were female, compared with 59.5% and 40.5% respectively a year earlier.
The number of in-force long-term disability schemes increased by 4.2% and the number of people insured rose to 3,053,808 – up 5.2% compared to 2021. The in-force benefits and premiums amounts for this market rose by 3.9% and 8.6% respectively.
Again, the gender split was similar to the previous year, remaining at around a 60%/40% split in favour of men.
The report also showed the number of in-force critical illness cover policies increased by 11.6%, from 5,088 to 5,678 with in-force benefits and premiums amounts rising 9.7% and 11.6% respectively.
Sums assured rose 9.7% from £51.3bn to £56.3bn, premiums increased by 11.6% from £154.6m to £172.5m and the number of people insured increased by 5.6% from 697,304 to 736,570.
In terms of gender split, 55% of policy members were male and 45% female.
Of all in-force group risk policies, 71.2% provide death benefits, 22.3% provided disability cover, and 6.5% provided CI cover.
Incredibly positive news
Keith Williams, head of group risk UKI at Swiss Re and one of the authors, said: “In a year of prolonged political and economic uncertainty, when high inflation plagued consumers and businesses alike, it’s great to see that interest in added value benefits remained high across the board.
“The results for LTDI were particularly encouraging, equating to an additional 150,197 individuals insured at a time when the government is looking to help more workers stay in – and return to – the workplace.
“What’s more, the fact that over 90% of in-force LTDI policies cover fewer than 250 employees demonstrates that the market does not just serve larger employers.”
Katharine Moxham, spokesperson for Grid, added that the UK fast approaching the point where the number of employees provided with group risk benefits via their employer equated to half of the pay-rolled population, was “incredibly positive news” amid a cost of living crisis.
“It is testament to the value employers of all sizes place on protecting families from the financial devastation that death, long-term sickness-absence from work, and being diagnosed with a serious medical condition can bring,” Moxham continued.
“As government continues its focus on encouraging more people back into the workplace and reducing the costs associated with having a significant proportion of the workforce economically inactive, it’s particularly encouraging to see the growth in group income protection, since this product is ideally placed to help employers to achieve exactly that.
“Group risk products provide much more than financial support to people at the worst of times – they also facilitate access to practical help and support which often proves vital.”