Chapter 1: The UK group risk market

Question 1

What is group risk?

Answer 1

Group risk encompasses group life, group income protection and group critical illness cover.

Question 2

What is group life cover?

Answer 2

Group life cover provides benefits on a member’s death.

Question 3

What 2 forms can group life be paid as?

Answer 3

1. Lump sum

2. Pensions to spouses/financial dependents or both

Question 4

What is a more accurate name for group life?

Answer 4

Death-in-service benefits

Question 5

What is Group income protection?

Answer 5

This cover provides a continuing income for members who are unable to work as a result of illness or accident.

Question 6

True or False.

Potentially, income payments provided can continue right up to the point at which someone reaches their normal pension age and starts drawing a pension.

Answer 6

True

Question 7

‘Group income protection’ is a relatively recent term. What other names were given to describe this cover?

Answer 7

‘Group permanent health insurance’ or ‘long-term disability cover’

Question 8

Define Group critical illness.

Answer 8

Cover that provides lump sum benefits to scheme members who are diagnosed as suffering one of a list of specified medical conditions

Question 9

Complete the following statement about group risk.

The _______ promises benefits to their _______, but then insures their ________ to lay them by setting up the appropriate _______ _________ ________ with insurers.

Answer 9

1. Employer
2. Employee
3. Liability
4. Group risk cover

Question 10

Why do group risk schemes exist?

Please answer according to M.R CAT.

Answer 10

1. Moral Obligation
2. Relative Value
3. Completion from other employers
4. Attract and retain staff
5. Tax efficiency

Question 11

What are the industry bodies and organisations with influence on the UK group risk industry?

Please answer according to IC AAG

Answer 11

1. Investment and Life Assurance Group (ILAG)
2. Chartered Insurance Institute (CII)
3. Association of British Insurers (ABI)
4. Association of Professional Financial Advisors (APFA)
5. Group Risk Development (GRiD)

Question 12

Authorisation from which organisation will allow U.K. Insurers to write business in the EU?

Answer 12

Prudential Regulation Authority (PRA)

Question 13

‘Long-term disability cover’ is more correctly described as which group risk benefit

Answer 13

Group Income Protection

Question 14

Define the term ‘premium’.

Answer 14

Sum paid to insurer by policy holder such that in the event of an incident, the insurer will pay out a lump sum.

Question 15

What are the advantages of Self-insurance?

Answer 15

1. Avoids the margins insurers have to build into their premiums to cover their costs and make a profit.
2. Avoids insurer being subject to the volatility of changing market premium rates
3. As a result of point 2, the insurer avoids paying for other companies’ poor claims experience

Question 16

What are the disadvantages of Self-insurance

Answer 16

1. Incorrect predictions about future claims could cause financial problems
2. A catastrophic event (e.g. asteroid headed towards earth) could result in large surge of claims and thus can lead to financial problems
3. The company may not be able to take advantage of the exemption from the ‘Employment Equality (Age) Regulations 2006’ that apply to insured group schemes.

Question 17

What is the purpose of a captive insurance company?

Answer 17

A captive insurance company exists primarily to handle the risks of its parent (the company that decided to self-insure).

Question 18

What are the benefits of having a captive insurance company.

Answer 18

1. Vat exempt
2. Domiciled in tax havens
3. Premiums received by captive can earn investment income for group
4. Premiums paid by parent may be eligible for tax relief as a business expense
5. Captives can choose to give cover to risks that would otherwise be rejected
6. Captives can obtain cover from re-insurers (who provide lower rates) so they can then get cover for abnormal risks which helps avoid potential financial disaster for the parent.

Question 19

Insurers are the parties providing the cover under contracts between them and scheme owners. But what are intermediaries?

Answer 19

Intermediaries act on behalf of the scheme owners to obtain the best possible terms from insurers. They will typically help their clients put together complete employee benefits packages.

Question 20

Complete this sentence.

The insurers may transfer some of the risk they are carrying to _________.

Answer 20

reinsurers

Question 21

Complete the sentence.

UK insurers authorised by the _________ _______ ________ to write business in the UK can also write business in ____ _____.

Answer 21

‘Prudential Regulation Authority (PRA)’

‘the EU’

Question 22

What is the Association of British Insurers (ABI)?

Answer 22

The trade association for insurance companies in the UK which represents the collective interests of its member companies. It sets some policy that affects the group risk market - though the original target of the policy was often individual businesses.

Question 23

True of False.

It is compulsory for UK insurance companies to be members of the ABI.

Answer 23

False

Question 24

What is the Chartered Insurance Institute (CII)?

Answer 24

Professional body for people working in the insurance industry.

Question 25

What is the Investment and Life Assurance Group (ILAG)?

Answer 25

Advances the interests of providers and distributors of life, health, pension and investment products in the UK. Open membership to any practitioner in the industry.

Question 26

What is the Association of Professional Financial Advisers (APFA)?

Answer 26

Promotes the value of financial advice and the interests of financial advisers to influential regulators and policy makers.

Question 27

What is the Group Risk Development (GRiD)?

Answer 27

Collective voice of insurers, re-insurers and intermediaries who are active in the group risk market. It authors materials studied by insurance professionals.

Question 28

List the 3 barriers to UK companies doing business in the EU.

Answer 28

1. Need to satisfy local regulations and requirements for other matters (e.g. advertising)
2. Language & culture differences
3. Differences in contract law and taxation

Question 29

Complete this sentence.

Insurers may not wish to cover ____ risks. So UK insurers __ __ generally provide cover for employers _____ the UK.

Answer 29

non-UK
do not
outside

Question 30

Why did multinational pools come about?

Answer 30

Because premium rates in continental Europe and elsewhere were set according to tariffs laid down by local governments in conjunction with local insurers. This ensured that the premiums charged by insurers were sufficient to make the risk of insurance companies failing minimal.

Question 31

Define multinational pooling.

Answer 31

A financing mechanism that can reduce the cost of insured employee benefits through the payment of multinational dividends by combining policies in more than one country under a multinational pooling programme. It allows multinational companies to combine insured employee benefits plans in 2 or more countries within an agreement. An aggregate account for the whole pool is then created showing the overall premiums paid minus claims. If a surplus remains, it is paid out as a dividend to the multinational client.

Question 32

What are the 2 different methods of pooling?

Answer 32

1. Stop-loss arrangement

2. Loss-carry-forward method

Question 33

What is a stop-loss arrangement?

Answer 33

Where any loss will be written off immediately and each year’s pooling account is created without any regard for what has occurred in any other year.

Question 34

What is the loss-carry-forward method?

Answer 34

Allows for the pool manager to carry forward any loss to subsequent years, but this will often have a proviso that losses in one year are written off after, say, five years if the pooling experience has not in the meantime been good enough to offset them.

Question 35

Depending on the method used in a multinational pool, what charge does it determine the size of?

Answer 35

Risk retention charge.

Question 36

What are the advantages for the client in a multinational pool?

Answer 36

1. Possibility of money back from pool without having to pay any additional premium
2. Receives global management information about its employee benefits schemes.
3. Where pool is operated by single insurer, it may offer more liberal underwriting terms based on the size of the worldwide pool. Thus it is easier for members who require underwriting or for employees to relocate as the need to re-underwrite them each time has been removed or diminished.
4. Dividends arising from the pooling arrangement can normally be paid to the most tax favourable location.

Question 37

What are the advantages for the insurers within pooling networks.

Answer 37

1. Enables local insurers to win some group risk business, they otherwise wouldn’t have access to
2. Increase in volume of premiums offsets any reduction in profit margin from pooling dividends
3. Pooled business tends to ‘stick’ more than un-pooled group risk business, as they get to keep the multinational pooling arrangement and its benefits. So insurer can be more confident of its future income stream.

Question 38

What are the disadvantages of multinational pooling?

Answer 38

1. Internal politics of multinational organisations
2. Local subsidiaries may have a good relationship with one insurer but has to end relationship to move to a different insurer that participates in the pool - as instructed by parent company.
3. Price of cover available locally to subsidiaries may not be as good with a network pool partner vs other insurers.

Question 39

What is the difference between a stop-loss arrangement and loss-carry forward method?

Answer 39

In a stop-loss pool, any losses (excesses of claims over premiums) are written off each year; in a loss-carry-forward pool, any losses are carried forward to the next year’s accounts.

Question 40

Which insurance company is the largest writer of group risk business in the UK

Answer 40

Canada Life