15 August 2019
To answer this question, we need to consider a critical issue facing insurers when selling life insurance to individuals.
One of the biggest risks to the insurer is when the potential client takes out the insurance knowing that they are likely to claim from the insurer in the near future. E.g. they take out disability insurance knowing that they are suffering from depression and may well be able to claim from their disability policy in future. This is commonly known in the industry as anti-selection. Insurers need to protect themselves against these anti-selection claims and therefore do extensive medical and financial underwriting before issuing the policy. They also have policy terms and conditions which try to prevent these types of claims which are often confusing to the client and potentially lead to prolonged disputes at claim stage. This leads to additional costs for the insurer, making life insurance expensive particularly for individuals requiring relatively low levels of cover as the administration costs become a significant part of the total premium.
These problems are largely avoided when life insurance is provided by an employer to their staff, for the following reasons:
• The staff member is not electing to get the insurance for themselves. It is the employer who is choosing to provide this cover for their staff. So, the issue of anti-selection is largely avoided. Group insurers may still need to protect themselves when very small employer groups are taking out the cover, or they are providing very high levels of cover for certain staff.
• The level of cover is usually related to the level of salary for each staff member. This effectively reduces the risk of over insurance for individuals who are more likely to claim in future. This in turn reduces the need for extensive medical and financial underwriting. It also naturally provides a hedge again inflation eroding the value of the cover.
• Only staff who are actively at work will be covered under the group insurance arrangement. This is an effective way on ensuring that the person insured is fit and healthy when the cover is taken out.
By reducing or eliminating all forms of underwriting, group insurance is not only simple to implement, it also makes the cover easier to understand, with a result of fewer disputes at claims stage. And given the simplicity of implementation, low on-going administration costs and the natural selection of relatively healthy lives, the insurer can provide appropriate levels of cover at very competitive premiums. This makes group insurance very cost effective, particularly for middle and lower paid staff members.
Zestlife offers lump sum group life, disability and funeral cover to small and medium size businesses. Lump sum cover amounts can be chosen by the employer as a multiple 1,2,3,4 or 5 times of each employees’ gross annual salary.
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Managing Director at Zestlife