Solving “Concentration Risk” on Group Protection

In the famous song, the Rare Old Times, we hear about a city that is going through a time of change. The protagonist talks about the new developments including the “glass cages that spring up along the quay”. While these words were written in the 1970s, they could easily have been written about Dublin today. Due to regular new job creation, Dublin, and the rest of the country, have seen recent significant development. This is great news for Ireland and presents plenty of opportunities for brokers in the field of Group Life and Group Income Protection cover for employees. However as more and more employees become based in centralised areas, this introduces “concentration risk” for life insurers providing these benefits. It is therefore important to understand the impacts this may have and be aware of innovative solutions to ensure value for your clients.

In recent years, we have got used to regular announcements about new jobs and aspirations to build new headquarters in Ireland. This has led to large scale commercial property development across Ireland in cities and business parks. Take the example of the IFSC. Now over 30 years old, its continued success is demonstrated by the fact there are in excess of 38,000 employed there. With Phase 3 underway, the IFSC is still expanding. Thankfully it is not just the IFSC that has seen growth - we have seen continued development within Dublin City, its suburbs and also across the rest of the country in a number of regional hubs.

This great news for the country presents opportunities for brokers to consider the life insurance needs for employees of growing or newly established companies. As employee benefits becomes a key way to attract and retain staff, it undoubtedly means the Group Life and Group Income Protection benefits should be top of the agenda for discussion with employers. 

 

Understanding the Group Protection opportunities and concentration risk

Brokers are best placed to advise employers on Group Protection needs. This includes advice on the form and type of coverages e.g. lump sum life versus dependants pensions, income protection etc. As part of this, they should be aware of the impact of benefit design on insurers’ risk capacity and the associated impacts on price. For example, as the number of insured lives within a given area increases, this may lead to “concentration risk” for insurers. Concentration risk is the risk that arises when there is a significant build up of insured lives within a small area. This could for example lead to large losses if there is some form of “catastrophe event” within this area. A catastrophe event is any event which leads to multiple deaths from the same cause within an area. Insurers will naturally want to control this risk.

For example, this may mean charging a higher premium as concentration risk increases – this is similar to how a unit linked investor may demand higher returns from riskier investment funds. Alternatively, it may mean not being willing to quote at all for new cases if an insurer has exhausted its concentration risk appetite within an area. It is therefore important for brokers to be aware of this issue, investigate innovative solutions and consider how best to ensure value for your clients. 

Global solutions to deliver value for your clients

One of the key aims in elipsLife’s market entry was to be able to help brokers offer innovative solutions in the Group Life and Group Income Protection markets to their clients. This new market entry opens up a significant new source of capacity for the market. We are aware of the potential concentration risks that may arise – to solve this, with our strong pedigree as part of the Swiss Re Group, we can build on what has been successful in other markets. 

 

Looking to other markets, this risk concentration issue has been mitigated in part through the introduction of an “event limit”. The way an event limit operates is to impose a maximum sum insured payable in case of a single catastrophic event within a defined area. While this may limit how much can be paid in the event of a catastrophe event, it will ultimately lead to a lower price for your clients and continuing access to insurance cover.

Event limits have worked well in other countries. They mean a lower price for your clients – both related to a lower risk as well as meaning more availability of insurers to quote on a case yielding a more competitive environment. As an event limit does include a restriction on catastrophe events, a key item to understand is what level this is set at. To ensure your clients benefit both from access to insurance cover as well as being protected in most circumstances, the event limit should be set at a significantly high level.

Outlook
The growing employment market and development presents opportunities for brokers. Group Life and Group Income Protection needs should be at the fore of brokers minds when advising employers as these will be part of a suite of features key to attracting and retaining staff. It is important that brokers are aware of the growing concentration risk that may arise for life insurers and how this can be mitigated. It is innovative solutions to this concentration risk such as event limits which will ensure continuing capacity in the market and value for your clients.