by Graham Lee, Ellipse's Chief Actuary
Since launch we have been
championing the use of age related premium rates for all sizes of schemes, we
believe this allows more accurate costing – premiums that reflect the risk that
has been insured over the period of cover, and don’t see the cross subsidy from
the young staff members to the older staff that is typical of unit rated
business.
However, we are aware that
some clients like the fact that the unit rate gives an idea of the cost on the
second year particularly as pay increases are typically easier for an employer
to predict than staff changes. So we’ve had a look at the experience we have
seen on over 700 of our own in force schemes, to see how much the average age really
changes over a year:
While there is variation the majority
are changing by less than 1 year, and the key points are that:
- For small schemes
(less than 500 members) the average age increases by about a quarter of a year
over a scheme year
- For
larger schemes the increase is much smaller, more like half a month per scheme
year
Given an increase in group life rates of around
9% for each year of average age, applying the above results gives an approximate increase in the second year cost of 2.5% for a small scheme and 0.5% for a larger
one.
Many factors, such as an
acquisition, recruitment drive or downsizing, can change the age profile
significantly over the year. What this analysis
shows is that, even where such major events are absent, staff turnover will mean that very few companies will have
exactly the same workforce in 12 months as they do today. An assumption that average ages will – on
average! – increase one year at a time is therefore a long way from what
happens in the real world.
