Group Long Term DisabilityRecent HistoryInsurers have been competing aggressively for group LTD market share since the end of the last decade. Most have used a strategy combining pricing discounts, extended rate guarantee periods and offering enhanced benefit features that have traditionally been available only in individual disability contracts. As was the case in the individual LTD market, low prices, extended rate guarantees and too liberal plan designs have led to high group LTD losses. These losses are now causing many LTD insurers to retract from the market or raise prices significantly. The Marketing of Group LTDThe lure of high profits has attracted many insurance companies to the group LTD market. Most LTD carriers made windfall profits when interest earnings on premium reserves were high. Historically, group LTD profits have also far outpaced health care earnings. With many medical insurers fearing that new health care legislation might limit or eliminate their health care business, marketing more group LTD appears to be a practical way to maintain their overall earnings goals. Even as LTD results have declined, many insurers remain attracted to group LTD business. Because the group LTD market is perceived to be under penetrated (50%), some insurers feel that by selling product features to first time LTD customers, rather than a lower prices to existing LTD policyholders, they can overcome temporary losses. However, the marketing results of LTD in recent years suggests that the 50% penetration figure is a fairly accurate estimate of the saturation point for the group LTD market. The remaining industries without group LTD policies consist mostly of poor LTD risks and customer groups less likely to buy LTD: industries characterized by low wage earners, high turnover, and union plans focusing exclusively on medical and dental benefits. In a few cases, some specialty insurers have had success marketing LTD to the less traditional customer (blue collar, municipalities, etc.) and have gained profitable "niche" market share that way. Overall, however, the non-traditional markets have proved to remain a poor source of profits for the insurance industry as a whole. There simply aren't enough "niches" to sustain a profitable, industry-wide marketing effort. Some group LTD insurers have increased their market share significantly in terms of the numbers of new firms written. Most, however, have been selling new, smaller firms that have been growing concurrently with larger firms downsizing. For the most part, the bulk of new LTD premium sales comes from insurers taking existing LTD accounts away from their competitors. In recent years, this has been accomplished with the strategy of lowering prices in order to "make an investment" in various markets; a generally unprofitable euphemism for buying business with low rates. In most cases, these "investments" have inevitably led to rate increases at the end of their rate guarantee periods. 24 Hour Care and Disability ManagementGroup Health, Disability and Workers Compensation insurers are expending considerable resources examining new and effective ways to co-manage medical and disability claims within a single program referred to as "24-Hour Care." While many obstacles both practical and legal exist to creating a seamless, unified plan design, several carriers and provider organizations have created administrative links between the existing group and workers compensation programs to more effectively manage disability claims. Applying occupational therapy and loss prevention guidelines from Workers Compensation programs to group disability claims is an example of an advantage 24-Hour Care offers. Changing the Paradigm: New Definition of Disability GuidelinesGroup LTD coverage has been traditionally based on a definition of disability that is determined by an insured employee's inability to perform the duties of either their own occupation or the duties of a similar occupation for which they are well suited based on training, education and experience. Newer concepts propose linking disability benefit qualification to the insured's inability to perform one or more of the generally recognized six Activities of Daily Living (ability to bathe, dress, use toilet, transfer body weight without assistance, continence and take nourishment unassisted). Additional guidelines evaluate cognitive impairments that limit a person's ability to make deductions or conduct their own affairs. These guidelines provide a less subjective way to evaluate a person's disability rather than trying to determine whether or not an insured is able to meet the requirements of performing a specific job. The Future of Group LTD InsuranceAs long as insurers continue to compete based on lower price, higher benefits and extended rate guarantee periods, it is doubtful that many LTD plan sponsors will consider revising their plans on their own. However, with LTD underwriting losses increasing by 10-15% per year, it is equally doubtful that many carriers will be able to continue to offer their programs at current pricing levels much longer. Relatively soon, LTD earnings will drop low enough to cool off the hypercompetitive attitude of the marketplace. Recent rate actions among major group LTD insurers suggest this change has already begun. Once this trend accelerates, most plan sponsors will be forced to revise their thinking regarding LTD plan design and plan funding. Additionally, consolidations among the major LTD insurers will curtail the current competitive nature of the market even further. The result will be fewer insurers to choose from at lower benefit levels and higher prices. New, more effective approaches to disability management will emerge as 24-Hour coverage moves off the drawing board and into reality and changes in the attitudes of how disabilities are defined and managed occur. Future LTD contracts will reflect these changes in the long term disability insurance market. Effective Strategies for Plan SponsorsEmployee benefit LTD plan sponsors should prepare now for the changes in the LTD market that are already beginning by taking the following steps: - Make sure your LTD disability policy provisions are consistent with your company policy regarding absenteeism and loss control. Don't buy an extended "own occupation" definition of disability provision, just because it was included as part of a "competitive quote". Do it only if that is how you want all of disability claims handled and that is consistent with your personnel policy. A better alternative would be to explore the newer forms of LTD policies that are coming into existence. Incorporate these ideas into a comprehensive approach to disability management; both occupational and non-occupational. Get your Workers' Compensation carrier involved.
- If you are now in the process of purchasing a new LTD plan, do not add liberal benefit provisions just because the cost appears to be affordable now. That will quickly change. Those benefits will either become unaffordable or will simply be excluded from your policy at some point in the future.
- If your current LTD policy is already too liberal in design or costly, reduce benefits carefully; negotiating aggressively for a lower price with your insurer for each reduction you make. Maintain the most visible plan features of your plan: the benefit replacement ratio, maximum monthly benefit payment and the disability waiting period before benefits begin. The other plan features can usually be changed without notice or concern.
- Make sure your group LTD policy is placed with a reputable insurer with top financial ratings from at least three of the four major rating companies (A.M. Best, Standard & Poor's, Duff & Phelps and Moody's Investor Service). LTD is an especially long term liability; a claim can persist for 20-30 years or more. It is crucial that your LTD insurer will be there to pay the entire claim. Even the state guarantee funds won't cover the extended liability of even a moderately sized LTD claim.
While the changes in the LTD market pose challenges for insurers and insured alike, acting now will not only avoid future problems in LTD benefit plan management, but will proactively deal with an often neglected aspect of disability benefit management that directly impacts on the most important personnel issue facing all employers - productivity. |
