According to 2012 U.S. Census data, there are more than 21 million U.S. households with earnings between $100,000 and $200,000 annually, and more than 48 million households with earnings between $35,000 and $100,000. The first tier of households is comprised of the nation’s most affluent consumers and a coveted market segment that is targeted by the financial services industry for a wide range of products. The second tier is the core of what many would consider to be the middle-income market. Much research is currently being conducted to better understand the behaviors and opportunities of this segment as it relates to financial products -- including Individual Disability Insurance (IDI).
Today, the top tier of the IDI market is dominated by a handful of carriers focused on the most affluent consumers, including physicians, dentists, other fee-for-services professionals and certain high income occupations. It is a highly competitive market segment built around sophisticated and relatively expensive product offerings. While sales activity is brisk in this market, overall sales have plateaued in recent years. Market share is often traded between a few key players from one year to the next. Future growth for these carriers may require a broader view of the market for IDI products in order to include more middle-income consumers.
In fact, a number of the top tier carriers have taken the first steps in this direction, introducing new or repackaged product concepts that may appeal to middle market consumers. These actions are based on the recognition that simply making existing IDI products available to a broader group of consumers may not capture the potential for growth within the middle-income market.
The refined product features that drive sales in the top tier IDI market segment are based on noncancellable policy forms with fixed guaranteed rates. These products often provide elements of protection that are designed to cover highly specialized occupational duties, and provide such coverage over an insured’s normal working life. Underwriting is extensive on the front end, and due to the nature of certain product features, claim processing can be complex and time consuming. This combination of rich benefits and their associated costs result in products that are likely to be too expensive for the middle-income market. Premiums per policy can exceed $2,500 per year.
Moreover, the most highly valued features of the top tier market may not benefit the salaried employees or hourly wage earners who are at the core of the middle-income market. For example, a definition of disability that provides protection based solely on current occupational duties or features that provide extended benefits for partial disability may have no relevance to the middle market. Typically, these features are designed for occupations that require highly specialized education and/or skills.
In general, middle market IDI products may need to be simpler to provide both value and affordability – a reasonable price correlation for middle-income consumers may be premiums in the range of $600 per year. Products that are built around benefits for total disability – the inability to perform the duties of any reasonable occupation – combined with short-term benefits for partial disability may be wholly appropriate and acceptable in this market. Furthermore, simplifying products can help keep prices down by lowering underwriting expenses and other administrative costs.
As noted above, a few of the top tier IDI players have already taken steps to increase sales in the middle-income market. At least two carriers have repackaged existing traditional IDI products in an effort to appeal to these consumers. Another carrier has introduced an innovative product concept that pays a lump sum benefit for a qualifying disability, after which the policy terminates. Others may have products on the shelf that might meet the needs of the middle market with a little tweaking, should they choose to pursue such opportunities. As IDI carriers explore the middle market opportunity, it is likely that alternative product concepts will be considered.
Marketing to the middle
Solving the product design and pricing issues may be the easy part of capturing the middle income market opportunity for IDI carriers. A bigger challenge may be to simply reach those consumers. Even if it was practical to offer identical products in either the top tier or the middle markets, it is unlikely that the most current IDI producers would pursue business across such market boundaries. Producers tend to focus on specific market segments for many reasons, including market familiarity, financial compensation, personal preferences and even social status. Face-to-face selling remains the predominant means of interaction with potential buyers for the majority of IDI producers.
There are some IDI carriers that have traditionally been considered to have a middle-market focus. Overall, the sales of these carriers have lagged far behind those of the top-ranked IDI carriers. Known for their willingness to take blue and gray collar business, they capture a small fraction of what may be a big market. Far more robust is the sales activity of carriers focused on worksite products.
Worksite carriers offer voluntary products to occupation classes and income categories far below that for which IDI carriers may have interest. The typical worksite disability products are hollowed out versions of most IDI offerings and often distinguish between on-the-job or off-the-job disabilities. These policy forms are usually guaranteed or conditionally renewable, which lack the premium guarantees of top tier IDI products. Benefits periods are generally short term and may be offset for benefits payable by government programs such as workers compensation and Social Security. The conditions of renewability may include continuous employment with a sponsoring employer.
Existing middle market research has demonstrated that many consumers look to employers for access to financial products, including disability coverage. To this point, a number of top tier IDI carriers offer products that target their traditional markets through special employer-sponsored “multilife” programs. Designed to supplement group Long Term Disability (LTD) coverage and targeted at incomes in excess of $75,000, these programs often include guaranteed issue underwriting. It can be argued that these programs may already capture a portion of the upper middle-income consumers. Expanding multilife programs to include somewhat lower-income segments may be one conduit to increased middle-market sales for some IDI carriers.
New era of digital dollars
Given the many changes that are occurring in the insurance marketplace, especially the manner in which consumers interact with carriers, there may be other distribution opportunities for IDI carriers to consider. The creation of state and federal exchanges for the purchase of health insurance has inspired the creation of employer-sponsored “private exchanges,” from which employees can select a range of benefits – including disability insurance.
While life insurance has had an Internet presence for many years, automobile and health insurers are leading the way to online sales and service. The rapid transition from desktop and laptop computers to mobile devices as another means of engaging with customers will also be transformative. Regardless of the means of engagement, consumer education about the need for IDI coverage will be key to the industry’s success in the middle-income market segment. Top tier IDI marketing and sales narratives tend to be product centric. In the medical and dental markets for instance, buyers tend to be well versed in the purpose and value of the most highly touted product features. This knowledge is acquired through exposure to targeted media such as medical/dental practice journals, professional association publications, as well as the frequent solicitations of IDI producers who work these markets. A product laden market approach may work in the professional markets, but it may not be appropriate for the middle-income market.
In contrast, it is unlikely that the typical middle-market consumer would not be exposed to disability products in any detail, if at all. Very few are solicited for coverage and many who have coverage through an employer may not understand what they have or how it works. Marketing to this segment needs to target different sensibilities and very basic financial priorities, such as covering the expenses of daily living or maintaining home ownership in the event of disability. The focus should be on the benefits of having coverage rather than the nature of the product features. In a phrase: Keep it simple.
It may be accurate to say the middle-income market is underserved for IDI products. However, broadening the IDI market by pursuing middle-income consumers may take a meaningful effort on at least a couple of fronts. First would be to design products that are attractive and affordable to the market, followed by a strategy for marketing and distribution. With the potential to reach millions of consumers who may never have been approached about IDI coverage, it is an opportunity that should not be ignored.