To Excel With Worksite DI Products, Understand Differences Between Them

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It is easy to fall into the trap of thinking that disability insurance is all the same. But when it comes to worksite products, that kind of thinking can influence how insurers view your business and can cause unstable premiums for your clients.

By understanding the differences between worksite disability products, you can help your clients get the right products and have insurers aggressively seeking your business.

In general, those worksite disability products that use group enrollment meetings and take a true group approach to underwriting achieve an average 35% participation rate. Thats not bad. But the worksite disability products that use one-on-one enrollments and underwriting typically do even betterthey generate an average participation rate of about 45%.

It is the second category of worksite disability that is the topic here. The question is: How do you reach the target participation rate of 45% (or more)? Its simple: Be sure your client offers an appealing contract to all employees of the group.

How do you do that? Look for a contract that features a 100% all-source benefit that allows the employee to receive up to 100% of pre-disability income from all sources (Social Security, workers compensation, etc.) before offsets begin. This feature encourages employee enrollment.

But how do premiums remain affordable when the claimant is receiving up to 100% income replacement, you ask. In reality, offsets are rare, since most worksite disability products sold offer non-occupational coverage and a benefit of less than 12 months. Social Security does not usually kick in until after five months, limiting possible offsets. Furthermore, non-occupational benefits do not pay work-related claims, eliminating even more offsets.

Thus, the 100% all-source benefit does not create a strong liability to the insurer. As a result, the insurer will not add a huge pricing load because it does not have a high degree of concern that the 100% benefit will deteriorate the risk.

The result? High participation and stable premiums.

Other affordable provisions that influence high participation include portability, survivor benefits and waiver of premium.

At the same time, recognize that contracts that feature a limited pre-existing condition benefit may have more volatile pricing due to the associated risk implications. This feature pays a reduced benefit for a six-week period if the employees disability is the result of a pre-existing condition.

The net effect of this benefit is often a dramatic shift in expected demographics. Enrollments usually result in a significantly higher female composition than may be priced in some short elimination period products.

The pre-ex benefit is obviously attractive to any employee who may currently have a medical condition and anticipate absence from work for that medical condition; women who are pregnant especially like this benefit.

But remember: While this benefit may increase participation, it also brings the incidence rate up among the entire population and will wreak havoc on risk and premium stability in future renewals.

As a producer, you need to understand what goes into pricing the worksite product. Be aware that as much as 50% of pricing is for non-claim costs–commissions, overhead, marketing, and premium tax. While unheard-of for true group disability, non-claim costs of 50% of premium are entirely normal and expected for worksite products and heres why.

Worksite insurers assume a very high acquisition cost in the first year, since most brokers charge 40% to 60% in first-year commissions. In addition to high commissions, enrollment materials are a considerable drain of first-year premiums. Deferring too much expense to future years can be dangerous for an insurer if persistency is lower than anticipated. Worksite insurers must be conservative in their expense pricing, since it is so costly when coverage is moved prior to the originally anticipated end date.

That also explains why it is so vitally important for worksite insurers to provide quality service to brokers and policyholders. Because so much of an insurers investment is tied up in first-year premiums, an employer that changes coverage after one or two years brings the insurer into a significant deficit position.

For this reason, in an effort to retain clients, worksite insurers typically offer excellent service. As a result, these insurers have a limited list of brokers they do business with, and they are serviced like royalty. These brokers understand the importance of keeping clients with one insurer for multiple years, and are rewarded for doing so.

How do producers get on that top brokers list? By focusing on the clients best interests, rather than carrier-hopping to increase commissions.

The market is very under-penetrated and has tremendous growth potential. Producers who understand how worksite products function will profit and gain credibility in the industry, while their clients will get what they need: stable premiums and excellent service.

is vice president-underwriting and client development for Disability RMS, a Portland, Maine provider of disability reinsurance services owned by CORE, INC, Irvine, Calif. E-mail him at: gdulac@disabilityrms.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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