Dealing With Some Common Problems In Voluntary Disability Programs

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For group carriers, the transition from contributory to voluntary disability plans has brought to light some important lessons on the changes that occur when employees pay 100% of the cost.

While various trends have made these products attractive to employers and carriers over the last five years, many have discovered that this new opportunity is also filled with challenges. Not all forays into this market have been successful.

Heres a short list of some of the most common hurdles associated with voluntary disability plans and some steps insurers can take to get beyond them:

Low Participation: Struggling voluntary programs often have low participation as a root cause of their ills. To risk stating the obvious, adequate participation must be achieved in order for a voluntary disability program to succeed.

Poor participation can result in an insufficient spread of risk and dramatically increases the chances of adverse selection.

Carriers often fall into the trap of thinking that they can price for any level of participation. However, when the demographics of the enrolled employees differ significantly from those of the overall employee population, the resulting exposure plus the effects of adverse selection can overwhelm pricing adjustments.

Steps a carrier can take to achieve adequate participation and spread of risk include establishing employer buy-in, emphasizing one-on-one communication with employees, developing effective marketing materials and using a simplified enrollment process.

Poor Persistency: Expense losses associated with large acquisition costs and high lapses in the early years often undermine profitability.

Voluntary products can have very high expenses in the first year due to front-loaded commissions (e.g., 40% to 60% of premium) and other acquisition costs. Because of this, persistency is one of the biggest drivers of profits.

Here, the business can lapse for one of two reasons: individual certificate lapses or the termination of an entire group. Either represents a significant expense risk during the early policy years that can be even greater than the morbidity risks.

Carriers can mitigate this potential, to some extent, by avoiding market segments with high turnover rates and carefully managing renewals to avoid “shock” lapse rates at the end of the rate guarantee periods.

Open Enrollments: A lack of discipline around open enrollments can open the floodgates to adverse selection.

Open enrollments usually do not make sense if there is already good participation or very little chance of improving it significantly.

Otherwise any new enrollees are likely to be high-risk individuals. If open enrollments are allowed, rules and conditions must clearly be defined to limit the carriers exposure.

Examples of such conditions are medical underwriting, limited benefits, and pre-existing condition exclusions on new enrollees or increased benefit amounts.

Complex Product Design: Offering a voluntary disability product with several options or choices may seem like a great way to tailor a product to each individuals needs, thus making it more attractive and encouraging high participation.

Instead it often has the undesirable effect of creating significant anti-selection risk. If the product is perceived as too complicated to understand, participation is likely to be low. In addition, those employees who do enroll may select against the carrier by choosing the richest option.

Disability is already a complicated product; with a voluntary plan it is even more important to keep it simple.

Bad Distribution Fit: Another common mistake is to assume that all worksite products and worksite brokers are the same.

Simply rolling out a voluntary disability product through your existing distribution channel may not be effective.

Whether using employee benefit brokers, worksite brokers or worksite specialists, the chances of success vary greatly depending on how well a distributors practices, experience and compensation requirements line up with a carriers target market, product design and service needs.

Producers who spend little time on voluntary products will require significant training and support from the carrier.

On the other hand, producers who specialize in worksite products typically will offer several types of services to the employer and carrier such as handling enrollments, consolidated billing and even claims administration.

The choice of distribution method, its cost, and the value it adds need to be considered when designing and pricing a voluntary disability product.

Inadequate Enrollment Methods: Participation levels and profitability are tied directly to the effectiveness of a carriers enrollment methods.

One-on-one meetings are preferable, but group meetings may suffice if there is sufficient support from the employer and adequate marketing materials.

The success of either method hinges on the ease and simplicity of the enrollment process for the applicant. Employees are not apt to sign up for fully contributory coverage if the carrier makes it difficult for them.

Effective enrollments can be accomplished by taking advantage of technology such as personalized enrollment forms, laptop illustrations and enrollments, enrollments conducted through the Internet or intranets, call centers, interactive voice response systems, electronic kiosks and electronic signatures.

The presence of any of these problems in a voluntary disability program can result in quickly disappearing profits under the weight of first-year expenses and adverse selection. But these challenges can be met with proper planning, product design and discipline.

, F.S.A., M.A.A.A., is actuary, disability reinsurance, for ING Res group reinsurance operation in Minneapolis, Minn. He works with both short-term disability and long-term disability products.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 19, 2003. Copyright 2003 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.