Dealing With Some Common Problems In Voluntary Disability Programs
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.