By Ron Gendreau
Want to sell voluntary disability insurance as well as traditional group disability insurance?
You had better understand how the carriers you work with think about the underwriting considerations. The risk profile of a case changes when employees pay even a small share of the total disability insurance bill, and the risk profile can change in a drastic way when employees pay all of the premiums.
Here are some of the underwriting challenges voluntary disability carriers face along with strategies for overcoming those challenges.
1 Open enrollments: A brokers or employers idea of an “open enrollment” often means giving all employees the opportunity to apply for coverage once a year during a predetermined time frame, with no medical underwriting, for coverage that is guaranteed to be issued to all enrollees. Without implementing risk management tools, this definition of open enrollment makes it difficult to monitor trending on the case and to manage the risk for voluntary cases.
2 Waiving minimum participation requirements: For brokers and employers who want to ensure access to coverage for employees who want it, waiving participation requirements may seem like a relatively simple request. Not so, especially in the voluntary market, where participation rates are typically far lower than in cases where an employer is paying some or all of the premium. In the latter scenario, higher participation means that the risk of the group is spread across a larger and more diverse employee base.
To deliver a competitive quote for a 100% employee-paid plan, a carrier needs to plan on a minimum level of participation. Missing that target by even a few percentage points can amount to a huge gap in a carriers ability to manage the resulting risk, especially if the open enrollment does not include risk management tools. Some carriers will turn down a case that falls short of target participation levels in order to preserve a particular risk management standard; others may choose to keep the case but require long-form medical underwriting or may determine that the percentage of guaranteed issue coverage will be lower than 100%. In any case, falling short of a minimum participation rate almost always spells bad news for the broker, the employer and the carrier.
3 Inconsistent pre-existing condition parameters: Like the definition of “open enrollment,” there are variations on periods related to pre-existing conditions. It is very important that the broker understands this because differing parameters can have a sizable impact on the risk a carrier assumes, which directly impacts the price of the plan.
Some carriers, for example, offer a look back, look forward approach to pre-existing conditions that is more liberal on the front end. In other words, they do not look as far back into a claimants medical history or as far forward into the effective date of the contract to determine if there is a pre-existing condition. This often results in a higher price because the carrier assumes more risk. Likewise, other carriers are more stringent with their look back, look forward periods; the longer the parameters are drawn out, the less risk the carrier assumes and the less the employee may pay for the coverage.
In the voluntary world, carriers need to be cautious with requests to waive pre-existing condition requirements on take-over business because it is difficult to track which employees were covered under a previous voluntary plan in order to apply credit for time served.
Astute carriers who want to deliver more long-term value and fewer surprises at renewal time use their pre-existing conditions clause as a risk management tool.
4 “Rich” plan designs: In a highly competitive market, it may be tempting for brokers to sell based on price or plan options. Particularly in the voluntary market, it is imperative to maintain a balance between delivering affordability and realistic plan design. A carrier that is committed to delivering long-term value will be focused on designing a plan that offers attractive benefits but is not too “rich,” that is affordable but not constructed on the cheap in order to skimp on benefits. Plan design is a critical area for the broker, employer and carrier to discuss and collaborate on, so that each party clearly understands the needs of the plan, the options for meeting those needs, and the impact on both price and the ability to deliver long-term value.
5 Composite versus age banding of rates: It used to be that virtually all carriers quoted based on the employee census as a whole. Today, some carriers make it their practice to quote on an age-banded basis for all voluntary business where participation is less than 50%. This is important for several reasons. Age banding is another risk management tool. It allows a carrier to better balance a plans risk, since the older we get, the more likely we are to become disabled. From a cost perspective, it means that older participants pay a little more, but it can help entice younger employees to participate when their rates are most attractive. In the long-term, the more disciplined risk management can help prevent price spikes, which benefits all participants.
Although composite-rated plans often are considered easier to administer, some carriers are able to offer personalized enrollment forms if complete census data is received up front. This helps reduce the administrative burden by communicating to each participant on a personalized basis about his or her premium and benefits.
6 Increased incidence rates: Employers who contribute toward long-term disability premiums have significantly higher participation rates than do 100% employee-paid plans. The voluntary plans also have incidence rates as much as 50% higher than employer-paid plans. There are 2 primary reasons for this. Higher participation rates mean a better spread of risk in employer-paid plans. Also, employees who know they need or may need access to disability benefits due to a pre-existing condition are more likely to participate in a plan even if they are paying 100% of the premium. Fewer participants, a less diverse risk pool and anti-selection combine to result in higher incidence for voluntary plans.
Despite these challenges to an individual carriers ability to manage risk, deliver affordable pricing and provide value over the long-term, the industry as a whole faces some formidable challenges to long-term success in the voluntary space.
Throughout much of the market, there are minimal risk management tools, and in some cases, no tools in place, allowing anti-selection to occur. Additionally, much of todays pricing is unmatched to the age and other demographics of a case. Lack of underwriting discipline and short-term pricing at the expense of a long-term strategy (whether on the part of the broker, employer or carrier) will only lead to headaches for everyone involved.
The market has not yet widely embraced the fundamental reality that the same underwriting guidelines that apply to employer-paid plans cannot apply to, and will not withstand the risk burden of, the voluntary market. So what is the solution?
Brokers need to look for carriers that care about the long-term prospects for the business. Financial discipline is a key that will determine which carriers do the best job of satisfying customers in the voluntary marketplace. It is critical to a carriers ability to consistently provide a low-cost solution to the employees buying the coverage, and to a carriers own sustainability for the long haul.
Simplified short-form medical underwriting, or “SSMU,” is one tool that is demonstrating real value in addressing many voluntary disability underwriting concerns. It is applied in cases where the broker and employer want to help the carrier manage risk for the longevity of the case. Effectively, SSMU asks each potential enrollee several questions that help the carrier assess the applicants potential risk. The questions are clear and easy to understand, the information helps speed the underwriting process, and the resulting benefits to the employer and the plan participants are substantial.
A carrier using SSMU can relax, and perhaps even waive, its minimum participation requirement on a particular case because it has a more complete picture up front about the risks it will be assuming with the case. In some instances, the carrier can even pass along discounts on other values realized by the plan experience.
From a plan design perspective, SSMU eliminates any concern that upon underwriting review, benefit levels may be reduced from what was originally quoted.
When paired with some carriers pre-existing conditions clause, SSMU can help ensure the affordability and predictability of the plan, and may actually reduce pricing levels.
Ron Gendreau is senior vice president of underwriting and profit management for the group benefits division at Hartford Financial Services Group Inc., Hartford. He can be reached at ?????.
Reproduced from National Underwriter Edition, October 14, 2004. Copyright 2004 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.