The disability insurance industry is at an important crossroads in its relatively short history.
For the past 10 to 15 years, providers of both group and individual disability insurance products have been struggling with a variety of problems, some self-inflicted and some beyond our control. These include:
Commoditization of disability products. This is being driven by intense price competition and distribution strategies that focus on volume.
Lack of awareness. This refers to the dearth of knowledge about the need for protection from the financial and occupational consequences of unexpected injury or illness, especially among consumers. The recent negative publicity about industry claim practices and so-called “bid-rigging” may be moving consumers from lack of awareness to having a negative perception.
Shrinking profit margins. Lack of underwriting discipline, compounded by poor economic conditions for disability insurance (e.g., higher unemployment, lower interest rates, low inflation), and worsening morbidity among U.S. workers, are the chief reasons for this.
Slow organic growth. This has been driven by the churning of in-force cases between carriers (especially in group products), despite significant market potential.
To be fair, there has been some improvement in profit margins for individual disability products, especially those written since the late 1990s. This improvement occurred after massive consolidation in this market during that same decade. (As you may recall, in 1990, there were about 100 carriers writing individual disability insurance; today there are 20.) In addition, many of the surviving carriers made significant changes to their contract forms. However, there has been little improvement in bottom line results in the group disability business.
Despite these issues, the industry does have a significant opportunity for future growth. This is because the need for private disability insurance is greater today than it has ever been.
Here are some reasons why:
First, much has been written about the impending retirement of aging baby boomers. However, not much has been said about the fact that the boomers that wont be retiring soon are older and less healthy each year. The risk of income loss due to disability for this group is significant, and disability insurance should be part of most boomers financial plan.