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.
The shrinking, more diverse workforce presents significant opportunity, too. This country is approaching a major labor shortage. The growth rate of the U.S. workforce is already decreasing, and the U.S. Census Bureau predicts that the domestic workforce itself may start shrinking by 2016. Not only will the workforce be smaller, but it will be much more diverse, with older workers, females, minorities, immigrants and even teen-agers.
Competition for scarce labor will increase the importance of employee benefit programs that can help attract and retain talent. Offering group disability insurance is a great example of a relatively inexpensive benefit that provides great value.
On another front, the limits to government programsspecifically, to public disability programs such as Workers Compensation and Social Security Disability Incomecan be difficult for most people to access. Also, these programs only cover disabilities incurred in the course of employment or those severe enough to last at least 12 months or result in death. The state and federal bureaucracies that process these claims are overwhelmed by increasing volumes of work and litigation, leading to very long decision times. Add to this the financial issues already faced by the Social Security system, and suddenly private disability insurance looks like a more reliable and accessible solution for many U.S. workers.
In the planning area, Americans in general are saving less. According to the U.S. Department of Commerce, personal savings, as a percentage of disposable income, have decreased steadily since 1998. Its also been well documented that household debt levels are climbing, and a recent Harvard University study revealed that illness and injury are significant contributors to personal bankruptcy.
The result is that most families could not pay their living expenses for very long if a breadwinner became sick or injured without some kind of income protection benefit.
Finally, the employer market is still underpenetrated. Market surveys and other estimates generally agree that up to half of U.S. employees are without disability coverage, and more than half of U.S. employers with 10 or more employees do not offer any kind of disability insurance to their employees. This is especially significant among smaller employers, which have been contributing most of the job creation over the past several years.
The challenge for the industry is to identify these “non-users” of its products and design the right products (group, individual or hybrid) and distribution channels to reach them effectively. The increased interest in voluntary/worksite disability products is a good example of this.
The opportunity is here. To capitalize on it, successful disability insurers will innovate to reach the underpenetrated market. That means developing new products, distribution, service and technology; rebuilding margins and capital through greater underwriting discipline, which will lead to a more stable market for buyers and distributors; and restoring customer confidence by educating potential buyers about the importance of income protection as part of a sound financial plan.
Drew F. King is president of JHA, Inc., Portland, Maine. His e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 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.