Close Close

Life Health > Life Insurance

Voluntary Disability: Reject More, Cover More

Your article was successfully shared with the contacts you provided.

MIAMI–Tougher underwriting procedures for disability insurance in the voluntary market could make the product more profitable and cut rates for healthy workers, a group disability executive says.[@@]

Ron Gendreau, senior vice president for group profitability management and underwriting at Hartford Life, Simsbury, Conn., talked about the value of “simplified medical underwriting” in the voluntary disability market at a disability conference here organized by JHA Inc., Portland, Maine, a disability insurance reinsurer and consulting firm.

Gendreau described SMU as a strategy for helping voluntary disability insurers defend against antiselection, or the risk that only the sickest workers will be willing to pay for disability coverage.

Traditionally, one of the main strategies voluntary disability insurers have used to minimize the effects of antiselection is to require that a minimum percentage of a company’s employees participate.

But for a plan that offers voluntary disability coverage on a guaranteed issue basis, “I don’t believe that 25% participation protects you,” Gendreau said.

Brokers often persuade insurers to bend rules on minimum participation levels. If a plan guarantees coverage to all applicants once participation reaches a certain level, then rates have to be high enough to protect the insurer against the likelihood that many applicants are “a claim waiting to happen,” Gendreau said.

Chuck Meintel, JHA’s chief group actuary, presented an analysis suggesting that even mild antiselection can eat up about a quarter of the projected profits at a typical voluntary, guaranteed issue plan.

Today, even though voluntary LTD exposes insurers to more risk than traditional LTD does, voluntary LTD costs only about 25% more than traditional LTD for business already in force, and voluntary LTD costs only about 18% more than traditional LTD for new cases, Meintel said.

The narrower gap for new sales means that “we have a competitive market where people are trying to buy share,” Meintel said.

Hartford Life is trying to prevent antiselection and improve group disability profits by asking applicants a series of simple questions about their health, Gendreau said.

When applicants report that they have been diagnosed with heart disease, cancer or other serious conditions, Hartford Life requires that they go through a full medical underwriting process.

Only a small percentage of the applicants who bother to go through the medical underwriting process end up qualifying to buy coverage, Gendreau said.

Although the SMU process can knock out more than a quarter of voluntary disability applicants, Hartford Life has found that it can cut actual claims experience to less than 85% of the expected level of claims experience, Gendreau said.

“We’ll offer discounts to employers that use this approach,” Gendreau said.

Because SMU can give an insurer the confidence it needs to offer a big majority of workers lower rates, it can end up increasing the affordability and attractiveness of coverage for healthy workers, Gendreau said.

Although guaranteed issue has a place in the employer-paid group insurance market, making healthy employees subsidize the cost of coverage for sick employees seems to be a bad idea when the healthy employees have to pay for the coverage with their own money, Gendreau said.

Some disability insurance executives in the audience suggested that some employers, such as owners of smaller companies, may have a strong preference for making coverage available on a guaranteed issue basis.

But Gendreau said he found while working for a longtime user of SMU procedures that employers were open to hearing about SMU.

“Brokers are actually the slowest ones on board,” Gendreau said.