Integrated group disability insurance programs work–but only if they include a traditional claim review process.
A rigorous claim review process can help hold down costs and make the product more attractive for insurers, employers and the insurance professionals who place the coverage.
Traditionally, insurers have sold group short-term disability and group long-term disability plans as two distinct products.
The contracts have had obvious differences in features, but they also have applied different eligibility criteria and experienced different rates of claims.
A typical STD policy, for example, provides benefits for non-occupational disabilities and has a claims frequency of 70 to 75 claims per year for every 1,000 employees covered. Short-term disability benefits pay up to 70% of the claimant’s salary and can last up to six months.
A typical LTD policy covers both occupational and non-occupational-related disabilities, with three to five claims per year per 1,000 lives covered. These claims typically are covered to normal retirement age and pay up to two-thirds of an individual’s income.
Most carriers have managed STD claims and LTD claims separately and have made only minimal efforts to package STD and LTD coverage together.
In the 1990s, group disability insurers tried to create greater value for group disability customers by selling new, integrated, “24-hour” disability insurance packages. The packages were supposed to deliver “seamless benefits” incorporating STD coverage, LTD coverage, workers’ compensation insurance and, in some cases, medical insurance.
The integrated group disability product attracted more buyers to the market and helped to bridge the gap between the various disability products.
However, unintended consequences resulted from discounts on the integrated product, the lack of a benefit payment gap between the day STD coverage ended and the day LTD coverage began, and the blurred review lines between parties responsible for different types of claims management.
In essence, the transition from STD coverage to LTD coverage became so seamless that it created an artificial fast track for LTD claims approval. Claims managers had fewer opportunities to assess each claimant’s situation and benefit eligibility.
Because claimants were not required to reapply when shifting to the LTD coverage from the STD coverage, less emphasis was placed on reviewing the short-term claim when coverage ended. That decreased the motivation for claimants to recover and get back to work.
With the traditional claim management review process eliminated, carriers saw rising claims costs that hurt their bottom lines. Assurant Inc., New York, looked at claims for the period from 2001 to 2005 and found that the level of claims for the integrated product was 26% worse than the level of claims for the stand-alone product.
Many other carriers experienced a similar increase in claims cost. Many removed the discount on the combined product, and some added a load to the rates.
Continuing to develop product packaging that makes it easier for customers to work with group carriers should remain a priority in the industry. The simplicity and efficiency of administration created by bundling related products makes perfect sense for group disability insurance. Offering employers one contract, one bill or one service contact person can be a competitive advantage.
However, failing to apply a distinct claim review process for each product is not an effective means of evaluation. While fully integrated product offerings may appear at first glance to be advantageous to the customer, the incidence and cost of claims are higher than expected, and that drives up costs at renewal.
Carriers can achieve profitable market growth and please customers by packaging integrated products with a more traditional claim review process. The traditional claim review process works, and adhering to this proven review model will help the “new” integrated disability programs succeed.
Here are three other steps carriers can take to strengthen integrated group disability programs:
–Train STD claim examiners in job modification techniques that can help claimants return to work.
–Conduct an early LTD review midway through the STD claims duration to flag potential LTD claimants.
–Conduct a second full medical review before accepting LTD liability, to verify that the claimant’s disability condition has continued and meets the LTD contractual requirements.