Disability Insurers Scrap For

Disability insurance company executives and producers expect 2007 to be another year when they will celebrate slow, steady growth of the demand crumbs left by skyrocketing health insurance rates.

Health insurance “is not even a 900-pound gorilla anymore,” says Bob Taylor, executive director of the Council for Disability Awareness, Portland, Me. “I call it the 1900-pound gorilla.”

Because of the skyrocketing cost of major medical insurance, “disability gets less and less shelf space,” says Christopher Jerome, senior vice president of disability group underwriting operations at UnumProvident Corp., Chattanooga, Tenn.

Even in the individual market, moderately affluent self-employed professionals and small business owners may find that paying for high-quality family health insurance tempts them to skimp on disability coverage.

Even when consumers have both health coverage and disability coverage, rising deductibles, co-payments and coinsurance rates could backfire, by causing some insureds to go without needed care, says Drew King, president of JHA, Portland, Maine, a disability insurance consulting and risk management firm.

Some disability insurers may make more active efforts this year to do something about the 1900-pound gorilla.

In 2007, “I think we’re going to see more and more focus on healthy lifestyles,” Taylor says.

What else could happen in 2007?

2. Interest rates could go up. Or down. Or stay the same. Interest rates are of vital interest to disability insurers for 2 reasons: they affect the health of the economy as a whole, and they affect the returns that long-term disability insurers earn on the enormous pools of capital needed to support benefits obligations that may last 10, 20, 30, or even 40 years.

In recent years, low rates have helped disability insurers to some extent by helping the economy, but hurt them by depressing portfolio returns.

In 2006, rates rose early in the year but then flattened out, King says.

In 2007, the strength of the job market could give the Federal Reserve Board the courage to start pushing up rates, but turmoil in the mortgage market could lead it to push rates back down.

3. The job market could push marginal employees toward the door or cause employers to take a more generous view of which workers can return to work. When the job market is strong enough, employers are willing to invest in programs and equipment to help employees return to work. When the job market is bad, some employers seem to treat disability insurance as a supplement to unemployment insurance.

4. The oldest boomers are turning 61. Every time the median age of the workforce grows one year, that increases total disability claim costs about 4% to 6%, Jerome says. Aside from the fact that the boomers are getting older, “people are electing to stay in jobs longer,” he adds.

5. Disability insurers may be able to lighten up. “Negative trends are easier to see than positive trends,” says Kevin Tierney, vice president of underwriting at Disability Risk Management Services, Westbrook, Me.

Many have noticed that disability sales are growing in the mid-single digits, but what they may not have noticed is that pricing and underwriting have been extremely tough in the past couple of years, and disability insurers have room to loosen underwriting and lower prices a bit in 2007 and increase sales without hurting overall profits, Tierney says.

Moreover, the regulatory concerns facing some carriers in the market have given smaller carriers room to expand, he adds.

In addition, even though the boomers are older, they have turned out to be healthier than cautious disability insurers might have expected, Tierney says.

5. Efforts to educate employers and employees about the need to protect income will expand. A few years ago, JHA and the Disability Management Employer Coalition, San Diego, seemed to have the disability awareness field to themselves.

Recently, “as an industry, we’ve recognized the need to advocate for our product,” King says.

The Life and Health Insurance Foundation for Education, Washington, has ramped up DI education efforts.

The International DI Society, Seal Beach, Calif., a 2-year-old disability insurance group, attracted 240 attendees to its second annual conference in 2006. IDIS hopes to attract even more to its third conference, which is scheduled for October in Las Vegas.

The society also is working with the American College, Bryn Mawr, Pa., to offer a disability insurance class and develop a disability professional designation program comparable to the Chartered Life Underwriter program, according to W. Harold Petersen, the group’s president.

Petersen says he sees signs that interest in both group and individual disability insurance is increasing. The number of carriers in the market dropped to 26 a few years back, from about 300 in the early 1990s, but now the number has increased to 32, and one of the new players in the market is a unit of American International Group Inc., New York, Petersen says.

Another new group, Bob Taylor’s Council for Disability Awareness, is beefing up its consumer education Web site and trying to get attention by commissioning surveys on the effects of disability on aspects of household finances such as efforts to save for retirement.

6. New standards for handling claims may or may not kick in. State regulators have announced major settlements with UnumProvident, and California and other states have issued stern warnings about how disability insurers should interpret contract clauses that give them “discretion” to interpret contract terms.

Insurance company executives argue that critics misunderstand the discretionary clauses, and that the clauses give them a very limited kind of flexibility.

Caryn Montague, a North Miami Beach, Fla., disability insurance consultant and personal producing agent, contends that the broader clauses do appear to give insurers a great deal of flexibility.

Disability carriers did seem to go a bit easier on claimants about 18 months ago, but now many appear to be at least as tough as they were before, Montague says.

When claimants suffer from severe, clear-cut disabilities such as paralysis of the legs, insurers seem to be paying much closer attention to signs the claimants may have suffered from pre-existing conditions and evidence that the claimants might be able to handle their old jobs, Montague says.

When claimants suffer from “subjective” conditions, such as mental illness or multiple sclerosis, disability insurers are quicker to challenge the conclusions of the claimants’ physicians, Montague says.

7. A deal could materialize. In 2006, Aetna Inc., Hartford, acquired Broadspire, Plantation, Fla., a large disability services business, from Platinum Equity L.L.C., Beverly Hills, Calif., for about $160 million in cash. Aetna said it was making the deal, which brought it arrangements with 85 large customers with 1.3 million STD plan members and 1 million LTD plan members, to build its integrated health and disability operation.