Growing your long-term disability customer base has become increasingly more difficult despite the fact that only 35% to 40% of employers offer LTD coverage as an employee benefit.
Currently, carriers typically tend to fight over existing business, creating premium churn rather than working to grow the market with new premium sales. In the last 6 years, only 3 of the top 10 disability insurance providers have actually grown their in-force-a reflection of lackluster growth in a market full of potential new sales opportunities.
One of the reasons for this lack of sales growth and constant business churn may be attributed to the way carriers underwrite and price business. While the technology and tools of underwriting have improved over the years, the basic methods for selecting and pricing risk have changed very little.
Without question, we have seen greater block segmentation. Though actuaries are trying to better pinpoint pricing, the census and review of the business have remained very much the same since 1978. To put it into perspective, this was the same year that New York Yankees’ shortstop Bucky Dent hit his famous homerun in a tie-breaker game against the Red Sox.
For example, to determine a premium pricing quote rate on small cases, underwriters currently use 3 main sources of information including industry and census demographics and a discount program.
There are several ways that this process could be improved.
For example, over the years, insurance providers have learned which LTD coverage plans work better for a variety of specific employee groups such as manufacturing groups, etc. Because of this knowledge, underwriters and/or field sales personnel should be able to more effectively match coverage plans with industry and demographic groups, and price accordingly. This simple pricing strategy could be used to enhance sales.
Another tactic to consider in targeting new cases and developing pricing is to utilize existing publicly available data on individuals as well as group demographics. This information is available on the Internet or for purchase from a variety of outlets. Consumer-oriented and catalog companies already use demographic data, credit scores, household information and many other sources to target customers.
For example, consider the information learned at a recent Deloitte Touche meeting on maternity and how data highlighted at the meeting could help carriers price short-term disability or LTD cases.
Maternity claims comprise 26% of all STD claims and 13% of all LTD claims.
Attendees at the meeting learned that each 35-year-old woman has a 7% chance of becoming pregnant during the policy year. If a woman already has two children, the percentage drops to as low as 3%. And, if she has one 2-year-old child, the mother’s chance of becoming pregnant jumps to 15%.
Using this type of information, carriers could substantially improve the disability coverage plan design and price the case accordingly.
Other information exists that could be used to improve underwriting practices. Information that carriers should consider leveraging include: facts about home ownership, credit scores, food purchased and physical activity level–all of which is available from a variety of sources. This information could hold the key to better underwriting and carriers could match the plan census with the information described above; it could certainly lead to better underwriting.
Another area of improvement is with midsize cases and the use of experience rating.
For years, underwriters have chased the “great case” or the “no claims in 3 years” case and have driven prices to an unsustainable level. The believability or credibility of a midsize case may be grossly overstated. Credibility formulas generally do not account for the predictability of the past. Carriers need to better understand the case history, the quality of the information being underwritten and changes in the environment. Using a purely formulaic approach to underwriting midsize cases will likely lead to underpricing and churn.
Furthermore, credibility formulas should be significantly adjusted on a case-by-case basis for these midsize groups. Some carriers now employ intricate methods to pinpoint how much credibility they are going to attribute to a mid-size case. Things like plan design and history, actual-to-expected claims review and quality of data come together to adjust credibility, up or down.
In an age where information is easily accessible via the Internet, companies now have the ability to gather and apply data previously inaccessible to the insurer. They do not have to ask a broker to obtain that information from the customer.
The opportunity and the tools necessary to grow inforce blocks exist. Using contemporary information sources and purposefully integrating non-traditional demographic data into underwriting models will drive better or more stable pricing, and support longer-term customer relationships.