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Disability Insurers, Producers Trudge Toward Better Days

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Disability insurance industry players have slogged through a difficult-but mostly profitable-year. Now they are hoping they can keep pushing ahead until the job market turns around.

JHA, Portland, Maine, a disability reinsurance unit of General Re Life Corp., Stamford, Conn., is still compiling disability industry performance figures for all of 2009. The final report will probably show that new U.S. group disability sales fell, according to JHA President Drew King.

But, during the first half, despite the effects of the Great Recession, combined revenue from U.S. group long-term disability and short-term disability sales held steady at about $6.7 billion, JHA estimates.

New group disability sales fell 4% in the third quarter of 2009, but voluntary disability sales increased about 11%, according to LIMRA, Windsor, Conn.

Meanwhile, most group disability operations have been profitable, King reports.

Andy Castillo, an actuary at Munich American Reassurance Company, Atlanta, used the term “sustained profitability” to describe the individual market in November 2009, at the Southeastern Actuaries Conference annual meeting.

Unum Group Corp., Chattanooga, Tenn., a leading disability writer, has done so well that Fitch Ratings, Chicago, increased the insurance financial strength ratings of the insurance company units to A from A-.

But experts interviewed were quick to warn that past success does not guarantee future performance. Disability insurers could run into capital-related problems.

Writers of long-term disability insurance set aside and invest large reserves to back obligations to claimants. The Great Recession has hurt disability insurers by pushing rates on government bonds and notes down to levels that squeeze returns on disability claim reserves.

In theory, The Great Recession capital markets turmoil also could reduce disability insurers’ and reinsurers’ access to capital.

In reality, for the direct writers, access to capital “is still an issue,” King says. “I would not say it’s a crisis.”

Meanwhile, the challenge disability insurers, reinsurers and producers face from the shrinking U.S. workforce is obvious and immediate. Even if the economy were strong, the aging of the baby boomers would be pushing an enormous generation of consumers out of disability insurers’ underwriting sweet spot.

“There are just far fewer GenXers than there are baby boomers,” and “they’re much more transient,” says Lawrence Hazzard, a vice president at Berkshire Life Insurance Company, a unit of Guardian Life Insurance Company of America, New York.

The demographic shift means that the average age of the workers in a typical group disability case is rising, and it means that individual disability risks are trickier to analyze, Hazzard says.

In the individual disability market, a lawyer who buys a noncancellable, guaranteed renewable disability policy today could leave to open a skydiving school, Hazzard says.

Meanwhile, employers are laying off workers and, in many cases, cutting the hours of the remaining full-time workers.

Lockton Inc., Kansas City, Mo., a broker, is working with carriers to update policy definitions to reflect the decrease in hours. The changes could ensure that an employee who works fewer hours due to a furlough program will continue to qualify for disability coverage, says Christopher Tamney, a benefits account executive in Lockton’s Chicago office.

Insurers try to do what they can to please brokers and employers, Tamney reports.

“It has been a pretty competitive market over the past year,” he says. “There’s definitely a slew of markets out there.”

“We are in the midst of the ‘softest’ underwriting cycle I have seen in many years,” says Gerald Bannach, president of Custom Disability Solutions, South Portland, Maine, a disability reinsurance provider. “No one would appear to have much pricing power.”

Many employers are “window shopping” to get their carriers to cut rates, then sticking with the incumbent carriers to lessen implementation risk and administrative hassles, Bannach says.

Bannach and other DI experts talked about the need to keep today’s solutions from creating tomorrow’s problems.

The shift to wholly or partly employee-paid voluntary disability programs is an example of a seemingly minor change that could have big consequences, says Matthew Gilligan, president of Disability RMS, Westbrook, Maine, a disability reinsurance provider.

“I think it’s somewhat early to make any general pronouncements” about how well underwriting of voluntary and hybrid programs has worked, Gilligan says.

Bannach is warning that over-emphasis on price could cause problems.

“Intermediaries are not necessarily vetting the best service provider, or best fit from a target market perspective,” Bannach says. “That cannot be good for anyone over the long haul.”

Another risk is the possibility that high unemployment rates could lead to an increase in disability claims.

Traditionally, 7% of newly unemployed people have applied for disability benefits, Mark Warshawsky, a member of the Social Security Advisory Board, reported in October 2009 in Buffalo, N.Y., at an Association of Administrative Law Judges meeting.

For now, insurer and reinsurer executives interviewed said they have noticed no evidence of the Great Recession increasing the number of disability claims.

“We saw an uptick in claims in other lines,” Tamney says, giving dental insurance as an example. “Not so much on the disability side.”

Gilligan says workers may be too worried about losing their jobs to go out on claim.

High housing costs and high debt levels may be forcing some workers with serious health problems to keep working and maximize income, King says. But, at this point, “I’m not ready to declare victory,” he adds.

The initial Social Security Disability Insurance program claims rate has been soaring, and some believe that is a sign that private disability claims are about to pour in, King says.

In February 2009, the SSA thought it would handle 3 million new SSDI claims in fiscal year 2010, up from 2.6 million in 2008. Because of the recession, the SSA increased the estimate to 3 million in July 2009. In September 2009, the estimate was increased to 3.3 million, Warshawsky says.

In the long run, Bannach says, the best strategy for insurers, reinsurers and producers is to stick to the basics and deliver competitive plan designs with competitive pricing. “History has proven that the market will rebound,” he says. “Staying focused on providing solid products with competitive rates and then providing the level of service our customers expect will help to move the current market in the right direction.”

Berkshire has tried to combine innovation with risk management by introducing products that help insureds cover well-understood risks. One new feature helps doctors and dentists protect their ability to keep up student loan payments, Hazzard says.

Lincoln National Corp., Radnor, Pa., and other disability insurers are trying to appeal to workers who like to work, and employers who like to return workers to work, by offering new return-to-work assistance benefits.

MetLife Inc., New York, has focused on educating employers about how disability insurance and other benefits can help them as the economy recovers.

Only 61% of U.S. employers with fewer than 500 workers offer disability insurance, compared with 87% of larger employers, but MetLife survey data show that disability insurance and other benefits, such as life insurance, are major contributors to employees’ sense of loyalty to employers, says Michael Fradkin, a vice president for disability and long term care product management at MetLife.

“Disability income protection is too important to be considered a discretionary spend,” he says.