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Life Health > Life Insurance

Individual Disability Insurance: Morbidity Holds Steady

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The events of 2008 that sent the global economy into a recession are still fresh in the minds of most businesses. The impact on many markets was obvious and damaging, but did the individual disability income (DI) industry suffer similar, economic-driven effects, particularly in the areas of morbidity, sales, underwriting and claims?

Munich American Reassurance Company, Atlanta, conducted a survey of DI insurance companies in December 2011, with results based on 16 respondents published in the first quarter of 2012. The purpose of the survey was to assess the current state – the pulse – of the DI market. The survey was comprised of more than 90 questions that were meant to address the whole spectrum of the market – starting with pricing, product development and profitability; continuing with sales and marketing; and, finally, underwriting, claims and reinsurance.

Overall, the responses revealed a stable, profitable and growing marketplace for DI products, with some responses showing early signs of a shift in the procurement and delivery methods for new business, which will likely be an area of robust development in the short- and long-term.

Given the recession, Munich Re had been expecting a deterioration in morbidity results. While its own experience has shown increased volatility, there has not been an overall deterioration. The survey results point to a similar conclusion, with nearly 75% of survey respondents indicating that incidence and terminations have been relatively unaffected by the economy. This conclusion is not reflective of a lack of tools or data, however, as supported by respondents’ additional disclosure that nearly 70% had conducted a morbidity study within the last year. Further proof that the morbidity impact was negligible was supported by the fact that more than 90% of respondents indicated that they had met their profit targets in 2010 (the last full year before the study was conducted). These results were consistent with conclusions from published sources, such as Milliman.

While the recession had a clear impact on sales over the past two to three years, survey questions focused on the current state of the DI market and on forward-looking growth and sales expectations. 83% of respondents expected overall growth in premium in 2012, and 90% expected growth over the next five years. Focusing on specific DI products, 70% of respondents expected growth in fully-underwritten DI products, with 55% expecting growth in guaranteed standard issue (GSI) sales and 67% expecting growth in multi-life products. However, GSI and multi-life expectations were more optimistic with more than 30% of respondents expecting increases of more than 10%, while expectations for fully-underwritten DI products were an increase in the single digits. These results seem fairly consistent with recent LIMRA data that notes flat to low increases in fully-underwritten DI, with more substantial increases in GSI and multi-life. Furthermore, companies are taking actions to support and generate such growth. Based on survey responses, organizations are investing in sales-specific training and marketing programs. However, product development was not among the steps being taken to support growth expectations. 50% of respondents have a DI product that’s four years or older, and only 40% have plans to update a product within the next 12 months.

Responses to the underwriting questions revealed no significant differences from the results of a Munich Re survey published in 2000 of DI underwriters, which illustrates a remarkable level of market stability. The 2011 survey asked the same questions regarding 2009 and 2010 separately – expecting economy-induced pressure – but revealed no discernable differences in responses. While a similar overall percentage of offers are still being made as compared to 2000, underwriting has become more stringent with modifications of extra premiums and/or exclusions of appropriate cases, leading to a 14% reduction in standard offers. However, responses showed that placement rates are significantly lower for counter-offers, which include extra premiums, usually when combined with exclusions. Exclusions only fared a bit better, where placement rates were at about 17%.

Based on the 2000 survey, respondents employed from one to 60 full-time equivalent (FTE) underwriters, with nearly 50% employing less than ten. In 2011, the FTE levels ranged from three to 65 underwriters, with 19% employing less than ten. Another 19% of respondents reported reducing their staff due to the economic downturn. Actual FTE comparisons between the 2000 and 2011 surveys are difficult because the majority of underwriters were underwriting both life and disability products in 2000. Based on the 2011 survey, underwriting staffs have become more specialized, with most working only DI cases, with the majority of respondents indicating caseloads of 50-100 per underwriter, an industry best practice.

Prescription drug databases are becoming a popular tool in underwriting, with the cost fairly low considering the added risk protection of the discovery of undisclosed medical history. Over 50% of respondents order prescription database searches in exceptional cases, 18% require a database search above a certain benefit threshold and 9% require database searches on all applications. 18% of respondents indicated they are not using prescription databases. 27% of respondents indicated that their companies plan to increase the use of prescription drug databases over the next 12 to 24 months.

Responses to claims questions revealed a risk-management focus with respondents using an array of tools to manage their claims. More than 80% of respondents employ an internal physician review, and more than 50% use internal experts such as financial specialists and nurses, and external resources, including field representatives and physicians. However, only 25% of respondents indicated that they use internal and external vocational and rehabilitation experts to add greater depth and understanding to reviews. 73% of respondents utilize a formal quality assurance review program, but the majority of those programs review a sample of less than 5%.

Survey questions also addressed claim examiner caseloads. Based on Munich Re’s claims experience and research, the maximum caseload that a DI claims examiner can effectively handle ranges from 70 to 100 claims with caseloads falling as the complexity of the claims rises. However, the optimal caseload is dependent upon many factors, including the size of the company’s claims department, availability of claim resources and individual examiner’s technical strengths. 66% of respondents indicate their examiners have between 40 and 125 individual disability claims. However, 27% report caseloads of fewer than 40 active adjudicated claims.

Based on responses, the overall conclusion is that the DI marketplace is stable, with a strong risk management focus. The experience monitoring, tighter underwriting and breadth of claim tools reinforce that conclusion and also support the consistently delivered profits. This offers a solid foundation for the companies as they tackle the marketplace reaching for an expected increase in sales.


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