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Life Health > Life Insurance

Disability Insurance Observer: Floor and Freedom

By Allison Bell

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Nathaniel Hendren, a young economist, has published a paper that may require the National Bureau of Economic Research and Harvard University to hire extra public relations people to handle all of the speaking engagement booking requests he’ll be getting.

He used fancy statistical analyses, long-term care insurance (LTCI) carriers’ underwriting guidelines and survey data to show that the applicants rejected by LTCI insurers are difficult and expensive to cover because they have a great deal of sobering information about themselves that does not show up in the LTCI applications.

Hendren also did a similar analysis of the individually underwritten disability insurance and individually underwritten life insurance markets and found similar results there.

Hendren estimated that the amount insurance rejectees would have to pay insurers to compensate for all of the extra risk implied by hidden, “private information” would be about 42% of the premium for life insurance, 66% for disability insurance and 82% for LTC.

It’s not all that surprising that the level of risk is high in the LTCI market. LTCI carriers are putting out announcements about increasing rates, cutting benefits and, in some cases, leaving the market that sound as if they come from the same depressing news factory. Most of the companies say one reason for the depressing news is that claims have been somewhat higher than expected.

But what’s interesting is that similar underwriting problems exist in the disability insurance market. Disability insurers also face some of the other challenges facing LTCI providers. Like LTCI providers, disability insurers count on earnings on investments in high-grade corporate bonds and similar safe assets to fund long-term liabilities. Thanks to the Federal Reserve Board, those earnings are depressed. Of course, disability insurers also face a weak economy and consumers’ lack of willingness to plan seriously for all of the bad things that could happen in life.

A decade ago, individual disability insurance producers were going through a terrible shakeout and expressing concern about the future of that market. 

Why do disability insurance businesses at least seem (to my outsider journalist eyes) to be doing so much better than LTCI carriers these days?

One reason may be that disability insurance businesses built up their organizations earlier, when the economy was stronger, and already have gotten through their days of extreme doom.

Another reason may be that the individual disability insurance market has thrashed out some of the philosophical battles that still beset the LTCI market.

Disability insurers have been requiring full medical underwriting for years; some LTCI carriers are just starting to ask for the results of medical tests.

A third reason could be that, in the LTCI market, Medicaid provides a floor for the poor and for people who engage in creative Medicaid planning, but private LTCI, annuities, whole life, and personal savings and investments are about the only options for people who aren’t poor and don’t want to pretend to be.

In the disability insurance market, the Social Security Disability Insurance program has provided a minimum level of almost universal income protection for most full-time U.S. workers for decades.

I wonder if the mere existence of SSDI has an effect on how the private individual disability insurance market operates.

Of course, regulators have pressed disability insurers hard on matters involving problems with payments of claims, and many disability insurance policyholders have non-cancelable policies with rates that can’t increase. But it doesn’t seem as if there’s the same level of consternation about any guaranteed renewable disability insurance premium increases that are out there as there is about LTCI.

Maybe that’s partly because regulators assume that people who have a significant income to protect can handle an occasional premium increase, but maybe it’s also partly because the existence of SSDI gives regulators a sense that the little people have been taken care of and that, to some extent, the people in the disability insurance market can fend for themselves.

That might not be great for disability insurance policyholders who face rising rates or other problems, but maybe it makes that market a little more resilient.

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