The situation in the “total and permanent disability” (TPD) market in Australia is a good reason why insurers should employ fearful, negative actuaries and underwriters, and treat them with respect.
As a reporter, I always want the insurance companies that I write about to be offering some new product or feature. Ideally, something easy to understand.
Marketers, too, are often looking for some interesting new twist to help set a product apart from the pack and break free from the tyranny of the spreadsheet, with the search results sorted in order from least expensive to most expensive.
Issuers of “superannuation funds” — mandatory retirement funds — in Australia tried to help their funds break free from the tyranny of the spreadsheet by offering attractively priced TPD benefits options with little or no extra underwriting.
A TPD product or feature pays off when the insured suffers from a severe, unusual type of disability.
The problem is, the people with the authority to bless the sale of new product sales features did not seem to understand how diligent lawyers helping ailing, highly paid executives might be at proving that their executive clients were totally disabled, especially when the economy was going bad.
The result: Even at a time when a weak job market and low interest rates are making insuring and reinsuring long-term disability insurance profitable, the results of a hazy understanding of policy design risk have made soaring Australian TPD claims a story big enough to make news in the United States.
Of course, insurers have to accept underwriting risk and investment risk or accept that they will soon become irrelevant. But this is a case in which it seems as if a few subtle tweaks in policy language could have provided insurers with a great deal of protection, if only insurers had fully understood the risks they were assuming.