Producers need DI products that offer stable rates and benefits
Today's worksite disability market is evolving. I'm not referring to the evolution of distribution in shifting from traditional products to voluntary, nor am I referring to individual producers gravitating to the flexible use of a group chassis. I'm talking about the worksite disability market evolving into its early stages of maturity.
Generally, when an insurance market matures, groups begin to "churn," or move in-force business from one carrier to another.
They do this for many reasons. While we are aware of brokers who purposely move renewed business to gain first-year sales commissions, most agents look to build long-term partnerships with their carriers. The two more common reasons for moving business are to secure lower rates and improve customer service. This is a practice that carriers in the traditional employer-paid group market have struggled to address for years. Today, we are beginning to see this churning in the worksite voluntary disability market.
Churning cannot continue if carriers want to meet their growth and profit targets. This practice should be of significant concern if carriers do not want to jeopardize their distribution relationships, the persistence of clients or the product's underwriting risk.
The focus of our sales approach has to be detoured from the first-time buyers who made early market growth so successful.
A maturing marketplace
The maturing worksite disability market is marked by an increasing amount of in-force business being put out to bid. Distributors are taking their in-force customers to the market because of the promise of lower rates and out of concern with the in-force carriers' commitment to the market.
This shift begs the question: In a market where the cost of coverage is less price-sensitive than the traditional employer-paid market, why are cases being shopped?
While rates are still a factor, distributors are more interested in rate stability, the carrier's service, and the enrollment and education process than in the individual's cost of coverage. These qualities work to stabilize product pricing, and this is where carriers need to focus.
To illustrate the ways pricing factors into our market's development, it is important to understand recent historical trends.
In 2002, according to research by Eastbridge Consulting Group, worksite and voluntary disability sales grew significantly over the previous 2 years, and disability sales outpaced life for the first time ever.
Sales have since decreased some. We believe this is because the market has begun to focus on churning existing business instead of developing the first-time buyer markets, as in previous years. Part of the problem is the result of a number of carriers entering the market quickly–too often at the risk of their products' profitability.
As carriers entered the market and contributed to its incredible growth, many did so with products on a group chassis that had features and commission structures similar to individual products. This allowed for pricing and features that made the product and marketplace even more competitive, resulting in impressive sales volume. The structure of the group products was designed with more flexibility and rate competitiveness, as well as with the option for case level renewals. Using the renewal feature at the policyholder level had been unique to individual marketplace distribution.
But the pricing and risk-control assumptions made in worksite disability product development have proven very different than in the traditional voluntary markets:
?Female participation percentages are much higher than the original assumptions;
?Underwriting risk controls have not been as tight, to ensure enough employees opt to buy DI when there are minimal employer subsidies; and,
?Plan design features are more liberal for this unique market, which can lead to overinsurance. At claim time, many employees receive excessively generous benefits.
It did not take long for many group carriers to experience those assumption errors. They have begun to feel hurt by the market's double-edged sword, and losses have been realized at both ends of the risk spectrum: the underwriting risk and first-year expense risk.
To further aggravate matters, carriers often tried to make up for disappointing profits by restructuring products during renewal, resulting in the perception by distributors that carriers were taking away benefits. For instance, carriers would suddenly require DI benefits to be integrated with Social Security or workers' compensation.
These changes are difficult enough to sell to a single employer, never mind to a body of employees. For distributors, this is a task not easily conquered. To save relationships with their clients, provide value and resell rate increases, agents naturally shopped such cases. Agents also began to lose faith in their carriers' products and market commitment as carriers restructured their offerings.
A domino effect ensued. When tolerable loss ratios are exceeded–resulting in reduced underwriting profits–carriers propose renewals with rate increases or product design changes. When agents begin shopping cases to find them new homes, carriers' assumptions about persistency are disrupted, resulting in higher commission expenses than expected. All this develops into perpetual losses for the carrier.
It's a situation that can be avoided.
In this unique marketplace, it is important to remember strong renewals help provide more competitive rates, resulting in higher employee participation. However, the DI product's design should take into account that renewals should be used to target poor performing segments (such as industries, large cases and so on) and not to correct a past aggressive growth strategy.
How to win
What has made the worksite disability market so successful is the carrier's high level of service and unwavering commitment to its distribution. Agents have stated repeatedly that the success of their client relationships depends on pricing stability and a high quality of service. It is far easier to sell the right product than to sell the right renewal.
The worksite disability market is in its early stages of maturing. This is a sign of the market's successful growth. Maturity can bring wisdom–and smart worksite disability providers will use this wisdom to manage through today's changing market. By providing your distribution with a stable product that allows for restructuring and unwavering customer service, you will enjoy future success.
Michael Turner is a director in the client management organization of Disability RMS, Westbrook, Maine. He can be reached at mturner@disabilityrms.com.
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