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Disability Insurance Claims – An Inside View (Part 1)

By Gerry Katz, MSPA, RHU, ALHC, DABFE, FACFE

 

Those of you marketing disability insurance today will no doubt agree that our choices in competitive contracts have significantly changed and diminished in number during the past 5-8 years. The days of the 1980’s give-aways have disappeared. The industry has turned to “guaranteed renewable” forms of policies and away from the “noncan” policies we once relied upon to market. From a contractual aspect, “return to work” incentives have become new buzzwords within policy design, and most companies have abandoned the once heralded guarantee of “specialty definitions”. “Work-site marketing” has become the new thing! My, has this business changed!

To better understand what our industry has lived through, I need to take you back to the 1970’s, which I view as the “building and competitive period” of the disability insurance business. Disability insurance carriers, mostly in the brokerage arena, focused on product features to compete against each other. Many mutual life insurance companies with captive agents did not offer a truly competitive disability policy, and their business products were either lacking or did not exist.

Premium growth rates of 8-9% and more were the “norm” among the top 8-10 companies in our business. Although a good deal of “guaranteed renewable” individual premium was already in force, “noncan” policies were really catching on. Group association products, mostly cancelable and sold to members of professional associations through the mail, had increased in numbers during the previous 10 years. Blood and special screening tests were used only for some very large cases and HIV had not yet become an underwriting problem.

Individual disability products were written with maximum benefits of $8,000 to $10,000 per month for total disability. Elimination periods (waiting periods) of 30-90 days, with growing emphasis on 60 days, were indicative of our individual market. Long-term “own occupation” contacts were heavily marketed by most of the top 8-10 companies, all seeking to underwrite similar occupational segments. “Lifetime Sickness” before age 45 and then age 50, was becoming the choice of many brokers.

It was during this historical period of our industry, that “Residual” (long term partial disability) and Cost of Living Adjustments (COLA) were developed and offered by many companies. Residual (loss of 20-25% net income) triggered long term “partial disability” benefits from most of the products sold during this period of time and commissions were paid on a sliding scale that increased from a base of 45-50%. Producers writing more than $10,000-$15,000 of annualized individual premiums earned bonuses of 5-10% and those who wrote $20,000 or more were paid up to 70% in first year compensation. Individual disability business products were designed to meet the needs of higher-earning professionals and business owners.

Overhead Expense plan issue limits climbed for the first time going beyond $10,000 per month, and Disability Buy-Sell policies were written by a handful of companies with maximum issue amounts of $500,000 on one life. Although the premiums for these business products were not a significant segment of our business, they facilitated the sale of new life insurance cases and gave some of the more sophisticated agents an edge, by “packaging” and solving several different client needs at one time.

General economic conditions had not necessarily played a big part in the marketing of disability products prior to this period of time. However, you may be old enough to remember standing on line to fill up the gas tank in your cars. You may also remember the 9-14% interest rates you were receiving on some of your “conservative” investments.

The income stream from these new disability premium dollars created higher expectations for company earnings. These expectations (among other considerations) led to product and underwriting assumptions that would create problems for our industry 10-12 years down the road.

The 1980’s gave rise to rapid growth of new companies entering the individual and group disability market places. In an effort to capture more market share and premium income, many mutual companies began to market disability insurance, with some requiring that full-time agents not place this type of business with other companies.

Increasing emphasis was placed on prices and policy features. Premium growth rates hit record high levels of up to 20%. Specialty definitions of total disability were being marketing with the aid of separate “specialty” letters, explaining to surgeons and other professional specialists how they would be “guaranteed” disability benefits. In addition, a small group of very competitive brokerage-oriented carriers began to make major underwriting concessions to receive endorsements from professional associations. This same group of companies also began to significantly discount premiums for “list-bill” sales of multiple lives in a business or professional practice.

First year total compensation rose to 80% with 15-20% renewal rates, for those producers who were the “big-hitters.” It was a time in our industry when several companies “peaked” their issue limits on individual disability policies to 70% or more, of an individual’s net income.

Lifetime Sickness benefit periods were extended to age 50, 55 and 60. Individual issue amounts of up to $20,000 per month and more were being issued on a single life.

That same person could, under specific underwriting and occupational rules, also apply for up to $30,000 to $40,000 per month overhead income limits. Buy Sell coverage was available to high earning attorneys, surgical group members and business owners, in amounts of $1 million on one individual.

Several companies were issuing Cost of Living adjustments beyond 10% per year and some of the most competitive among them provided “guaranteed” minimal COLA no matter how low the government’s Cost Of Living Index became. These same companies built an “annual indexing” (annual increase) into their individual policies, and these increases were granted without any medical or financial underwriting. Policyholders were guaranteed an annual increase in their disability benefits by merely paying a small additional increase in premium. Financial underwriting was requested only after five years of indexing.

By 1986, it was obvious to some companies (and should have been more obvious to others) that overhead and the cost of doing business were taking a toll on company profits. There was a significant “spike” in the number of new claims. “Managed care” was effectively reducing historically high income within the physician and surgeon occupations. In addition, due to a combination of past give-a-way programs, concessions in underwriting, reduction in base premium rates and the emerging of several “new” forms of disability, net profits were disappearing! Next month, in part two of this series, I’ll provide a snapshot of the industry beyond 1986 and tie certain events together to show you how company practices and specific economic conditions changed our industry, perhaps for many years into the future.

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