Disability insurance sector faces a major crisis

Sandy Govender is Head of Group Insurance at MMI Holdings.

Regard Budler, Managing executive of the Corporate Segment and Distribution at MMI Holdings.

Pressure in the group disability market has increased to the point where it’s no exaggeration to say that the industry is on the edge of a cliff; so the question is, how do we turn around the trend to create a long term future for valuable benefits that drive the financial wellness of employees?

In a struggling economy employees tend to go onto, and stay longer on, disability as the prospects of a return to work are lower. And the recent change to make employer-sponsored disability benefits tax-free has created a further unsustainable load of employees remaining on disability. 

The current price of group disability insurance still reflects favourable historical claims experiences as well the impact of competitive price-cutting behaviour by insurers. However, the best view of the long term sustainable cost is well above current pricing levels, especially in the absence of holistic risk management and behaviour-changing interventions by employers and insurance providers.

Our research shows a clear link between the macro-economic environment and the disability claims experience. With the wide expectation that the economy will continue with its lacklustre growth for some time to come we expect that, without significant action, the disability claims experience is only likely to get worse or, at the very least, to not improve substantially.

And there’s another looming problem for the industry: the marked increase in claims for what are called ‘white collar’ disabilities. These are related more to lifestyle and stress. Given that this group generally have higher salaries, this inevitably leads to an overall increase in the average pay out per claim. The tax free nature of these higher benefits acts as an incentive for clients to go onto disability and then to stay there which leads to more claims of longer durations than have been seen before.

So, the grim picture for the industry and employers is clear. Following the years of good claims experience, followed by a period of suppressed pricing and now higher claims, responsible insurers will be forced to price their insurance books markedly higher to limit unsustainable losses.

The time to act is now. The focus for employers urgently needs to shift to putting in place effective risk management practices for their business and their staff to prevent spiralling costs of group benefits. Otherwise the burden of exacerbated claims will be borne by future generations of employees through sharp premium increases and reductions in take-home pay.

We have to move away from the damaging commoditisation delivered by aggressive pricing which is unsustainable and detrimental to the overall lifetime financial wellness of both the employee and the employer because it collapses the choices of insurance solutions down to a single product and to engagement on price only. This limits the ability of advisers and insurance companies to have a meaningful and value-added engagement with clients around improving and managing their workforce risks.

In the current binary context, little consideration is paid to:

• the best combination of services which improve the future claims experience by encouraging the most productive behaviours, activities and structures in the workforce
• the services and products which enhance the well-being of the workforce and engage the employer on a journey towards sustainable employee wellness management
• providing a robust insurance solution that is stable over business cycles
• the true cost of insurance over the lifetime of an organisation and not just the current review period.

Adopting a more holistic approach to the financial wellness needs of employees in partnership with financial advisors and clients is the best starting point for a new approach. The objective should be to achieve a ‘steady-state to steadily-improving-state’ of the employee’s physical and financial health. The longer term outcome of this approach will be to reduce the disability risk and make it more stable over time. And research demonstrates that this will deliver a positive economic benefit to the employer through enhanced employee productivity.

This sort of holistic risk management approach will address the underlying causes of distress that tend to lead to an increased incidence of employee disability. The goal is to break the claims experience deterioration by focussing on the prevention and basic care needs of employees. And this can be achieved through a broad spectrum of solutions, tailored for a specific organisations, which include:

• interventions to improve financial wellness especially by helping employees to manage the immense stress of their debt burdens which increase as the economy worsens.
• early identification and proper diagnosis of stress-related issues in the workplace using a suite of information services like those provided by Hello Doctor.
• expanding the cover net through primary low cost health solutions (e.g. Momentum Staff Care Solutions)
• improving the cover net with upgraded comprehensive health solutions or providing gap cover
• effectively deploying incentivisation and rewards programmes like Multiply to drive employee behaviours that improve their physical and financial health.

By using this approach over a multi-year period, disability insurance claims and pricing could be normalised at a more stable level while also delivering sustainable employee wellness at an overall lower cost of insurance.