Downturn in economy impacting disability experience
It is generally believed that depressed economic conditions can increase the risk that insurers will experience growth in the number of disability claims. During times of economic uncertainty, more people are likely to claim disability due to reductions in consumer confidence, as well as fears about job security and the possibility of layoffs. People already on disability might also be reluctant to return to work, as they currently have a guaranteed income during a time of economic difficulty.
Studies performed in the U.K., Australia and the U.S. have shown that the economic measures that best predict future disability experience include unemployment rates, consumer confidence levels, the total number of bankruptcies, and changes in Gross Domestic Product (GDP). South Africa currently has a depressed economic outlook in terms of growth, business and consumer confidence. Although much has been done in South Africa in terms of job creation over the past few years, unemployment remains one of our country’s most pressing issues. Current economic indicators tend to imply a pending rise in unemployment, and higher interest rates, food and fuel prices will lead to an increase in bankruptcies, as more consumers fail to make their increased loan repayments.
It is important to bear in mind that industries are affected in different ways by economic conditions and hence the disability experience of some industries will be more cyclical than others. Those who are self-employed or partners in small businesses will particularly feel the effects of increasing fuel prices, interest rates and lower consumer spending, which will only increase the reluctance to return to work of those receiving a guaranteed disability income. On the other hand, for some employees on disability, receiving only 75% of their income will be insufficient to maintain their lifestyles during these times of high inflation, which might encourage them to return to work where possible.
While the current trend of growing inflation remains a concern, the resulting increasing interest rates do have some positive effects on long-term disability insurance. Disability income cover is a long-term liability for insurance companies, so they will invest funds to meet future claim payments. When disability income premiums are calculated, the return that will be earned on the invested funds is taken into account. Therefore, when interest rates rise, the return on the funds will be higher, so insurers will require lower invested funds to meet the expected claim payments. In turn, this means that premiums can be reduced for the same level of claims. The cost of disability claims where the income payments are linked to inflation will, however, increase in periods of higher-than-expected inflation. Depending on the insurers’ longer-term view of inflation and interest rates, premiums for inflation-linked disability cover may increase.
Disability experience cycles can also be driven by the levels of generosity of the policy benefits, terms and conditions, as well as underwriting and claims assessment practices. Some insurers tend to be more generous during times of economic growth and good claims experience; however, this may in itself result in deteriorating claims experience, as there are greater incentives to make a claim.
Whatever the cause, we are seeing some evidence that the number of disability claims is increasing in South Africa, which might be linked to the economic downturn. However, whether this trend will continue or not depends on the economic growth, consumer confidence as well as appropriate disability assessment and management continuing.
By: Grete Kritzinger (pictured above right), Business Development Executive at RGA Reinsurance Company of South Africa Limited
