Disability claims: on the rise ?

Depressed economic conditions can increase the risk that insurers will experience increases in the number of disability claims.

Studies performed in the UK, Australia and the US 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).

The underlying reason is that 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 retrenchments. People already on disability will also be reluctant to return to work, as they currently have a guaranteed income during a time of economic difficulty.

The local scenario

South African insurers should take heed of the international experience, as the risk of a local economic downturn becomes increasingly real. Current economic trends tend to indicate a pending rise in unemployment and higher interest rates could lead to an increase in bankruptcy, as more consumers fail to make their increased loan repayments. South Africa's economic growth rate has slowed due to a number of issues, including the high price of oil. In addition, South Africa's electricity crisis is impacting negatively on economic growth and job creation. However, the 2010 FIFA World Cup is likely to provide a protective cushion to the economy during the next three years.

The silver lining

The 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 increase, 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.

As the wheel turns

Disability claims are also subject to cycles. Some industries are more cyclical in terms of disability experience than others. Stable, established industries like those of professional classes, for example, doctors are more immune to economic cycles than volatile industries, such as construction. Also, if there is good growth in an industry, more jobs will be available, resulting in better disability experience.

Disability experience cycles can also be driven by the levels of generosity of the policy benefits, terms and conditions. Insurers tend to be more generous during times of economic growth and good claims experience; however, this may in itself result in worsening claims experience, as there are greater incentives to make a claim.

Drivers of disability costs

There are various other factors driving disability costs. Among these are social attitudes (including work ethic), job satisfaction, workplace stress, health and lifestyle, as well as working conditions and the type of work in which an individual is involved.

Many of the these factors are interlinked. It is, therefore, difficult to predict disability experience because one does not examine each factor in isolation.

While insurers will calculate premium rates by starting with a basic or standard rate based on past experience, these rates will be adjusted to take into consideration the current economic outlook, as well as company and regional variations, such as work conditions and the impact of HIV/AIDS.