Over-insurance and aggregation
Over-insurance occurs when a client is insured in excess of their individual disability allowance, which ensures that disability insurance compensates only for the inability to work, due to ill health or disability, and does not incentivise the insured to stay at home rather than go back to work.
A client should not be placed in a better position, or be enriched, through a disability claim so it would be financially more attractive for him or her to stay at home rather than go back to work.The benefit may cause anti-selective behaviour as an individual with a higher than average likelihood of claiming could potentially buy as much cover as possible in order to profit from likely future claims. Excessive benefits could in themselves create an incentive to claim.
Creating a ceiling
A ceiling is therefore placed on the total amount payable for disablement regardless of the number of policies purchased. This is based on the principle that people should at all times be incentivised to go back to work where possible. It is important to note that the policy covers the ability to work and not the ability to find work.
The Association for Savings and Investment SA’s (ASISA) code of good practice for disability insurance (Chapter 3) illustrates factors that can be used to determine the amount of disability cover a client is allowed in terms of their age.
Establishing over-insurance
The industry works on 75% of a client’s income to determine this allowance. To allow for both lump sum and income benefits, all benefits should be expressed in terms of a monthly benefit. The monthly benefit can then be compared to the monthly earnings of the client to check for any over-insurance. The principle followed when aggregating different benefits, is to consider the degree to which the benefit definitions overlap.
The client should disclose all disability cover at new business stage as this would allow over-insurance to be detected upfront and the extent of the over-insurance to be assessed. The broker would, of course, also be able to establish this when conducting a thorough needs analysis. In the event that the application is still submitted, the correct response would be to reduce cover at the new business stage rather than to reduce benefits at claim stage, since there is no refund of premiums in the event of benefits or part thereof being declined as a result of over-insurance.
Aggregation
At claim stage, other sources of disability cover would be determined and if the client failed to disclose this information regarding the additional cover when taking out the policy, the proceeds from the claim may be reduced and the insurance companies involved in the disability claim should share the reduction of benefits amounts amongst themselves.
Aggregations take into account all forms of disability cover, including disability income benefits (PHI), occupational disability, impairment and group life benefits.
When calculating the disability cover allowed, details such as how many income earning years to retirement age should be factored in. The particular needs for business assurance, personal cover and cover in respect of debt are considered in setting the maximum allowance.
The methods used to determine the maximum allowance do not replace the necessity of a thorough individual needs analysis that includes all income, the effect of disability on that income and allows for all disability cover, including group cover that is in force. Only then can the need for further cover be ascertained.
