Group Long Term Disability: Strategic Concepts For Plan Sponsors

by Bill Colopoulos

In order for group LTD plan sponsors to purchase the right program for their employees, it is necessary to understand the factors influencing the long term disability insurance market.

Recent History

Insurers have been competing aggressively for group LTD market share since the end of the last decade. Most have used a strategy combining pricing discounts, extended rate guarantee periods and offering enhanced benefit features that have traditionally been available only in individual disability contracts. As was the case in the individual LTD market, low prices, extended rate guarantees and too liberal plan designs have led to high group LTD losses. These losses are now causing many LTD insurers to retract from the market or raise prices significantly.

The Marketing of Group LTD

The lure of high profits has attracted many insurance companies to the group LTD market. Most LTD carriers made windfall profits when interest earnings on premium reserves were high. Historically, group LTD profits have also far outpaced health care earnings. With many medical insurers fearing that new health care legislation might limit or eliminate their health care business, marketing more group LTD appears to be a practical way to maintain their overall earnings goals.

Even as LTD results have declined, many insurers remain attracted to group LTD business. Because the group LTD market is perceived to be underpenetrated (50%), some insurers feel that by selling product features to first time LTD customers, rather than a lower prices to existing LTD policyholders, they can overcome temporary losses.

However, the marketing results of LTD in recent years suggests that the 50% penetration figure is a fairly accurate estimate of the saturation point for the group LTD market. The remaining industries without group LTD policies consist mostly of poor LTD risks and customer groups less likely to buy LTD: industries characterized by low wage earners, high turnover, and union plans focusing exclusively on medical and dental benefits. In a few cases, some specialty insurers have had success marketing LTD to the less traditional customer (blue collar, municipalities, etc.) and have gained profitable "niche" market share that way. Overall, however, the non-traditional markets have proved to remain a poor source of profits for the insurance industry as a whole. There simply aren't enough "niches" to sustain a profitable, industry-wide marketing effort.

Some group LTD insurers have increased their market share significantly in terms of the numbers of new firms written. Most, however, have been selling new, smaller firms that have been growing concurrently with larger firms downsizing. For the most part, the bulk of new LTD premium sales comes from insurers taking existing LTD accounts away from their competitors. In recent years, this has been accomplished with the strategy of lowering prices in order to "make an investment" in various markets; a generally unprofitable euphemism for buying business with low rates. In most cases, these "investments" have inevitably led to rate increases at the end of their rate guarantee periods.

Causes of Decline in Group LTD Earnings

Looking back over the last several years, the decline in group LTD earnings (and the changes in prices and benefits that are coming) can be explained by examining four market dynamics:

1) Market share "rate wars", extended rate guarantee periods and other forms of price competition. This has led to LTD plans being underpriced.

2) Adding liberal benefit provisions such as expanded definitions of disability and higher benefit maximums. This has increased the overall incidence of LTD claims; i.e., higher numbers of claims.

3) New and more difficult to manage types of disability. These have increased the average intensity of individual LTD claims; i.e., higher dollar claims.

4) Lower LTD reserves earnings due to lower interest rates. Inadequate rates have less investment earnings margin to support them.

Now that more and more LTD insurers are focusing on increasing market share by pursuing each other's business, the LTD market has developed two dangerous characteristics: underpriced plans with growing liabilities. In this hypercompetitive environment, smaller insurers can no longer keep up with the "investment" practices of the larger LTD insurers and have started to drop out of the LTD market altogether. Even the larger insurers who remain are suffering declining profits.

The stronger LTD insurers with larger market shares to protect have implemented plans to improve results. Their common strategy: increase premiums wherever possible and aggressively manage claims. The latter strategy is often referred to as "disability management".

Disability Management

Disability management strategies vary among different companies, but in general, the term refers to claim cost control efforts that emphasize rehabilitation, claim settlement, case management and social security and public program claim qualification assistance. Sharing information with health programs and workers compensation plans, use of managed care devices such as standardized disability protocols and linking short term disability and LTD claims systems are examples of the types of tools disability managers are now using to better administer and control rising disability related expenses and benefit reserve liabilities.

However, while disability management techniques may limit some current claim liabilities, they fail to provide an effective foundation for managing the rising costs associated with the additional claims activity that result from too-liberal plan designs and hard to manage, new forms of disability. Chronic fatigue syndrome, fybromygalia (non-specific pain source), allergic reaction to environmental conditions (such as latex gloves) and new "designer" disabilities, such as mid-life crisis syndrome pose serious new challenges to claim management. Moreover, subjective disabilities, such as mental illness/substance abuse and musculoskeltal conditions still pose serious challenges to even the most effective new disability claim management techniques. Changing social views on disability reflected in new benefit laws and regulations also incur additional costs.

New Alternatives

New disability management practices are often thwarted by the expanded definitions of disability included in the contracts of many LTD programs sold during the last ten years. The only way to effectively manage disability claims in today's changing market is to make substantive changes in current LTD contract language.

Disability management consultants, working in conjunction with disability insurers and reinsurers now recommend two approaches to improving LTD results: revising LTD contracts to provide less liberal plan designs and revising current group LTD contracts to limit the duration of benefit payments for disabilities resulting from certain conditions that are prone to subjective interpretation which can create potentially large, long term liabilities for both the plan sponsor and the insurer.

A Return to the Concept of Supplemental Disability Coverage

The first "new idea" is actually a return to the old concept of an LTD plan being a supplemental program to government sponsored disability coverage. It proposes limiting LTD plan liability by restricting disability coverage payments only to conditions for which the claimant has applied and is receiving social security and/or all other public provided disability benefits, such as PERS and PERA. Benefit payments payable beyond the 24 month "own occ" period, for example, would be conditional upon public plan approval and continued payment of the public benefits. When public benefits cease, so too would the plan's liability. The cost savings of this type of plan revision would be considerable.

Limiting Claim Liabilities Linked to Certain Disabilities

The second idea is to limit LTD benefit payment durations to either 12 or 24 months for disabilities resulting from the following causes or conditions:

• mental illness and chemical dependency (e.g., dementia, schizoid behavior, amnesia and drug-induced hallucination)
• musculoskeletal and connective tissue disorders (e.g., certain back and neck conditions, arthritis and some forms of spinal disorders)
• Epstein Barr (Chronic Fatigue Syndrome)
• Fybromygalia (unspecified pain source)

The immediate effect on any group LTD plan utilizing this type of aggressive plan revision could be considerable. Reserve projections would be significantly lowered by limiting even a few claims in these areas, since the average costs of these subjective disability claims are usually very high and nearly impossible to limit using rehabilitation or other means of disability management. What isn't so clear, however, is how limiting insured plans in this manner would meet various state insurance law requirements. As a new revision, each carrier would have to have its new contract filed and approved before such a policy could be offered.

24 Hour Care and Disability Management

Group Health, Disability and Workers Compensation insurers are expending considerable resources examining new and effective ways to co-manage medical and disability claims within a single program referred to as "24-Hour Care." While many obstacles both practical and legal exist to creating a seamless, unified plan design, several carriers and provider organizations have created administrative links between the existing group and workers compensation programs to more effectively manage disability claims. Applying occupational therapy and loss prevention guidelines from Workers Compensation programs to group disability claims is an example of an advantage 24-Hour Care offers.

Changing the Paradigm: New Definition of Disability Guidelines

Group LTD coverage has been traditionally based on a definition of disability that is determined by an insured employee's inability to perform the duties of either their own occupation or the duties of a similar occupation for which they are well suited based on training, education and experience. Newer concepts propose linking disability benefit qualification to the insured's inability to perform one or more of the generally recognized six Activities of Daily Living (ability to bathe, dress, use toilet, transfer body weight without assistance, continence and take nourishment unassisted). Additional guidelines evaluate cognitive impairments that limit a person's ability to make deductions or conduct their own affairs.

These guidelines provide a less subjective way to evaluate a person's disability rather than trying to determine whether or not an insured is able to meet the requirements of performing a specific job.

The Future of Group LTD Insurance

As long as insurers continue to compete based on lower price, higher benefits and extended rate guarantee periods, it is doubtful that many LTD plan sponsors will consider revising their plans on their own. However, with LTD underwriting losses increasing by 10-15% per year, it is equally doubtful that many carriers will be able to continue to offer their programs at current pricing levels much longer. Relatively soon, LTD earnings will drop low enough to cool off the hypercompetitive attitude of the marketplace. Recent rate actions among major group LTD insurers suggest this change has already begun. Once this trend accelerates, most plan sponsors will be forced to revise their thinking regarding LTD plan design and plan funding.

Additionally, consolidations among the major LTD insurers will curtail the current competitive nature of the market even further. The result will be fewer insurers to choose from at lower benefit levels and higher prices. New, more effective approaches to disability management will emerge as 24-Hour coverage moves off the drawing board and into reality and changes in the attitudes of how disabilities are defined and managed occur. Future LTD contracts will reflect these changes in the long term disability insurance market.

Effective Strategies for Plan Sponsors

Employee benefit LTD plan sponsors should prepare now for the changes in the LTD market that are already beginning by taking the following steps:

1. Make sure your LTD disability policy provisions are consistent with your company policy regarding absenteeism and loss control. Don't buy an extended "own occupation" definition of disability provision, just because it was included as part of a "competitive quote". Do it only if that is how you want all of disability claims handled and that is consistent with your personnel policy. A better alternative would be to explore the newer forms of LTD policies that are coming into existence. Incorporate these ideas into a comprehensive approach to disability management; both occupational and non-occupational. Get your Workers' Compensation carrier involved.
2. If you are now in the process of purchasing a new LTD plan, do not add liberal benefit provisions just because the cost appears to be affordable now. That will quickly change. Those benefits will either become unaffordable or will simply be excluded from your policy at some point in the future.
3. If your current LTD policy is already too liberal in design or costly, reduce benefits carefully; negotiating aggressively for a lower price with your insurer for each reduction you make. Maintain the most visible plan features of your plan: the benefit replacement ratio, maximum monthly benefit payment and the disability waiting period before benefits begin. The other plan features can usually be changed without notice or concern.
4. Make sure your group LTD policy is placed with a reputable insurer with top financial ratings from at least three of the four major rating companies (A.M. Best, Standard & Poor's, Duff & Phelps and Moody's Investor Service). LTD is an especially long term liability; a claim can persist for 20-30 years or more. It is crucial that your LTD insurer will be there to pay the entire claim. Even the state guarantee funds won't cover the extended liability of even a moderately sized LTD claim.

While the changes in the LTD market pose challenges for insurers and insureds alike, acting now will not only avoid future problems in LTD benefit plan management, but will proactively deal with an often neglected aspect of disability benefit management that directly impacts on the most important personnel issue facing all employers - productivity.

William Colopoulos, Jr. has over 16 years of experience in employee benefits and has held various positions within the insurance and reinsurance industry. Bill has personally visited and studied the group LTD product offerings of over 100 insurers throughout the US and Canada. He is currently an employee benefits consultant in Shorewood, MN. Bill can be reached at 612-474-8611, or via email at wmcolopoulos@msn.com.

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