Marketing Disability Insurance for Profit
By W. Harold Petersen – As seen in the March 2017 issue of Broker World Magazine.
Insurers and producers of disability insurance are pleased to be advised that the year 2015 produced the highest level of profitability in more than 20 years as reported by Milliman, the outstanding consulting actuarial firm, some months ago. This regular survey of disability insurers started over 35 years ago. It gives the industry the best look at itself and serves to determine what adjustments are needed, if any, to attain and maintain profitability.
During the 1990’s disability insurers tried to hide for concern that business would be written, increasing their exposure to the losses that were being incurred. To respond to the concern, many carriers left the disability business to concentrate on producing life insurance and annuities which they deemed to be a safer cover to insure. Those few carriers that remained in the disability business had concern about the volatility of the business. They used to delay in underwriting to discourage the sale of disability insurance. Producers tried to cope with this environment, but many, bitter and offended at the underwriting tactics then used defected from the disability insurance market all together.
Slowly carriers timidly started a new approach to disability underwriting, for by 2005 what many CEO’s referred to as financial hemorrhaging had stopped. Once again carriers were issuing coverage and actually starting to encourage producers to write their disability products. Industry efforts were working. Companies eased stringent underwriting demands. The Life Insurance Foundation for Education (LIFE) added a great effort to the promotion of disability insurance, including its now highly effective Disability Insurance Awareness Month (DIAM) held in May each year in an effort to educate consumers as well as producers. Its positive slogan, "protect your paycheck," caught on and has been used to stimulate and popularize the marketing of disability insurance.
In the same time frame, the Council for Disability Awareness (CDA) was formed. This is a cooperative effort of companies pooling resources to make members of the public aware of their needs for protecting their incomes. In 2005 the International DI Society (IDIS) was created to provide a platform for disability insurance and to gather the strength of the industry pillars, insurers, regulators, producers, and educators in the common cause of rebuilding the once neglected disability insurance industry.
According to the Milliman studies of the 70 companies writing non-cancellable disability business in 1979, the number dwindled to 26 by year 2005. At one time 545 of the 1,100 life companies in the U.S. offered disability insurance for sale.
In the last 60 years, we have made progress in overcoming largely unfounded fears and concerns that worked to prevent income earners from being able to insure themselves a cash flow if they became disabled. At first, there was a concern over the color of the shirt collar worn by the applicant. Applicants who wore blue collars were the underwriters’ preferred class and they were warmly considered. White collar people were suspect and deemed unwanted for their incomes were often higher than blue collar people. The fear was these workers "probably" had savings and investments, so they either didn’t need the insurance or they could live so lavishly on their passive income.
Adding further to the fears of insuring white collar people was the concern of determining when and if such a person was truly disabled and qualified to receive benefits. Their manual duties they thought may be nil and hard to analyze. From such fears came the definition of confining and non-confining sickness, which would also require a person to be necessarily and absolutely confined to their home or a hospital to be eligible for payment.
But the temptation for more premiums urged the underwriters to look more favorably on white collar workers and to even lighten the definitions of disability. The collar concerns have vanished and have given way to measuring a person’s disablement based on inability to perform his/her regular duties of the job, or similar language. But that victory in favor of the applicant gave rise to other concerns.
How does the industry feel about aviation occupations, offshore oil rig workers, fishing boat captains, entertainers and professional athletes? In general, underwriters don’t want to insure people with these occupations, but very favorable supplemental sources are available to provide quality coverage for them.
These efforts have encouraged more life companies to enter or re-enter the disability business. Competition continues to encourage better products and response to the public awareness of the need for disability insurance to be looked upon as a primary financial planning tool.
The American College, in conjunction with a large and reputable disability insurer, made a study of disability insurance in the work force, its problems, and its relevance to the well-being of Americans. This study substantiates what many producers have individually researched, but it is a study that is absolute and cannot be doubted. It deals, however, with employed people. Self-employed people have to be treated according to their individual circumstances.
The concerns about the use of group insurance include how to moderate issue limits, taxation of benefits if the employer pays the premium, and lack of coverage for bonus and/or profit-sharing income. Also, the group insurance is cancellable and could result in a very difficult situation for an insured because there are no conversion guarantees should the group be cancelled or the insured decides to leave the group.
Milliman also studied the group disability market and exposed the problems inherent in using that form of insurance to provide income security to people. This study also altered us to the many substantial needs for special plans of disability insurance brought into focus by the Group DI Study, plans such as Buy/Sell, Key Person, Loan/Lease, Severance Disability, Venture Capital, and the big one, Retirement Plan Disability Insurance.
Disability insurance is in the opinion of many who are familiar with the underwriting process to be the most intense and challenging of all underwriting efforts. It involves being part doctor, lawyer, CPA, business person, psychologist, and soothsayer. Included in the underwriters’ consideration must be other coverage in force, eligible government benefits, occupation, work experience, and income.
Much of the arduous individual risk selection has been usurped by Guaranteed Issue, Guaranteed to Issue, and streamlined and simplified underwriting. Irrespective of these breakthroughs, there is industry respect for the people who produce the excellent results for insurers while performing excellent service, making the sale of disability insurance once again joyous and profitable.
New products have entered the market making possible issuance of as much as $500,000 per month of benefit, up to $100,000,000 to fund Buy/Sell agreements, and up to $50,000,000 per person for other uses. These issue amounts plus fresh issue attitudes make possible a whole new realm of coverage for purposes of Disability Financial Planning.
Underwriting is an essential key instrument in the quest for new markets and new profit opportunities. It has opened new attitudes for companies and new opportunities for purveyors of these concepts and products.