Long Term Disability – Incidence Gap – What is it?

Disability incidence rates have increased continually over the past 5 years. This incidence trend, which is the rate at which new claims are changing compared to the past, is industry wide and affects everyone.

Based on published reports from industry leaders, Manulife and Sun Life, current Long-Term Disability (LTD) pricing, is not reflective of this increased disability incidence trend. Munich Re (the leading global provider of reinsurance) agrees.  Using their LTD Benchmark Index analysis, they suggest that the increased trend is driven mainly by a sudden surge in mental health claims over the last 3 years.

Factors Impacting Incidence Rates

Sun Life suggests that, besides mental health, accidents, arthritis, and circulatory disorders, all contributed to a 31% growth in LTD claim incidence between 2014 and 2019.  Depending on the industry, there are also other factors influencing the incidence of disability. Some, are as follows:

  • Age Ranges (Different age groups exhibit different disability occurrences). Disability is not fully relative to one’s age infact, studies show that prevalence of disability increased with age – Source: Statistics Canada
  • Occupations (Certain occupations are exposed to specific hazards and face difficulty in returning to work following disability, compared to other occupations)
  • Geographic Locations (Access to rehabilitation facilities and medical professionals is limited in rural areas. Thus, disability incidence rates vary depending upon the geographic locations)
  • Seasonal Claim Patterns (i.e. Seasonal affective disorders) which is a major depressive disorder, with a seasonal pattern where one experiences difficulty waking up, lack of energy, and dietary symptoms.

Most Insurers use an average incidence of the past 5 years in experience rated pricing. The imbalance between those 5 year trends and the actual last 3 years is what is creating the incidence “trend” gap as the most recent trend is not reflected in the original 5 year rating assumption.

Given generationally low investment returns, Insurers cannot absorb this variance as their payout rates are increasing, while the returns on invested premiums are decreasing.  With their new pricing models, Insurers suggest that they intend to offer stability, predictability, and sustainability, while taking into consideration the most recent trends.  But clearly, plan sponsors and employees who pay for this protection, will shoulder the burden of higher anticipated premium costs.

Uncomfortable Conversations

In the vast majority of plans, LTD premiums are paid entirely by plan members, to preserve the non-taxable nature of the benefit at time of claim. Increases in disability premiums, will thus be borne entirely by plan members themselves. Given that we think, this repricing will be a multi-year phenomenon. Plan Sponsors will need to ‘educate’ employees on these trends, so as to engage them in this discussion; that will no doubt impact these same members over the next 12 to 36 months.

Plan Sponsors worried about member engagement or pushback with respect to member premium contributions may need to revisit premium contribution splits and, in some cases, employers may want to change the taxability of the benefit to ‘taxable’. This would allow the Plan Sponsor to share this premium with their members. Clearly, the global pandemic, will not make the prospect of sharing a greater portion of premium costs palatable to most, but it is a consideration.

We think Plan Sponsors will have no choice but respond to calls from factions or cohorts within their employment population who will push back when asked to pay more for disability insurance. Disenfranchised individuals may even petition for the elimination of disability income protection entirely. Caving to such pressure, would have grave consequences for plan members.

Eliminating LTD is not an Option

The days of the BBQ fundraiser for a worker afflicted with an illness are over, the costs are simply too great. Moreover, as we have already heard, the reason for this cost escalation is primarily attributable to the significant increase in disability incidence rates. Eliminating disability coverage now, would be equivalent to cancelling flood insurance in the spring after enduring record winter snowfalls and freezing temperatures.

LTD is unquestionably the most important benefit that can be offered by a benefits plan.  Transactional reimbursement of health and dental claims may seem important, but those expenses can be budgeted.  Replacing 67% of one’s gross income for the next 15-30 years of one’s work career is not “budgetable”.

As much as we may not like it, rising disability rates are a function of earning a paycheck or put another way, a cost of doing business.  An employer earning 50K will have to assign $800 of that to disability insurance.  In that case, if they become disabled, they will bring home 33.5K. Without disability insurance, a worker that becomes disabled, will bring home $0 and will eventually require Social Assistance.

For more information from the Insurers on this matter, please review the following links:

 

Manulife Incidence Gap

 

Sun Life Incidence Gap

2020-09-24T16:31:04+00:00