10 Ways to Get Into the Game
Individual disability-income products come in a variety of shapes and sizes, all of which can be profitable for insurers.
In the world of individual disability-income insurance, the product possibilities are nearly endless. For companies that are not currently offering individual disability products, there is a wide range of ways to enter the market, each with different distribution, product, underwriting and management implications. The best solution for a particular company depends on its starting point, target market and corporate strengths, weaknesses and goals. Each of the following approaches to entering the individual disability market appeals to a different type of insurance company.
Traditional Market
Prosperous small-business owners and up-scale professionals and executives have historically been the core of the individual disability market. This has been a very challenging market, however, even for companies with extensive experience and skills. Although there is significant revenue and, recently, significant profit in this market segment, new entrants should take great care to avoid repeating the mistakes of the past in developing their approach. For example, they should target market segments that have shown favorable risk experience or low penetration rates, such as corporate executives or middle-income employees. They also should anticipate performing a high level of underwriting and claims management, and should design their offerings to minimize the risk of overinsurance and adverse risk selection. The market for traditional individual disability coverage has been returning to growth and profitability after many difficult years, but it should be approached with care by new entrants.
Life Insurance-Related Sales
In the course of a normal ordinary life sale, an agent develops information about the applicant's income needs, and the insurance company develops information about the applicant's medical characteristics. The life insurance product provides income replacement in the event of death; however, the insured will not have coverage in the event of disability. By providing a disability offering alongside its life insurance product, the company can leverage the costs of its life insurance underwriting. Ordinarily, disability underwriting involves a more in-depth exploration of finances and medical conditions than does life underwriting. With a properly designed disability product and supplemental application, however, a minimal amount of extra effort can yield extra premium revenue for the company and extra coverage for the insured. Disability riders providing a specified monthly benefit tied to the face amount of the life policy provide one such solution. One fairly innovative product in the market is sold with a face amount of five times income and provides monthly benefits that depend on the severity of disability. The face amount, elimination period, benefit period and benefit eligibility for the disability benefit are defined in a way that requires minimal extra explanation by the agent. With the addition of a fairly simple application supplement, the insured can qualify for limited but valuable disability benefits, and the insurance company can show extra revenues to the company and agent for minimal extra sales effort.
Multilife Disability Plans
Group disability plans have proven to be a successful means of offering disability coverage to a large group of employees. These plans, however, often do not fully meet the needs of high-income executives, who seek coverage with higher amounts, more predictable costs and greater portability. These goals can be achieved through a well-designed multilife individual disability-income plan. Multilife plans are designed to fit neatly with the underlying group plan, but to offer benefits more consistent with traditional, individual disability offerings. If participation rates are high, they can often be issued on a guaranteed basis, making the sale an easy one for group brokers as well as individual specialists. Multilife disability-income plans often are most appealing to the very executives who make the decisions about employee benefits, and the favorable spread of risk resulting from the high participation rates may result in good morbidity experience for the insurance company. A well-designed executive carve-out or supplement program has many benefits for all concerned.
Mortgage Protection
Home ownership is at record levels in the United States. Between mortgage financing and refinancing, along with increasing levels of home-equity debt, many middle-income households are relying on their ongoing income to service a monthly mortgage. A number of insurance companies currently sell mortgage term-life insurance to protect a mortgagee in the event of death. With minimal extra underwriting, it is possible to add a rider to provide disability coverage for the amount of the mortgage. Since the amount of income replaced is fairly minimal, there is little or no need for additional financial underwriting. The disability benefits may be paid for a stated period of time, such as two years or five years, or they may be paid for the remaining term of the mortgage.
Retirement Savings
As baby boomers grow older, more and more options are available for qualified defined-contribution plans, and more and more money is expected to pour into these plans. Individuals contributing to such plans rely on their current income to finance their future retirement, and a prudent financial plan should protect this stream of income. A properly designed product targeted to replace the income currently dedicated to retirement planning could be built with simple underwriting and issue rules and packaged alongside products designed to accumulate wealth for retirement. For companies with significant investment experience, more complex products could be developed that would pay disability benefits directly into qualified retirement savings plans or other investment vehicles.
College Savings
The recent popularity of state-sponsored college savings plans provides a similar opportunity. By definition, the people who are contributing to these plans will be relatively young but still will be subject to disability risk. As in the retirement savings arena, a product could be designed with limited issue ages and limited underwriting to insure the portion of income that is contributed to the plan each month. The product could be defined with fairly long elimination periods and targeted to complete the college savings plan in the event of a severe disability, providing for fairly inexpensive coverage for the consumer. Depending on the insurer's tolerance for product complexity, benefits could either be paid directly to the insured or into a deferred investment vehicle more closely linked to the child's expected need for future college tuition.
Work-Site Disability
For many employers, especially in small businesses or blue-collar industries, the cost of traditional group coverages is prohibitive. Work-site products, where premiums are paid by employees via payroll deduction, offer a potential solution. Popular work-site products include life insurance, vision, dental, disability and long-term care. Insurers who have invested in the infrastructure necessary to offer work-site products can achieve economies by offering as many products as possible in order to retain control of the payroll slot, to serve the range of a customer's needs and to maximize revenue to cover high fixed expenses. Adding disability to a product mix helps to secure these goals. Work-site disability products typically offer simple definitions, total-only disability benefits, one- or two-year benefit periods and simplified underwriting such as a health questionnaire rather than a complete medical application, depending on group characteristics. Income replacement levels often are low in order to keep the premiums affordable.
Association and Affinity
Association disability has, historically, been a very challenging product due to its over-concentration on medical markets and its increasing overlap with traditional individual disability-income products. With the increased mobility of the work force, however, association and affinity groups remain an attractive means of accessing customers who might not otherwise purchase disability insurance. The keys to success in this market include designing products that are simple to explain and issue, ensuring that benefits are different from those available on traditional, individual disability products sold by individual agents and brokers and performing sufficient underwriting to manage the risk. For a company that has access to these distribution channels and is able to think creatively about its product design, association and affinity markets present significant opportunity for growth and profits.
Direct Marketing
For companies with direct-marketing expertise, or who have relationships with marketing organizations, an appropriately designed disability product can be an excellent source of revenue and profits. Direct-marketed products should have the simplest possible design and underwriting methods. Benefits should be limited in nature and should be paid for very well-defined losses. Companies must also balance the savings in commissions (since no agent is involved) with the additional costs of preparing and mailing marketing materials. The cost structure for direct-marketed offerings will depend heavily on the response rates achieved through mailings or telemarketing.
Accident Only
Disability insurance products that pay benefits only for disabilities resulting from accidents offer the advantage of simplicity. Since accidents are rarely related to prior medical history, little or no medical underwriting is required for accident-only products. Therefore, these products are natural candidates to be offered through distribution channels that have minimal tolerance for underwriting. Typical products pay a modest monthly benefit for a period of one to five years, and may include a variety of accident-related riders, such as hospital income benefits or payments for specified losses. The cost of these products is typically quite low.
Individual disability insurance is not a monolithic product. There are many ways in which individuals may be protected from the risk of disability. For each company, finding the right product to match its target markets and areas of expertise involves careful thought and design. For almost any insurer, however, there is some type of individual disability offering that will provide the opportunity for growth and profits while benefiting the customer, agent and insurance company.
(Thomas K. Penn-David is second vice president, Munich American Reassurance Co. He is responsible for regional marketing of life and health reinsurance. Daniel D. Skwire is principal and consulting actuary with Milliman USA in Portland, Maine, specializing in group and individual disability insurance.)
By Thomas K. Penn-David and Daniel D. Skwire
