2011 annual survey of the U.S. individual disability income insurance market

Transcription

1 2011 annual survey of the U.S. individual disability income insurance market Robert W. Beal, FSA Principal & Consulting Actuary Anne Mitchell, FSA Consulting Actuary July, 2011 This report cannot be published in any other form or publication without written permission from Milliman.

2 Table of Contents Section I: Introduction... 1 Section II: Survey Highlights... 3 Section III: Sales Results... 5 A. Volume of Sales... 5 B. Annual Growth Rates from 2009 to C. Noncancelable versus Guaranteed Renewable Business... 7 D. Business Products... 7 E. Occupation Classes and Key Occupations... 8 F. Markets G. Distribution H. Observations on Sales Trends Section IV: Underwriting A. Issue and Participation Limits B. Replacement Limits C. Underwriting Requirements Individual Sales D. Underwriting Requirements Employer Sponsored Multi-life Market E. Simplified Underwriting Programs F. The Impact of the Economic Recession on Underwriting Practices G. Observations on Underwriting Trends Section V: Product and Pricing A. New Product and Premium Rate Changes over the Last Year B. The Availability of Specific Products C. Products for the Employer Sponsored Multi-life Market D. Mental/Nervous Limitations E. Observations on Product and Pricing Trends This report cannot be published in any other form or publication without written permission from Milliman.

3 Section VI: General Trends A. How Satisfied Are Companies With Their Results? B. Making the IDI Sale Easier C. Favorable Trends in the IDI Market D. Unfavorable Trends in the IDI Market E. Obstacles to Long Term Financial Health of the IDI Market F. Opportunities for Growth G. Changes in Historical IDI Claim Patterns H. Impact of Recession on Sales and Claims I. Impact of Health Care Reform on the Disability Market J. Observations on General Trends This report cannot be published in any other form or publication without written permission from Milliman.

4 Section I: Introduction Milliman surveyed 15 insurance companies that are active in the United States individual disability income (IDI) market. The survey asked about new business sold between 2002 and 2010, the distribution of sales among key marketing segments, underwriting requirements, product offerings, favorable and unfavorable trends, and opportunities and obstacles in the current IDI market. Milliman has published this annual survey since This report presents the results of the 2011 survey. The scope of the IDI market in this survey includes traditional noncancelable and guaranteed renewable IDI policies. Policies are generally individually underwritten, with the exception of policies sold in the employersponsored multi-life market where guaranteed standard issue (GSI) underwriting is common. Although the maximum benefit periods may be as short as 12 months, the most prevalent maximum benefit periods are to age 65 or longer. The survey excludes the type of IDI plans sold at the worksite to employees where policies seldom have benefit periods longer than two years and often pay disability benefits that are due to accident only. In the worksite DI market, the application typically involves a short health questionnaire and simplified underwriting, unlike the traditional IDI market where applications and medical underwriting are more extensive. Worksite disability policies are one of a number of insurance coverages sponsored by the employer and made available to employees on a voluntary basis. Contributors The table below lists the 15 contributors to the survey: Contributors to the 2011 IDI Market Survey Assurity Berkshire Illinois Mutual MassMutual MetLife Mutual of Omaha Northwestern Mutual Ohio National Principal RiverSource State Farm The Standard Thrivent Union Central Unum In total, these 15 contributing companies issued policies with $321 million of new annualized premium in We estimate that their total premium represents 90% to 95% of the IDI market in terms of new sales. 1

5 Reliances and limitations In conducting the 2011 IDI market survey and preparing this report, we have relied upon the information provided by the contributors. To the extent that this data is incomplete or inaccurate, our results may be materially affected. This report is being made available to the general public. This report cannot be published in any other form or publication without written permission from Milliman. Milliman does not intend to benefit any third-party recipient of its work product. 2

6 Section II: Survey highlights This section summarizes highlights and observations from the report. Sales results While the overall annual growth rate in new premium between 2009 and 2010 was negative at -3.4%, it was an improvement over the prior year s annual growth rate of -12.5%. Four contributors to the survey reported positive annual new premium growth rates in 2010 versus only one contributor in Contributors believe that unfavorable economic environment is the primary reason for depressed sales. New premium sold to physicians and dentists continued to grow, both in absolute dollars and as a percentage of total new premium for the industry. Lawyers and executives had decreasing sales, continuing a trend that started in The growing prevalence of IDI sales to the medical occupations is similar to sales patterns prior to catastrophic financial losses of the mid-1990 s, which were largely caused by a severe jump in claims from doctors in response to the movement to managed healthcare and to attempted healthcare legislation at that time. Underwriting There were very few changes to medical and financial underwriting requirements during The changes that did occur were generally slight liberalizations to existing requirements. The highest maximum issue and participation limits were stable during the year, with the exception of the top medical occupation class when long-term disability (LTD) was present. The highest maximum participation limit in this segment increased from $25,000 to $30,000. Several contributors other than those already at the highest maximum limits did increase their maximum issue limits in Products The majority of contributors to the survey reported new product introductions or revisions during the year. Premiums were decreased by several contributors, through either rate reductions or the increased availability of premium discounts. General trends Survey contributors ratings of their overall profitability and sales have improved somewhat when compared to last year s survey. Poor economic conditions have been a major factor in depressing sales but have not created materially greater claim activity among the survey contributors. The most frequently mentioned favorable trend was strong financial results that were due to continuing favorable claim experience. The most frequently mentioned unfavorable trends were low sales, a poor economy, and competitive pressures. 3

7 Final thoughts IDI is by its nature a risky product where long-term guarantees are made in an ever-changing and unpredictable world. The financial impact of changes made to an IDI portfolio, whether liberalizing or restricting, may not show up for many years. It is important to manage this business cautiously and with consideration of the longer term. Diversification of markets where IDI is sold is one way to hedge against the risky nature of the product. More than 40% of all new premiums in 2010 came from physicians and dentists at a time when healthcare reform and its possible implications are on the horizon. Expanding the market to generate sales from a variety of occupations can provide a cushion against the external forces that impact a particular segment of the market. This may require new and different product features and expansion into unexplored distribution channels. IDI fills an important need in providing financial security for its insured population. History has shown that IDI can meet this need and also generate profits for insurers as long as sound risk management principles are followed and the premiums charged are appropriate for the risks undertaken. 4

8 Section III: Sales results This section analyzes trends in the new business sold by the 15 IDI carriers from 2002 to A few carriers revised some of their pre-2010 statistics, which has caused small variances in the overall results from what was reported in Milliman s previous IDI market surveys. A. Volume of sales The chart in Figure 1 shows total new annualized premium and policies sold by the 15 IDI carriers from 2002 to The combined new premium for the 15 carriers decreased from $332 million in 2009 to $321 million in 2010, a 3.4% reduction in new premium. The volume of new policies decreased from 209,142 to 197,962, a 5.3% reduction in new policies. This is the second consecutive year in which the total new premium and new policies for the 15 contributors has dropped, although the reduction in 2010 was much smaller than in Many contributors attribute the reduction in new sales in 2009 and 2010 to the economic recession. Six of the 15 IDI carriers produced more than $35 million of new premium each in 2010 (compared to five in 2009) while seven produced under $10 million apiece (the same as in 2009). The graph in Figure 2 shows the cumulative new premium by company as a percent of total new premium in 2010 after carriers are ranked by their new premium (i.e., Company A had the largest volume of new premium in 2010). 5

9 In 2010, similar to prior years, the top five IDI carriers produced 69% of the total new premium in the study, and the top 10 IDI carriers produced 95%. Note: Figure 2 omits new premium from carriers not participating in the survey. B. Annual growth rates from 2009 to 2010 Figure 3 shows the annual growth rates (AGR) of the 15 companies from 2009 to 2010, ordered highest to lowest. Four of the 15 carriers had positive growth in new premium from 2009 to The highest AGR in 2010 for any of the carriers was 19.5% and the lowest was -18.7%. The overall growth rate for all companies combined was -3.4%. In 2009, only one carrier had positive growth in new premium over the prior year. 6

10 C. Noncancelable versus guaranteed renewable business Figure 4 shows the percentage of new premium sold on guaranteed renewable products in years 2002 to Disability buy-out business, which is technically classified as "Renewable for Stated Reasons Only" for annual statement reporting, has been included as noncancelable or guaranteed renewable based on whether or not the premiums are guaranteed. Over the full nine years ( ), guaranteed renewable premium has averaged only 16.5% of total premium, but this percentage has been trending up. Although it has not been consistent year-to-year, the trend from 2002 to 2010 shows that premium from guaranteed renewable policies has represented a slowly increasing percentage of total premium. D. Business products Two common IDI products offered by companies for the business market are overhead expense (OE) policies, which reimburse insureds for business expenses incurred while they are disabled, and disability buy-out (DBO) policies, which provide funds for buying out a disabled partner s share of the business. Thirteen of the 15 contributors offer OE policies, while only eight of the contributors offer DBO policies. The table in Figure 5 shows the percentage of IDI premium from OE and DBO policies by year from 2002 to These are shown as (1) the percentage of total IDI premiums from all companies regardless of whether they offer these business products and (2) the percentage of the IDI premium from only those companies that offer these business products. 7

11 Figure 5 Percentage of IDI New Premium From Overhead Expense and Disability Buy-Out Policies Years 2002 to 2010 Overhead Expense Premium Disability Buy-Out Premium Issue Year % Premium All Contributors % Premium Only Contributors Offering OE % Premium All Contributors % Premium Only Contributors Offering DBO % 4.99% 2.07% 2.72% % 5.09% 2.02% 2.46% % 4.56% 2.21% 2.70% % 4.81% 1.88% 2.31% % 4.87% 1.84% 2.25% % 4.25% 1.93% 2.32% % 4.80% 1.78% 2.11% % 5.56% 1.74% 2.03% % 5.63% 1.64% 1.89% Averages % 4.86% 2.04% 2.55% % 4.97% 1.79% 2.12% % 4.92% 1.90% 2.30% There has been a downward trend over the years in the portion of new premium from business products. This trend was reversed in 2009 and 2010 for overhead policies, possibly as a result of an increase in sales to small business owners and doctors. E. Occupation classes and key occupations Contributors were asked to provide their distributions of new premium by occupation class. Because of the variations in how companies define their occupation classes, particularly in the professional and executive classes, generic occupation classes were defined for this survey to which each contributor s occupation classes were mapped. The four generic occupation classes are as follows: Class 4A Occupation Class 4A includes professionals and higher-paid executives. Because doctors and surgeons were included in the top occupation class for many years, they are grouped here although many carriers now assign doctors and surgeons to special medical occupation classes. Class 3A Occupation Class 3A contains white-collar and managerial occupations that are not included in 4A. Class 2A Occupation Class 2A contains technical workers and supervisory occupations that typically do not perform manual labor. 8

12 Class A&B Occupation Class A&B contains the blue-collar occupations. The table in Figure 6 shows the distribution of new premium among the generic occupation classes. Figure 6 Distribution of New Premium by Generic Occupation Class Years 2002 to 2010 Issue Year 4A 3A 2A A&B % 21.1% 7.2% 4.6% % 19.3% 6.6% 4.6% % 19.2% 6.1% 4.7% % 18.2% 5.7% 4.9% % 15.6% 5.7% 4.5% % 14.0% 5.2% 4.4% % 12.7% 4.7% 4.1% % 12.3% 4.5% 3.7% % 10.6% 4.2% 3.7% Averages % 19.4% 6.4% 4.7% % 13.1% 4.9% 4.1% % 15.9% 5.5% 4.4% The year-to-year changes in the percentages in Figure 6 indicate that overall the IDI market continues to shift to professionals and executives (Occupation Class 4A). With the renewed focus on medical occupations in recent years and the emphasis on selling to executives in the employer-sponsored multi-life market, the generic Occupation Class 4A has been increasing its already predominant share of the IDI market. This trend may also reflect a gradual upgrading of occupations to higher classes. Figure 7 shows the distribution of new premium issued in 2010 between noncancelable (noncan) and guaranteed renewable (GR) policies by generic occupation class. Guaranteed renewable policies are much more prevalent in the lower occupation classes. 9

13 The table in Figure 8 shows the distribution of total new premium in years 2002 to 2010 among certain key professional and executive occupations. The results are based on information from the 10 contributors that were able to report their new premium split among these occupations. The combined new premium from these 10 companies represented 88%-94% of the total new premium for the 15 contributors over the period. Figure 8 Distribution of New Premium Among Key Occupations for Years 2002 to 2010 Issue Year Doctors & Surgeons Dentists Lawyers Executives Accountants % 6.2% 6.2% 28.1% 1.7% % 6.3% 7.6% 27.7% 1.9% % 6.5% 6.5% 28.4% 2.1% % 6.4% 6.8% 27.6% 2.0% % 7.3% 6.9% 28.2% 2.2% % 6.4% 8.1% 28.2% 2.3% % 7.0% 7.4% 26.6% 2.5% % 8.0% 7.3% 24.9% 3.1% % 8.9% 6.3% 23.1% 2.2% Averages % 6.3% 6.8% 28.0% 1.9% % 7.5% 7.2% 26.2% 2.4% % 7.0% 7.0% 27.0% 2.2% 10

14 Figure 8 shows that executives were the predominant occupation from 2002 to 2008, but doctors and surgeons took over first place in 2009 and their share of new premium continued to grow in The annual growth rates in new premium in 2010 for doctors and surgeons and for dentists were 8.2% and 7.9% respectively, while the annual growth rates for lawyers, executives, and accountants were -15.9%, -9.6% and -29.6%, respectively. The chart in Figure 9 shows the distribution of these 10 carriers with respect to the portion of 2010 new premium issued to doctors and surgeons. For three of the 10 carriers, doctors and surgeons represented over 40% of new premium in 2010, with one of the three exceeding 50%. Figure 10 shows the distribution of new premium between noncancelable (noncan) and guaranteed renewable (GR) policies issued to these key occupations in

15 Five contributors were able to track new premium issued to small business owners. Their combined share of the total premium of all survey contributors ranged between 55% and 62%. Figure 11 shows the percentage of new premium in years 2002 to 2010 sold to small business owners for these five contributors. For these five contributors, the percentage of new premium issued to small business owners jumped to 16% in years 2009 and 2010 from a more static trend line of 12%-13% from 2002 to F. Markets The following are definitions of three key segments within the IDI market: A. Individually sold business This segment is comprised of policies sold to individuals, typically one-on-one with agents or brokers. The individuals employers are not involved in the endorsement of the IDI product or the payment of the premiums. Normal individual underwriting is involved. B. Employer-sponsored multi-life business In this segment, referred to as "employer pay DI," employers decide either to purchase IDI products for groups of employees in lieu of or as a supplement to group long-term disability insurance or to allow insurers to solicit insurance to employees on-site and to collect premiums through payroll deductions or list billing. The latter situation is referred to as "voluntary" or "employee pay DI" and differs from the worksite disability market described in the Introduction of this report because traditional IDI products are sold. In both employer pay and employee pay cases, underwriting can vary from normal underwriting to guaranteed standard issue depending upon the size of the case and the level of participation among eligible employees. Premiums for employer-sponsored multi-life groups are typically discounted 15% to 35%, depending upon the size of the case, the premium payor, or other demographic factors. 12

16 C. Associations In this segment, IDI carriers seek endorsements from professional associations to provide IDI coverage to association members at a discounted premium. In general, traditional underwriting is used in the association market. However, as an inducement for sales, IDI carriers will sometimes offer some form of guaranteed underwriting (for example, guaranteed standard amounts up to a $1,500 monthly benefit after the first 100 members sign up) in addition to a premium discount, typically 10%. The employer-sponsored multi-life market has incurred favorable claim experience for many companies over the years compared to the experience of either individually sold or association business. A major reason for this better claim experience is that there is less anti-selection in the employer-sponsored multi-life market than in the other markets because the decision to purchase insurance in the case of employer pay business or to select available product options in the case of employee pay business is made by the employer and not the insured. Because of its favorable claim experience and opportunities for additional sales, the employersponsored multi-life market has been the focus of aggressive marketing efforts in the IDI industry in recent years as more companies enter this market. Figure 12 shows the distribution of new premium for all contributors among the three market segments in the years 2002 to Figure 12 Distribution of New Premium by Market Segment Years 2002 to 2010 Employer- Issue Year Individually Sold Sponsored Multi- Association Life % 31.3% 1.6% % 30.2% 2.1% % 28.9% 2.4% % 30.2% 2.7% % 30.6% 2.6% % 34.8% 3.0% % 35.7% 3.3% % 34.8% 4.2% % 38.4% 4.3% Averages % 30.2% 2.2% % 34.8% 3.5% % 32.8% 2.9% The percentage of new premium from the individually sold market segment has dropped from 61% in 2009 to 57% in 2010, while new premium from employer-sponsored multi-life business increased from 35% in 2009 to 38% in Although the association market represents a small percentage of total sales, the percentage of new premium sold through associations has been slowly increasing. The reader should be aware that the portion of the association disability market serviced by companies with traditional IDI products is small. The bigger association disability market is serviced by companies that specialize in this market and 13

17 offer conditionally renewable disability products. These association specialty companies are not included among the contributors to this survey. Figure 13 compares the annual growth rates for the three markets. Growth rates for the employer-sponsored multi-life market are split between employee pay and employer pay. Figure 13 Annual Growth Rates in New Premium by Market Employer-Sponsored Multi-Life Individual Employee Employer Issue Year Total Sales Association Total Pay Pay % -1.3% 27.6% -6.1% -18.9% 18.6% % 4.4% 14.3% -2.0% 5.1% -11.4% % -0.3% 15.3% 6.5% -6.2% 26.5% % 1.7% -1.0% 2.8% -4.6% 11.4% % -0.7% 20.7% 21.1% 30.0% 12.4% % -1.0% 13.2% 3.6% 16.5% -11.3% % -12.6% 10.6% -14.7% -21.9% -3.8% % -9.2% -2.2% 6.7% 23.5% -13.9% Average % 1.1% 13.6% 0.2% -6.5% 10.3% % -6.0% 10.3% 3.4% 9.9% -4.7% % -2.5% 11.9% 1.8% 1.4% 2.6% In 2010, new premium from the employer-sponsored multi-life market increased by almost 7% as a result of growth in the employee pay segment. On the other hand, new premium in 2010 from the individual sales and association markets fell by 9.2% and 2.2%, respectively. Although the association market is much smaller than the other two markets, it has experienced the strongest long-term growth rate. Figure 14 groups companies by the amount of 2010 new premium issued in the employer-sponsored multilife market. Six of the 15 contributors sold at least 20% of their new premium in this market, of which five produced 40% or more. Five carriers reported essentially no premium in the employer-sponsored multi-life market. 14

18 Figure 15 shows the split between employee pay and employer pay premium in the employer-sponsored multi-life market for the years 2002 to Figure 15 Distribution of Employer-Sponsored Multi-Life New Premium Between Employee Pay and Employer Pay, Issue Year Employee Pay Employer Pay % 34.2% % 43.2% % 39.0% % 46.3% % 50.2% % 46.6% % 39.9% % 45.0% % 36.3% Averages % 40.6% % 43.4% % 42.3% In most years since 2002, the percentage of employee pay premium, ranging from 50% to 66% of total employer-sponsored multi-life premium, has been higher than the percentage of employer pay premium. The percentage of employee pay premium in 2010 jumped significantly from the prior year (55% to 64%). Figure 16 shows the distribution of new premium in 2010 between noncancelable (noncan) and guaranteed renewable (GR) policies by market. The employer-sponsored multi-life market has a lower percentage of GR premium than either the individually sold or association markets. The percentage of GR premium in the employer-sponsored multi-life market does not vary greatly between employee pay and employer pay cases. 15

19 G. Distribution Contributors were asked to show the distribution of new premium by the following four distribution channels: 1. Career agents These producers are career agents of the companies whose IDI products they are selling. 2. Brokers Brokers are either independent producers or career agents for companies that are different from the companies whose IDI products they are selling. 3. National accounts National accounts are insurance companies that enter into marketing arrangements with IDI carriers whereby their agents sell either (1) the products of the IDI carriers, and the companies receive compensation in the form of marketing allowances from the IDI carriers, or (2) private-label IDI products, which are administered by the IDI carriers under turnkey arrangements Other producers Examples of other producers include personal producing general agents and members of producer organizations. 16

20 Figure 17 shows the mix of new premium by distribution channel for all 15 contributors combined for the years 2002 to Figure 17 Mix of New Premium by Distribution Channel Years 2002 to 2010 Issue Year Career Agents Brokers National Accounts Other Producers % 39.9% 9.6% 10.7% % 39.6% 9.1% 8.0% % 39.6% 9.0% 7.4% % 40.7% 8.0% 7.8% % 40.8% 7.8% 7.4% % 41.5% 7.2% 8.6% % 42.6% 6.8% 7.8% % 43.9% 6.2% 7.6% % 45.9% 5.9% 5.3% Averages % 40.0% 8.9% 8.5% % 42.8% 6.8% 7.4% % 41.6% 7.7% 7.9% The two main distribution channels are career agents and brokers, comprising 89% of the new premium in Over the last nine years, the share of new IDI premium sold by brokers has been increasing steadily. Brokers sold 46% of total IDI premium in 2010, compared to 43% sold by career agents. Over the last seven years, the share of new premium generated by national accounts and other producers has been slowly declining and shifting to brokers. Figure 18 shows the mix of premium among the various distribution channels between noncancelable (noncan) and guaranteed renewable (GR) policies. Career agents are more likely to sell guaranteed renewable policies than brokers, national accounts, and other types of distribution. 17

21 H. Observations on sales trends The overall annual growth rate in new premiums between 2009 and 2010 remained negative (-3.4%) but much better than the growth rate experienced from 2008 to 2009 (-12.5%). Four contributors experienced positive annual growth rates from 2009 to 2010 versus only one from 2008 to The share of new IDI premium issued on guaranteed renewable policies continues to increase slowly. Lower occupation classes (2A, A&B), nonprofessional occupations, and individually sold business are more likely to involve guaranteed renewable premiums. Doctors and surgeons shares of the combined new premium for the 10 contributors who were able to report sales by key occupations continued to increase in 2010 from 29% to 32%. The share for dentists increased from 8% to 9% while the share of new premium from executives, lawyers, and accountants fell. The share of new premium attributable to the employer-sponsored multi-life market increased from 35% in 2009 to 38% in This increase was driven in large part by the voluntary segment of this market. Brokers share of new premium increased from 42% in 2009 to 44% in 2010 while the share of new premium from career agents remained flat. The share of new premium from national accounts and other types of distribution continued to fall in

22 Section IV: Underwriting This section discusses current underwriting requirements of the 14 IDI carriers that contributed to this part of the survey. A. Issue and participation limits The issue limit is the largest amount of monthly benefit that an IDI carrier will issue to individual insureds. The table in Figure 19 compares the highest, lowest, median, and average issue limits among the 14 contributors, for (1) the top nonmedical occupation class and (2) the top medical occupation class, between the 2010 and 2011 surveys. Figure 19 Maximum Issue Limits Top Nonmedical Occupation Class Top Medical Occupation Class Measure: 2010 Survey 2011 Survey 2010 Survey 2011 Survey Highest $20,000 $20,000 $17,000 $17,000 Lowest $8,000 $9,000 $5,000 $5,000 Median $15,000 $15,000 $15,000 $15,000 Average $14,643 $15,429 $13,286 $13,429 Number of Carriers at Highest Limit Most carriers have a maximum issue limit of $15,000 for their top nonmedical occupation classes, although two more companies have increased their maximum issue limits for the top nonmedical occupation class to $20,000 since the last survey. Most carriers also have a maximum issue limit of $15,000 for their top medical occupations. The number of carriers with a maximum issue limit of $17,000 for their top medical occupation class has remained at two. The participation limit is the largest monthly benefit amount that an IDI carrier will permit after taking into account all in-force disability income coverages, including other companies and group LTD. Figures 20A (when no group LTD exists) and 20B (when group LTD is present) compare the highest, lowest, median, and average issue limits among the 14 contributors, for (1) the top nonmedical occupation class and (2) the top medical occupation class, between the 2010 and 2011 surveys. 19

23 Figure 20A Maximum Participation Limits With No Group LTD Present Top Nonmedical Occupation Class Top Medical Occupation Class Measure: 2010 Survey 2011 Survey 2010 Survey 2011 Survey Highest $30,000 $30,000 $25,000 $25,000 Lowest $10,000 $12,000 $6,000 $6,000 Median $18,000 $20,000 $15,500 $18,000 Average $18,833 $20,667 $16,417 $17,833 Number of Carriers at Highest Limit Figure 20B Maximum Participation Limits With Group LTD Present Top Nonmedical Occupation Class Top Medical Occupation Class Measure: 2010 Survey 2011 Survey 2010 Survey 2011 Survey Highest $30,000 $30,000 $25,000 $30,000 Lowest $10,000 $12,000 $6,000 $6,000 Median $25,000 $25,000 $20,000 $20,000 Average $23,054 $23,512 $18,364 $18,833 Number of Carriers at Highest Limit Most carriers are willing to participate at higher amounts when the insured has group LTD because benefits are usually taxable and typically offset for Social Security and workers compensation disability benefits. Three contributors participate up to $30,000 for their top nonmedical occupation class when there is no group LTD present, whereas five contributors participate up to $30,000 for their top nonmedical occupation class when there is group LTD present. B. Replacement limits Replacement limits are the maximum amounts of monthly coverage (new and in-force amounts, including coverage provided by other insurers) per annual earned income that an insurer will permit on individual lives. Replacement limits do not exceed the participation limits, which were discussed earlier. Because of different tax treatments of disability benefits, replacement limits vary based on whether the premiums are paid by employees or employers. Disability benefits are taxable to the insured when the premiums are paid by the employer, but not taxable if the insured pays the premiums with after-tax income. Consequently, carriers offer higher replacement limits in employer pay cases than employee pay cases. Many insurers offer higher replacement limits when the individual is also covered by group LTD because of the benefit offset provisions that are contained in the group LTD coverage but seldom in IDI policies and the taxable nature of LTD benefits when the employer pays the premiums. These replacement limits have been 20

24 raised in the past few years as competition in the employer-sponsored multi-life market has increased. Replacement limits with LTD also tend to be flatter percentages of income levels in order to align better with LTD plan designs. The next four sets of charts illustrate the current replacement limits among the 14 survey contributors: Figures 21A and 21B show limits for employee pay policies with no group LTD Figures 22A and 22B show limits for employee pay policies with group LTD Figures 23A and 23B show limits for employer pay policies with no group LTD Figures 24A and 24B show limits for employer pay policies with group LTD The figure on the left of each set of charts compares the median and highest replacement limits among the 14 contributors. The figure on the right shows the ratios of the highest and median 2011 replacement limits among the survey contributors to the corresponding limits from the 2010 survey. Ratios over 100% indicate where replacements limits have increased and under 100% where they have decreased. The purpose of the figure on the right is to indicate where competitive activity occurred between the 2010 and 2011 surveys with respect to replacement limits. 21

25 22

26 All four sets of charts in Figures 21A-24B indicate competitive activity to some degree. The highest replacement limits for employee pay business (with and without group LTD) did not change materially, while the changes in the median limits suggest that a number of companies were increasing their limits but not exceeding the highest limits set the previous year. Both the median and highest replacement limits for employer pay business without group LTD show significant competitive activity, particularly at the higher earned incomes. The highest replacement limits for employer pay cases with group LTD decreased modestly from the 2010 levels. C. Underwriting requirements: Individual sales Figure 25 shows the blood testing, financial documentation, and paramedical examination requirements for the 14 contributors normal underwriting rules applicable to individual sales. The requirements displayed in Figure 25 have been sorted so that each row of the table may represent two or three different companies. Thus, each row in Figure 25 does not represent the combined responses of any one contributor. 23

27 Figure 25 Blood Testing, Financial Documentation, and Paramedical Exams Blood Testing Limits (most states) $1,001 to $5,000 is Oral Fluids & $5,000+ blood, Age 18 to 45, $1,000 over 45. Financial Documentation Underwrite off application if age 50 or less and income below $150,000 and benefit amount applied <= $3,000. Require financial documentation on all other applications, specific financials vary by application. $2,500 Paramedical Exams (ages 40-49) $1,000 and above; This depends on age and BP. Some ages we get blood on all. All cases. $3,100 $2,501 All cases. $5,001 to $7,500 is physical measurements & paramedical > $7,500 age 18 to 45; $1,001- $5,000 is physical measurements & paramedical $5,001 for ages 45+. $2,500 $5,001 $2,001 $3,000 $2,000 None required for W-2 employees up to $3,000 all else documentation required. Varies by amount - $7,500+ at least one year's 1040 or similar $2,500 $2,000 to age 45, $1,000 to age 50. $3,000 $3,001 NA $2,001 $5,000 Required only when traditional paper part B completed on benefit amounts $7,501 and greater. For ages $2,500+, For ages $5,001. <=age 50 and <=$3,000/mo = no labs, > age 50 or > $3,000/mo require labs. NA $1,501 All $4,000 $3,001 $3,000 $11,000 $3,000 Required except under simplified underwriting program. $3,000 $3,100 All cases. Abbreviated: $1,500, Full: $5,000 $4,000 $4,000 ($2,500 for self-employed). $3,000 24

28 There were few changes in the underwriting limits in Figure 25 between the 2010 and 2011 survey. No companies reported changes in their blood testing limits. One company lowered its paramedical limit. One company went from requiring financial documentation on all cases in 2010 to not requiring financial documentation on W-2 employees with benefit amounts of $3,000 or less. Another company increased its financial documentation limits from $3,100 to $5,000. Contributors were asked whether they are using or considering using tele-applications, pharmaceutical databases, functional evaluations, and electronic underwriting engines in their underwriting. Figure 26 summarizes the responses of 14 contributors. Figure 26 Utilization of Tele-applications, Pharmaceutical Databases, Functional Tests, and Electronic Underwriting Engines Response: Teleapplications Pharmaceutical Databases Functional Tests Electronic Underwriting Engines Using now Have plans in near future Just beginning to think about it Not considering The utilization of pharmaceutical databases is very prevalent among IDI carriers. D. Underwriting requirements: Employer-sponsored multi-life market The employer-sponsored multi-life market involves three categories of underwriting depending upon case size, participation of eligible employees, and other demographic and risk factors: 1. Normal underwriting Normal underwriting involves regular medical and financial underwriting. 2. Guaranteed standard issue (GSI) GSI underwriting involves issuing policies to employer-sponsored cases on a standard basis to all actively-at-work applicants up to a specified monthly amount limit. 3. Guaranteed to issue (GTI) GTI underwriting involves normal underwriting of policies in employer-sponsored cases, with a guarantee that policies will be issued to eligible employees, albeit possibly rated and/or with waived impairments. 25

29 Figures 27 and 28 show the GSI underwriting requirements for employer-sponsored multi-life cases reported by five contributors that are active in the employer-sponsored multi-life market. Figure 27 shows the voluntary GSI requirements typical of employee pay cases, and Figure 28 shows the GSI requirements typical of employer pay cases where 100% of eligible employees participate. The information in these tables is a simplification of the actual GSI requirements of companies, which often vary by a number of considerations (e.g., age, occupation mix). Figure 27 GSI Underwriting Requirements Employee Pay (voluntary) Cases Co. A Co. B Co. C Co. D Co. E Minimum Number of Eligible Lives Minimum Participation % 10 Lives - 100% 100% - 100% 50 Lives - 30% 100% 30% 25% 200 Lives 30% 30% 100% 30% 25% 1,000 Lives 30% 30% 100% 30% 25% Maximum Issue Limits 10 Lives $3,000 $2,500 None $1, Lives $5,000 $7,500 $3,000 $3, Lives $5,000 $7,500 $5,000 $4,000 1,000 Lives $5,000 $7,500 $5,000 $5,000 Figure 28 GSI Underwriting Requirements for Employer Pay Cases Co. A Co. B Co. C Co. D Co. E Minimum Number of Eligible Lives Maximum Issue Limits 10 Lives $3,000 $2,500 $4,000 $5, Lives $8,000 $7,500 $7,500 $6, Lives $8,000 $7,500 $10,000 $8,000 1,000 Lives $8,000 $7,500 $15,000 $8,000 GSI underwriting practices for both employer pay and employee pay cases are tending toward smaller case sizes. In voluntary cases, many companies require a minimum number of lives to ensure a high participation in the smaller cases. For example, a company may require the larger of 10 eligible lives or 30% participation in a voluntary case before they permit GSI underwriting to be used. Figure 29 (employee pay) and Figure 30 (employer pay) show the distribution of employer-sponsored multilife new premium for issue years 2002 to 2010 by type of underwriting for these five companies. 26

30 Figure 29 Distribution of Employer-Sponsored Multi-Life New Premium by Type of Underwriting (for five companies) Employee Pay (voluntary) Issue Year GSI GTI Normal % 1.8% 70.1% % 0.9% 71.0% % 0.5% 68.0% % 0.2% 69.5% % 0.2% 69.7% % 0.3% 63.6% % 0.0% 71.3% % 0.7% 72.9% % 0.2% 70.2% % 0.8% 69.6% % 0.3% 69.6% % 0.5% 69.6% Figure 30 Distribution of Employer-Sponsored Multi-Life New Premium by Type of Underwriting (for five companies) Employer Pay Issue Year GSI GTI Normal % 12.1% 51.3% % 12.1% 44.5% % 8.9% 42.9% % 4.8% 40.0% % 5.3% 34.9% % 3.1% 40.4% % 3.3% 40.0% % 3.2% 36.4% % 2.1% 38.0% % 8.8% 43.7% % 3.4% 38.1% % 5.2% 40.0% Since 2002, the portion of employee pay new premium in the employer-sponsored multi-life market that was issued using GSI underwriting has remained quite stable, around 30%. In comparison, the corresponding portion of employer pay new premium issued under GSI underwriting has increased from 39% to 60%. In the employer-sponsored multi-life market, normal underwriting sometimes utilizes simplified underwriting rules, which allow the carrier to reject certain applications. In 2010, policies issued under simplified underwriting rules represented 14% of employee pay normal underwriting premium and 2% of employer pay normal underwriting premium. 27

31 Many companies have expressed concern with the aggressive nature of some voluntary GSI offers, i.e., higher guaranteed benefits and lower participation targets. There are no industry experience studies that show whether experience from employer-sponsored multi-life cases involving voluntary GSI is better or worse than other types of underwriting. However, the contributing companies were asked to rate their profitability in the voluntary GSI market. Figure 31 compares the responses of companies that have been active in this market, which includes six companies in the years and eight companies in Figure 31 How Satisfied Are Companies With Their Profitability in the Voluntary GSI Market? 1 = Very Dissatisfied 3 = Meets Expectations 5 = Very Pleased Rating Total Cos Median Average Similar to the responses in the prior IDI market surveys, none of the contributors rated the profitability of its voluntary GSI business better than "meets expectations" and all companies rated the profitability of their voluntary GSI business lower than the profitability of their total IDI business (see Figure 39). E. Simplified underwriting programs One of the traditional impediments to IDI sales has been the extensive and time-consuming underwriting requirements, particularly when compared to individual life insurance underwriting. To overcome this obstacle, a number of IDI carriers have introduced simplified underwriting programs for lower risk segments. Under these programs, many of their typical underwriting requirements (e.g., medical tests, financial documentation) have been abbreviated to speed up and simplify the IDI underwriting process. Contributors were asked to describe any simplified underwriting programs in place during the period. Figure 32 describes the simplified underwriting programs of five contributors. 28

32 Figure 32 Simplified Underwriting Programs Offered by Five IDI Carriers Company A B C Program Description Streamlined underwriting program: Subject to a complete application confirmed by a personal health interview and satisfactory MIB, no routine underwriting requirements necessary for up to $3,000 per month. Financial documentation still required for self-employed. Up to $3,000/month based on application and telephone interview only No income verification required when client's age is under 50 and their income is less than $150,000/year; no blood, urine, EKGs or APS required unless significant medical condition is reported by MIB, or information is obtained by TeleApp. D A streamlined underwriting program with limited benefits. (Discontinued in 2011) E IF: 1. Approved for a life application of $100,000 or greater at standard or better rates; 2. Employed at least 10 hours per week; and 3. Answer a limited number of yes/no medical underwriting questions on a simplified application. Eligible for $1,000 monthly (if no other DI) or $500 monthly (if only group DI) benefit, with a 90 day elimination period, 60 month maximum benefit period and no additional riders. Interestingly, the number of simplified underwriting programs that have been reported to Milliman s IDI market survey was seven in 2009, six in 2010, and five in F. Impact of the economic recession on underwriting practices Companies were asked how they have modified their underwriting practices with respect to financial and medical underwriting and occupation classifications as a result of the economic recession. Figure 33 shows the responses of four contributors. There were modifications in financial and occupational underwriting practices reported in the 2011 survey compared to 2010; however, there were no changes indicated in medical underwriting requirements in response to the recession. 29

33 Figure 33 Modifications in Underwriting Practices Due to the Economic Recession Company Financial Underwriting Occupation Classifications A We require two years of income documentation for those in the finance or real estate fields. B A little more conservative in applying income limits. May ask for more than 1 year's tax return on occupations with volatile income streams. A few occupations (real estate developers, commodity brokers) no longer insured. We are planning on redoing occupation classifications with the new product. C Regardless of income benefit amount - financial documentation will be required for occupations in the real estate industry; real estate developers are still uninsurable. D Increased financial documentation requirements for occupations in the real estate and financial industries. Restricted availability of product in certain real estate related fields. G. Observations on underwriting trends Since the last survey, the highest maximum issue and participation limits among the survey contributors did not change, except for the top medical occupation class when group LTD is present, where participation limits increased from $25,000 to $30,000. However, there was a lot of activity below the highest maximum limits as companies increased their maximum issue limits to stay in line with most of the competition. There was also considerable competitive increasing of the replacement limits since the 2010 survey. Companies made very few changes to their medical and financial underwriting requirements during No companies changed their blood testing limits during the year. Two companies had slight liberalizations in their financial documentation requirements. The survey shows GSI guidelines by case size contributed by five IDI carriers. The highest GSI limit, i.e., the maximum amount that will be issued without medical underwriting, is $7,500 among these carriers for voluntary cases with at least 50 lives and $15,000 for employer pay cases with at least 1,000 lives. For voluntary cases, the typical participation target is 30%. The portion of new premium from voluntary cases utilizing GSI underwriting has remained close to the 30% level since 2002, while the portion of new premium from employer pay cases utilizing GSI underwriting has increased from 39% to 60%. Companies average ratings of the profitability of their voluntary GSI business remain around 2.50 in a range of 1 (the lowest) to 5 (the highest). Two more companies since the 2010 survey have shared the ratings of their voluntary GSI business, indicating that more companies are getting into this market segment and studying their experiences. 30

34 Section V: Product and pricing This section of the survey explores the range of product development and pricing activity in recent years and the availability of certain types of coverages. Fourteen of the 15 survey contributors responded to the product-related section of the survey. A. New product and premium rate changes over the last year Respondents were asked to describe any product and premium rate changes they have introduced in the year since the 2010 IDI market survey. Figure 35 summarizes the responses of 11 companies. Figure 35 Product and Premium Rate Changes in 2010 and 2011 Company Product Changes Premium Rate Changes A B C D Introduced Term IDI pricing with the introduction of the Term Premium Conversion rider. Allows for ART pricing as well as option of a 5, 10, 15 or 20 year level term premium. Term is convertible to level on any anniversary up to age 56. Also introduced a To Age 67 Benefit Period We are introducing a new product later this year which has a base definition of disability of 2 year own occ and not working. Riders can be purchased to extend the own occ period or to purchase 2 year or 5 year pure own occ. The base policy has mental nervous limitations not included in our current product series. Beginning in late June 2010, began offering modified own occ with residual benefits to 4M occ class (e.g. Emergency Room Physicians, Anesthesiologists, Surgeons, Medical Resident ) Introduced Association discount - sex distinct rates, 10% discount for use in professional association settings. New rates associated with the new product are the only premium changes. 5% overall rate reduction for our fully underwritten DI product. Rate decrease was 10-12% for our top occ class and 1-3% for the other classes. 2-3% overall rate reduction for our GSI contract. Both changes were introduced in July Beginning late June 2010, will have 5% discount on premiums on DI policy if applied for in conjunction with new Term Life insurance policy; max discount on DI policy will be capped at 10% (10% large case, 10% multi-case or new 5% discount) E Recently updated/re-priced individual DI product. It was released in June F New graded rates. New Multi-Life rates and discounts 31

35 Figure 35 (Continued) G H We recently entered into the employer worksite market end of 2010, beginning of We will be introducing a new product later this year. There are no rate changes. However, we do offer varying levels of discounts with our new worksite product. We will have a few new discounts available with the new product. I A new Overhead Expense policy was released in J New product introduced, rate classes are split between medical vs. non-medical; a GR contract is available to all classes with all definitions of disability; Low cost 3% simple COLA is new: low cost residual is new; COBRA benefit included in base contract; re-priced CAT rates; 5yr mental nervous available to top non med classes New product introduced in 2010 was a total repricing. K New product introduced in late % discount for 5A business owners on the business protector product. Only three of the 14 contributors did not report any product or premium rate changes over the last year. B. Availability of specific products Contributors were asked to indicate whether they offered a list of specific IDI product features. Figure 36 tabulates their responses from Milliman surveys over the period of 2008 to Figure 36 Availability of Specific IDI Products Product Number Companies Having Product Feature ADL (Catastrophic) Rider Return of Premium Rider Lifetime Sickness Rider Pension Completion Rider Pure Own Occ Definition of Disability Pure Own Occ for Doctors There has been no change in the availability of the specific products listed in Figure 36 over the last four years. C. Products for the employer-sponsored multi-life market Contributors who are active in the employer-sponsored multi-life market were asked whether they (1) have a separate IDI contract for this market, (2) use group-type preexisting condition exclusions (pre-ex), and (3) use a separate application for GSI cases. Separate products for the employer-sponsored multi-life market 32