Aon Consulting s. Multilife Disability Plan Market Survey

2008 Aon Consulting s Multilife Disability Plan Market Survey

The first-ever broad analysis of the Multilife Disability Market Aon Consulting formulated the Multilife Disability Plan Market Survey to fill an information gap that has contributed to inefficient and fragmented approaches to the market. Rather than taking the traditional approach of asking companies about their benefit plans, Aon charted a new course by asking those who know the market best the leading individual disability carriers themselves. This survey focuses on the prevalence and plan design features of supplemental disability programs that provide individual long-term disability (LTD) policies for a group of highly compensated employees, which are known as Multilife programs. It does not address the need for coverage, which will differ from company to company. We recommend that companies considering a supplemental LTD plan start by answering the following questions: Do executives and other highly compensated individuals have earnings above the group LTD limits? Is variable compensation a large component of the total executive rewards program, but not included in the group LTD covered earnings? Do your executive employment agreements promise a level of coverage not available through the group LTD plan? Would increasing the maximum benefit level of your group LTD plan lead to a rate increase for all employees covered by that plan? Questions About the Study If you have any questions about the survey or want to know more about the Multilife Disability Plan Market, please contact your Aon Consultant or Aon s Executive Benefits practice at 1.800.574.0085.

Table of Contents Survey Methodology....................1 Summary of Findings....................2 Data and Calculations from Survey Results... 12 Our Capabilities....................... 14 2008 Multilife Disability Plan Market Survey Aon Consulting i

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Survey Methodology Responding carriers were asked to answer questions concerning their Fortune 1000 clients with individual policies that have list bills and therefore are considered multilife programs. We did not study individual policies (e.g., policies included as part of employment agreements) that are not part of a larger plan or program. The following multilife disability carriers* responded: Mass Mutual MetLife Principal Standard Unum Union Central These carriers cover the vast majority of the individual disability multilife market. The term average in this report is a calculation of the mean. We intend to conduct this survey every two years. This will enable us to capture trend data and provide an increasingly clear perspective on the multilife disability market. We also intend to expand the scope of the survey in future versions. Examples of additional data we will seek include gender mix, persistency, and a breakdown of industry penetration by plan type. *One of the carriers was only able to provide complete data for sections one and two. The answers for these two sections are therefore based on 100 percent of the available market data. Sections three and four are based on 90 percent of the known market. 2008 Multilife Disability Plan Market Survey Aon Consulting 1

Summary of Findings Size of the Market About 30 percent of Fortune 1000 companies offer supplemental long-term disability coverage using multilife disability programs. The advantages of using individual disability policies, including the attractive low-cost or no-cost options available to employers, raise a compelling question: why aren t these programs more prevalent among large companies? Some of the largest of the Fortune 1000 employ self-insured programs with very high limits. These programs virtually eliminate the need for supplemental multilife plans. Nevertheless, significant opportunity exists within this market for companies to improve the type and amount of disability coverage for their key employees. From experience, we know that companies have recognized that individual disability policies make their overall benefit offering more equitable by addressing the reverse discrimination that limits benefits for key employees. The programs also function as a risk management strategy, by transferring the highest coverage levels or variable compensation risk from the group plan to individual policies. Thus a shock claim for a senior executive would not have as much influence on pricing for the entire group long-term disability plan. Finally, a supplemental disability program can be a compelling recruitment tool. 30% 70% Do Not Offer Offer 2

Prevalence of Major Plan Types The market is nearly evenly divided; slightly more than half of the active plans are voluntary. Three plans, one of them very large, are classified by the carriers as employer-paid but also have an employee contribution requirement. These plans comprise about one percent of the market Interestingly, a theme commonly heard over the past several years has been that employers would be passing the cost of supplemental disability coverage on to employees, with a resulting shift toward greater prevalence of voluntary plans. The results of this survey bear this out for Fortune 1000 companies (also see chart on page 6). However, we observe anecdotally that this predicted shift has failed to materialize for smaller companies. 1% 53% 46% Voluntary Employer-Paid Combination 2008 Multilife Disability Plan Market Survey Aon Consulting 3

Summary of Findings (continued) Market Breakdown by Industry A market breakdown by industry shows that, of plans reported, the largest percentage of disability plans is found in Diversified Services with 16.6 percent, followed closely by Manufacturing with 16.2 percent. Other sectors individually providing more than nine percent of the reported plans include Trade-Retail, Commercial Banking, Financial Services, and Insurance. A partial explanation of this data might be found in companies that have large numbers of rank and file employees compared to the population of executives. These companies tend to deploy supplemental plans because increasing maximum coverage limits under the group disability plan in order to fully cover executives tends to drive up the rates for the entire program. Trade-Retail 14.5% Utilities 0.3% Other Transportation 2.7% 3.7% Trade-Wholesale 1.7% Commercial Banking 11.5% Communications 2.0% Computer Services 3.7% Construction 2.0% Telecommunications 1.7% Diversified Services 16.6% Manufacturing 16.2% Energy 4.4% Insurance 9.1% Financial Service 9.5% 4

History of the Market Sales and Implementation The number of multilife disability plans sold and implemented within the Fortune 1000 has remained fairly flat for the past seven years, for both employer-paid and voluntary plans. Historically the main distributors of these programs have been regional or boutique firms specializing in executive benefit programs. Fifty-four percent of programs have been in place since before 2001. Anecdotally, we are seeing most of the growth in the market occurring outside the Fortune 1000 level, with law firms and private companies showing strong implementation frequencies. 70 60 Voluntary Employer-Paid Number of Plans 50 40 30 20 10 0 Pre-1996 Aggregate 1996-2000 2001 2002 2003 2004 2005 2006 2007 Year 2008 Multilife Disability Plan Market Survey Aon Consulting 5

Summary of Findings (continued) History of the Market Growth Pattern For both kinds of plans, the absolute size of the market has grown slowly but steadily since 2000 The spread between the two plan types has increased since 2004 170 Voluntary Employer-Paid 150 Number of Plans 130 110 90 70 2000 2001 2002 2003 2004 2005 2006 2007 Year 6

Plan Size Employer-Paid Plans Average number of participants (compiled from average plan sizes provided by each responding carrier) 392 Range of plan averages 48 1,274 Lowest number of participants in any one plan 2 Highest number of participants in any one plan 17,677 Voluntary Plans Average number of participants (compiled from average plan sizes provided by each responding carrier) 478 Range of plan averages 193 764 Lowest number of participants in any one plan 5 Highest number of participants in any one plan 8,282 Any analysis of the data in these two tables should take into consideration the small number of carriers surveyed compounded by the extremely wide range of participant numbers. It is important to note that while the size of the plan may have an impact on the amount of coverage available without underwriting, the optimum plan size chosen by any particular company should be based on the demographic profile for that company and the coverage levels the company is trying to achieve. Companies should conduct full, diligent analysis of the issues and solutions regardless of their projected number of participants. 2008 Multilife Disability Plan Market Survey Aon Consulting 7

Summary of Findings (continued) Plan Design Covered Compensation The majority of both plan types cover both salary and bonus, as companies increasingly recognize the importance of the variable component of total compensation, which is generally not covered in a standard group disability plan. This helps to mitigate reverse discrimination in the system and enables equitable benefits for highly compensated employees. Employer-Paid Voluntary 5% 32% 24% 17% 63% 59% Salary Only Salary and Bonus Not Identified 8

Replacement Ratios Replacement ratios of more than 60 percent are slightly more common in voluntary plans than in employerpaid plans. Trend data on replacement ratios is very difficult to capture, but anecdotally, we observe that replacement ratios for employer-paid plans are trending downward toward 60 percent, similar to the replacement ratio provided through the group plan. However, total compensation is generally covered, which provides an equitable benefit that recognizes the importance of variable compensation in executive pay. Replacement ratios for voluntary plans have typically targeted higher levels up to 75% to account for the taxation of group LTD benefits paid for by the employer. As more group LTD plans become tax-choice or employee-paid, we will likely see voluntary plan replacement ratios trend closer to 60%. Employer-Paid Voluntary 57% 43% 62% 38% RR equal to or less than 60% RR greater than 60% 2008 Multilife Disability Plan Market Survey Aon Consulting 9

Summary of Findings (continued) Eligibility Criteria For both plan types, title is the leading eligibility criteria. A likely reason for this clear preference is that it eases and simplifies communication by taking salary and bonus dollar amounts out of the equation. The large number of other criteria is likely due to the plans that are offered to all employees, as well as programs that use a combination of title and compensation to determine eligibility. Employer-Paid Voluntary 13% 57% 18% 43% 11% 31% 24% 7% 58% 38% Salary Only Salary and Bonus Title Other 10

Benefit Amounts Employer-paid plans provide consistently higher monthly benefits than voluntary plans. This is likely attributable to the high percentage (76.4 percent) of these programs issued under a Guaranteed Standard Issue (GSI) underwriting offer. GSI underwriting requires only that the employee meet an actively at work requirement in order to be issued a policy. With the employer-paid programs, participation by all eligible employees is mandated, thereby increasing the carrier s ability to spread the risk of paying a claim over a larger block of policies. This allows carriers to offer higher coverage maximums for employer-paid programs. Average Monthly Benefit Inforce (Not Including Riders) $6,000 $5,000 $4,820 Voluntary Plans $4,000 $3,375 $3,456 Employer-Paid Plans $3,000 $2,381 $2,556 $2,000 $1,282 $1,000 0 Smallest average monthly benefit inforce for any carrier Largest average monthly benefit inforce for any carrier Market average monthly benefit inforce Employer-Paid GSI Voluntary 24% 30% 76% 70% Do Not Have Have 2008 Multilife Disability Plan Market Survey Aon Consulting 11

Data and Calculations from Survey Results Some results have been converted from raw numbers to percentages. 1. Total number of Fortune 1000 clients that receive individual disability insurance (IDI) list bills? 295 1a. Total number of plans deployed at Fortune 1000 clients 304 2 Breakdown of Fortune 1000 IDI customers by industry: a. Commercial Banking 11.49% b. Communications 2.03% c. Computer Services 3.72% d. Construction 2.03% e. Diversified Services 16.55% f. Energy 4.39% g. Financial Services 9.46% h. Insurance 9.12% i. Manufacturing 16.22% j. Telecommunications 1.69% k. Trade retail 14.53% l. Trade wholesale 1.69% m. Transportation 3.72% n. Utilities 0.34% o. Other 2.70% 3. Data for employer-paid plans: a. Percentage of Fortune 1000 clients with plans in which the employer pays 100% of the premium b. Percentage of these plans in which participants pay a portion, but less than 100%, of the premium c. Mean number of participants Mean Range 45.73%.99% 392 48 1,274 d. Lowest number of participants in any one plan 15 2 24 e. Highest number of participants in any one plan Mean Range 4,469 77 17,677* f. Percentage of plans that cover salary only 31.65% g. Percentage of plans that that cover salary and bonus 62.86% h. Percentage of plans with replacement ratios greater than 60 percent 56.91% i. Percentage of plans with eligibility based on title 57.86% j. Percentage of plans with eligibility based on salary level 17.86% k. Percentage of plans with eligibility based on salary and bonus level 10.71% l. Mean monthly benefit inforce, not including riders Mean Range $3,456 $2,381 $4,820 m. Percentage of plans with Guaranteed Standard Issue (GSI) offers 76.43% n. Mean maximum GSI offer Mean Range $4,373 $4,000 $7,357 12

o. Number of employer-paid plans first implemented in each of the following periods or years: 60 51 40 24 20 8 11 10 8 6 12 10 0 1995 or earlier 1996-2000 2001 2002 2003 2004 2005 2006 2007 4. Data for employee-paid plans: a. Percentage of Fortune 1000 clients with plans in which the employee pays 100% of the premium b. Mean number of participants Mean Range c. Lowest number of participants in any one plan Mean Range d. Highest number of participants in any one plan Mean Range 53.29% 478 193 764 34 5 103 3,326 1,161 8,282 e. Percentage of plans that cover salary only 17.28% f. Percentage of plans that cover salary and bonus 58.64% g. Percentage of plans with replacement ratios greater than 60 percent 62.26% h. Percentage of plans with eligibility based on title 37.65% i. Percentage of plans with eligibility based on salary level 24.07% j. Percentage of plans with eligibility based on salary and bonus level 7.41% k. Mean monthly benefit inforce, not including riders Mean Range $2,556 $1,282 $3,375 l. Percentage of plans with Guaranteed Standard Issue (GSI) offers 69.14% m. Mean maximum GSI offer Mean Range $6,375 $5,949 $6,800 n. Number of employee-paid plans first implemented in each of the following periods or years: 80 60 62 40 20 28 8 10 8 7 17 7 18 0 1995 or earlier 1996-2000 2001 2002 2003 2004 2005 2006 2007 2008 Multilife Disability Plan Market Survey Aon Consulting 13

Our Capabilities Aon Consulting is shaping the workplace of the future through benefits, talent management, and rewards strategies and solutions. We leverage our global network of offices, unmatched talent, innovation, thought leadership, and operational excellence to deliver distinctive value to our clients. Aon Consulting Worldwide had 2007 revenues of $1.352 billion. Capabilities Aon Consulting pools the best thinking and most advanced research from hundreds of global disciplines through one local point of contact to deliver creative, customized, human resource solutions, seamlessly, anywhere in the world. Health and Benefits: Aon Consulting s health & benefits practice is a global leader, with one of the largest wholly owned networks of worldwide offices of any consulting firm. Our health & benefits practice is uniquely positioned to develop customized benefits solutions to meet the needs of any organization. We are differentiated not only by our size and scale, but also by the way we approach our business: We diagnose the underlying causes of a problem, rather than simply managing its symptoms. Our services include: global benefits, group life and health, data-driven health strategies, workforce strategies and productivity, consumer-driven health care, health care management, individual life and health, benefits administration, and executive benefits. Retirement: The professionals in Aon Consulting s retirement practice have been navigating the many legal, financial and social complexities of designing and administering domestic and global retirement plans for over 60 years. We help our clients craft competitive plans that enable their employees to plan for their futures, while addressing business realities. We also specialize in ongoing review and analysis, including pension plan redesign and financial review. Our services include: global actuarial services, defined contribution consulting, investment consulting, tax & ERISA, and pension administration, and executive benefits. Compensation: Working in the financial, technology and biotechnology industries, Aon Consulting s compensation experts can help deliver positive ROI, balance stakeholder interests, achieve business continuity and attract and retain key employees through legally compliant, competitive, creative and performance-based reward strategies. Our programs include compensation advisory/counsel, compensation plan design, executive reward strategies, compensation and benefits surveys/benchmarks, performance/productivity studies, expense benchmarks, organization/salary management systems, market share studies and sales force effectiveness. Aon Consulting s Radford Surveys + Consulting and McLagan Partners are the leading providers of advisory and financial benchmarking for the technology and financial industries. Outsourcing: Aon Consulting delivers dedicated employee benefits, pension, recruitment and employment outsourcing solutions to large and mid-sized organizations across all geographies and industries. We have built state-of-the-art tools and scalable business models to define and deploy an outsourcing strategy for your business that can reduce your costs and HR staffing burden, while ensuring you are compliant with all local and global benefits, privacy and employment laws and regulations. Our services include: health & welfare administration, pension administration and recruitment process outsourcing. Human Capital: Aon Consulting s human capital practice excels at advancing the business of people. Our clients achieve better business results by developing, motivating and rewarding these employees in ways that support broader financial objectives and business strategy. Our unique tools and processes ensure that our clients select the right people for the right jobs. And, once they join the organization, we employ strategies to help your employees perform to maximum capacity. We also specialize in aligning and communicating your talent and reward strategies in accordance with the larger goals of your organization. Our services include: talent strategy, talent acquisition, executive on-boarding, performance management, leadership assessment and development, Benefacts personalized communication, workforce training, communication strategy and change management. 14

Want to Know More? Contact your Aon consultant or Aon s Executive Benefits practice at 1.800.574.0085

Copyright Aon 2008 Published by Aon s Executive Benefits Practice