Why Disability Costs are Rising and What You Can Do About It
For many of us, disability insurance is something we address when we get a new job. We sign onto our new employer's plan as part of our onboarding experience and forget about it for the rest of our tenure with that company. At least we forget about it until we have to make a claim. It's usually at that point we find out our employer had chosen the least expensive policy possible and we don't have the coverage we expected.
It is difficult to blame the employer, however. Disability costs are going through the roof and significantly impacts the profit picture of businesses of every size. Some estimates put the cost of employee benefits at 5% of a company's total budget, and they are still on the way up. What is causing this escalation in rates? It is certainly not from disability carriers gouging their customers and rolling in dough. Disability insurance, like all other forms, is a highly competitive business and any group that would try and overprice their products will find sales few and far between.
So What's the Problem?
In fact, there is no single source for the upward pressure on disability insurance. There are actually quite a number and they are creating the perfect storm which continues to force premiums to skyrocket without realizing any more profit for the Insurer. Let's have a look at what has changed in our society to produce this perfect insurance rate storm.
This is Getting Old
One important reality facing disability carriers in this country is that the average age of the Canadian population has been rising significantly for decades. According to Statscan, in 1956, Canada's average age was 27.2 years. Thanks to such factors as impressive increases in longevity, by 2012, our median age rose to 40.6; almost a 50% increase. In Alberta, which has the lowest median age of any province, our figure is still a sizeable 36.5.
The phenomenon of our aging population impacts on the disability insurance industry acutely. Generally, the older we get, the more chance we have of needing to make a claim for disability payments. If we have a nation 50% older than we once were, it is no surprise claims will mount; with their accompanying payouts and premiums rising to reflect the increase in payouts.
A New Attitude Toward Illness
At one time, there was a real stigma to being sick and off work, particularly for a mental condition. Suffering in silence was the most common response to afflictions like severe anxiety disorders and clinical depression. Now, however, people are far more likely to access disability payments as a result of "stress leave". In fact, according to the website Benefits Canada, an online forum for the Canadian insurance industry, their figures show mental health claims now account for over 30% of the total for long term disability claims. By no means would the insurance industry want to return to the days of "hanging on in quiet desperation" like the old days, but there is no doubting the financial impacts of the change in our attitudes toward being on disability leave.
That Darned Global Economy
Another factor that is readily apparent is that the low interest rate world we have been living in for the past number of years has seriously affected the non-premium revenue of disability carriers. At one time, they could count on revenue from investments to keep their premiums competitive. Now, however, at a time when the interest on GICs is almost in the negative range, premiums are a much larger portion of the earnings pie than they once were, which causes upward pressure.
The Sue You, Sue Me Blues
One societal change that has created issues in many areas of our society is that we have become more litigious. The result for Insurers is that more and more disability claims are being challenged in the courts and these legal fees are adding to the costs of insurance providers tremendously.
We Could Use Just a Little Health
In a Bloomberg-sponsored study, Canada failed to crack the top ten in the listing of "World's Healthiest Countries" and part of the reason is our rising obesity rates. We are the fifth most obese country in the world and obesity is bad for us. It impacts on our hips, knees, back and even our mental health. It is no wonder that as we have become fatter as a nation, disability claims have risen lockstep with the obesity stats.
Waiting for a Miracle
One more insidious aspect to ballooning premiums is that wait times for non-emergency conditions in Canada are growing, apart from those specific services that become politicians' pet projects such as hip and knee replacements. This means that the length of time it takes an employee to recover from an illness or injury becomes far longer and it's the Insurer that's on the hook for it.
So What Are We Going To Do About It?
For Insurers facing these challenges that are inflating their rates, there are few salves to apply. The insurance industry has little or no influence over our median age, our societal weight, our interest rates or any of the other factors exerting upward pressure on premium costs. The best they can do is invest wisely to maximize their capital investments, rethink policies to provide less coverage as a base for business with more options for the employees to upsize theirs.
Companies wishing to control their disability costs may wish to consider getting out of the game altogether. Rather than paying for their employees premiums, they could offer employees a "benefit bonus"; a sum of money given to employees on every cheque that would allow them to purchase their own insurance products they deem appropriate for their situation. The upside for the employee is greater flexibility in product options and more importantly, in the event of a claim, would not have to pay taxes on the disability payments they would receive. It would also help the employer control costs much more easily as they would not be affected by Insurers rate changes.
One other initiative a business may consider is to work harder at making their workplaces more human-friendly, safe and responsive to employees' overall physical and mental health. It is not only good for retention, good for morale which increases productivity, but can drastically reduce the instance of stress leave and ultimately lower the number of people seeking a claim.
The options that employees have to manage high disability premiums is to do some of their own investigation and research to identify how much insurance they actually need. Some buy too much, some buy too little. Both models are a waste of money. Being aware of the exact terms of the coverage provided by the company is absolutely essential and topping it up with their own policy is recommended.
A Word to the Wise
The issues facing disability insurance providers will likely not go away any time soon. Understanding the many forces that affect insurance rates is the first step to managing the problem effectively and finding strategies for dealing with these upward pressures. It is also incumbent on Insurers to make their clients aware of these inflationary factors. This way the customers can also develop their own strategies to respond to the situation and not simply assume pricey premiums are the fault of price gouging.