Are we finally getting it right?
With the ongoing focus on professionalism in the financial planning arena, all parties in the process have been working towards solving the challenges with disability cover. It seems like simplification is a main part of the insurers’ challenge which ties up closely with the mission of the advisor, to provide an appropriate product with suitable benefits to every client. COVER asked a few product providers and the FIA to comment on the progress we have made and whether the environment is now suited to giving appropriate advice to clients.
Verusha Ramlakhan, Product Manager, Glacier, Sanlam asks: ‘Will your client be left feeling limp after a disability claim?’
You’ve done the financial needs analysis. You’ve structured a comprehensive disability protection plan. You’re satisfied you’ve done the best for your client. But will their expectations be met if they have to claim? The unfortunate reality is that all too often their expectations are not met and you are left to take the brunt of their wrath.
There is a plethora of disability products to choose from and an almost infinite number of definitions to decipher; and whilst there is fairly broad uniformity of these definitions, the same cannot be said of the claim payment conditions. It is these conditions that often mean the difference between an honoured or declined claim.
It’s probably fair to say that all too often it is price, and not the claim payment conditions, that is the determining factor in choosing product or benefits. But price can be very misleading and is certainly not the correct way to compare products or benefits. After all, no two companies have exactly the same product and they certainly don’t have the same policy wording. This policy wording – specifically, the definitions describing the conditions under which a claim will be paid – will have a direct influence on the cost of the benefit.
Although everybody may want the “Rolls Royce” range of benefits, not all can afford them, and so the product providers offer a range of options which provide a good balance between the type, extent and affordability of cover. Yet, when a dispute arises over the payment of a benefit, the product provider is often perceived to be the villain (not always unjustifiably so). But often the basis of the dispute is a misunderstanding on the part of the client of the type and extent of cover he has; or it is a disconnect between his (or his doctor’s) determination of the impact of his condition on future activities and that of the company’s claims assessor.
Much of the confusion and discontent can be avoided if the client’s expectations are managed upfront and properly aligned with what the product actually covers. This means he needs to understand precisely what the product covers, the level of benefits for the conditions covered, any exclusions – temporary or permanent, and the meaning of the policy wording and how it will impact him in the event of a claim.
There are two broad types of disability cover:
This cover provides insurance against the risk of being unable to earn an income due to an activity-limiting condition or health problem. Traditionally there are three categories of occupational disability cover:
– Own occupation (most expensive option): Client must be unable to carry out his specific occupation to be eligible for a benefit. This is normally restricted to professionals.
– Own or reasonably similar occupation: Client must be unable to carry out his own or other occupation for which he is suitably qualified to be eligible for a benefit.
– Any occupation (cheapest option): Client must be unable to carry out any occupation to be eligible for a benefit.
The benefit can usually be selected as either a lump sum (Capital Disability) or an income (Income Protection). In the case of Capital Disability, only permanent disability is provided for, whereas both temporary and permanent disability is covered under the Income Protection option.
Impairment disability relates to the functional or physical loss of an organ or other part of the body.
– Physical Impairment: This benefit typically covers the physical or TOTAL functional loss of limbs, eyes, hearing or speech. Unlike other forms of disability cover which expire at age 65, this cover can usually be included for whole of life.
– Functional Impairment: This benefit covers the partial or total loss of bodily functions. The benefits are usually tiered with the amount of the payment being a function of the degree of impairment.
Any benefits will be paid as a lump sum and the impairment must be permanent for a claim to be considered.
Gavin Came, Chairman of FIA’s Financial Planning Committee, sees Disability cover as the ‘Cinderella Benefit’.
Mark is young and fit. He mountain-bikes regularly, enjoys parties, and has an infectious joi de vivre. It is difficult to imagine Mark lying disabled in hospital. Equally difficult might be persuading this healthy young man that he needs disability cover, especially given that he probably has no dependents, so death benefits are largely unnecessary. Yet, disability cover, despite being slightly harder to execute in terms of underwriting, is essential – Mark is doubtless unaware that he is two to four times more likely to become disabled than to die.
Perhaps the only consideration is whether Mark is able to continue to perform his duties, in which case the test relates exclusively to occupational disability and functional disability falls away. A contrary argument is that, if Mark were forced to ‘take it easy’ following a heart- attack, his long-term career and therefore, earning capacity, might be permanently impaired to some extent; thus the claim value compensates for that long-term impairment, even though he is back at work. So, one of the difficult decisions is whether he implements functional disability (impairment cover) and dread disease cover, or occupationally described disability cover … or both!
The test for occupational disability is more scientific. Ignoring the possibility of malingering or over-aggressive claims underwriting, it can be determined whether Mark is able or unable to function in his own/similar occupation with some certainty. Impairment cover, on the other hand, does not link with the sum assured precisely to the value lost, so one can be over-or under-benefitted with regard to loss of earning capacity. I could be argued that impairment cover, while providing real benefits, is more an emotional need than occupational cover.
Two broad categories of cover are available:
1. Income protection
In my mind, this is the most under-recommended, under-rated disability product available. For a young client like Mark, stand-alone income protection, properly sold and calculated, exactly matches the gap that will emerge from either temporary or permanent disability. In the case of older, self-employed clients, the commonly offered business overhead cover provides the ‘sleep-well-at-night’ factor, because others are dependent on the business owner for their livelihood. Of course, income protection cover is often included in a well-structured retirement fund, so a young client may well be covered, but it would be tragic if this was not established initially. Tax deductability eases the burden of implementing the cover. It is also essential to ensure the cover is as comprehensive as possible in relation to the client’s circumstances.
In implementing income protection, it is critical to ensure an optimal hedge against inflation both prior to and during claim. This latter coverage is often sacrificed on the altar of affordability. The response should be to lower the cost, rather than not having an escalation – it is essential that the client adjust his lifestyle early than to allow steady cost-of-living increases to erode the provision well into a permanent disability scenario.
A vital consideration is that product features like waiting periods are tied to a client’s employer’s policies and practices; for example, if an employer contractually commits to pay a temporarily disabled employee for three months, then an income-protection policy with a one-month waiting period, is arguably a waste of the higher premium when a cheaper three-month waiting period would suffice. This issue often requires the employer to form a policy in this regard, and sometimes triggers a review of even retirement benefits.
2. Capital Disability
It is in this area that the debate regarding impairment or occupational cover has the most impact. The major use of capital disability is to settle capital sums such as outstanding home loans or other debts, as is often recommended in conjunction with income protection. Other uses of capital disability is to compensate a company for a key person being unable to continue working or to allow for a disabled partner to be paid out in whole or in part when he is unable to continue to contribute to the partnership.
The substantial difference between this cover and income protection is the claims underwriting. Because this payment is once-off, the underwriter must be absolutely convinced that the disability is permanent. In the case of income protection, a subsequent recovery by the client simply causes the monthly payment to stop. The resultant possibility is real that an income replacement claim is honoured but a capital disability claim is deferred.
3. Short-term insurance
This cover can also be offered through a short-term contract. In this, the considerations are the terms and conditions of the cover, including the right – if any – for the underwriter to withdraw from the scheme and/or to increase premiums and in which circumstances.
Whatever the cover selected or the controversy surrounding the benefit, disability cover remains simultaneously a Cinderella benefit and the most important of all covers for a client to have in place.
Liberty Life urges both brokers and intermediaries to consider all options when reviewing disability cover.
Disability insurance is one of the more complicated financial purchase decisions because benefits and product types can vary significantly. The biggest issue is matching benefit to need, and need is often difficult to articulate before the fact.
Critical questions, both from the perspective of the insured and insurer, are what constitutes disability and when it occurs.
For example, many disabled individuals lead perfectly normal economic lives. They are not precluded from living an economically productive life just because they lost a limb or suffer a type of impairment that prevents them from performing certain activities.
Try telling Stephen Hawking he can’t pursue a career in physics or Natalie du Toit and Oscar Pistorius they can’t pursue sporting careers.
Such issues are at the heart of an understanding of how certain benefits or product types match particular needs.
From a disability perspective, the financial risk individuals run is the loss of future income up to retirement and beyond. Disability insurance aims to protect against precisely this risk.
Other types of disability insurance such as impairment are designed to meet other needs or activate coverage off a different trigger. However, if the need is to manage the risk of not being able to work with the consequential loss of future earnings, then the benefits that should be selected should manage the following risks:
- Protection against limited-duration loss of earnings as a result of temporary disability
- Protection against long-term loss of future earnings as a result of lengthy or even permanent disability
- Inflation protection of lost income for long-term disability
This is not to say that other products don’t have their uses. Increases in interest rates could leave the individual exposed to the risk that large lump-sum obligations such as bond have to be discharged.
Another critical choice is that between a lump-sum benefit and a regular income-type benefit.
If the need is to replace a regular income stream, a regular-paying benefit should be selected. Individuals who select lump-sum benefits to meet income replacement needs (as opposed to capital replacement or liability needs) do not realise how difficult it can be to match lump sums with lost potential income.
Approximately 20 percent of individuals aged 27 years of age who suffer a permanent disability live longer than 25 years after the disabling event. Predicting exactly how long you will live after such an event is impossible.
There is a danger that younger individuals who buy disability insurance will pay too little for their needs (if they live for long periods of time) while older individuals with disability may pay too much or have too much cover.
The decision between either “own occupation” or “any occupation” is crucial when looking at definitions of disability and the individual’s ability to continue working.
Sometimes disability may also be described in terms of the individual’s ability to perform certain daily living activities or work activities. However, activity-based definitions may be influenced by the subjectivity of the insurer’s preferred activities list.
With other list-based products such as impairment cover, too many unnecessary conditions may be covered and the insurance premium then becomes too expensive relative to the right level of required cover.
With occupation-type definitions, a claim may require a personal judgement and can therefore be seen as highly subjective. To put it simply, there are many different types of occupations and the judgement of the individual’s ability to perform them is left to the insurer.
Choosing a company with an ethical claims philosophy in these instances is key. Some companies, however, offer individuals the opportunity to specify their own occupation definition.
Generally, policies also offer a range of waiting periods before assessing the claim. A factor to bear in mind is that many individuals have fairly generous sick-leave benefits. The issue here is whether the individual will be paying for a benefit already enjoyed under another product or offering.
Individuals must consider how much funding they already have in place to cover any given period of lost income. Also, when selecting a waiting period, it is important to consider the duration of any treatment the individual may need.
The appropriateness of accelerated versus non-accelerated benefits should also be considered.
An accelerated benefit may be more affordable for the consumer, but increased limits might be necessary, which may increase underwriting requirements.
Overall, if the need of the individual is to replace a regular lost income, then a regular income-paying benefit should be sought. If the individual already has an existing disability policy in place, it is necessary to assess whether or not the current cover is appropriate for need and trigger event (occupational or inability to work with resulting loss of income versus other trigger mechanisms such as impairment or reduced abilities and lost capacity to engage in certain activities).
A disability product should pay a benefit that matches the income need over time and is triggered in a time of genuine need.
Dalene Allen, co-founder and head of underwriting at Altrisk, says better education and disclosure during the application process would reduce dissatisfaction with disability benefit pay outs.
The key is to be certain that clients understand what they are buying and select policies that match their needs. In addition, the importance of providing accurate information, particularly in relation to occupation and current cover in force, cannot be underestimated in preventing disability claims being repudiated or paying less than expected.
Insurance is a promise to pay an agreed amount if an identified event comes to pass in the future. Clients need know the terms and conditions under which their claims will be upheld and ensure they make an accurate disclosure when applying for a policy to avoid disappointment at the claims stage.
Disability insurance can be complex, which compounds the problem. Various cover options (capital disability, impairment, dread disease and loss of income) and types of disability (physical or functional, temporary or permanent, related or unrelated to a person’s ability to perform his or her occupation or a similar occupation) make it difficult for clients and financial planners to select the most appropriate options. Furthermore, each application is handled individually and the terms offered at the underwriting stage are based on the disclosed occupation, duties, qualifications, income and industry.
Disputes often arise because of misunderstandings over benefits covered or policy definitions and limitations; for example, clients submit claims unrelated to the cover purchased.
A client purchasing a disability policy needs to be very sure that he or she chooses the options relevant to his or her circumstances. This is where a well-informed advisor can have a positive impact on the selection process. A comprehensive financial needs analysis is vital.
There are a number of other reasons for increasing dissatisfaction at disability claims stage. Clients need to disclose their occupations and the associated duties accurately to ensure precise underwriting. Failure to do so results in a reassessment during the claims process. Claims are increasingly being repudiated because of a mismatch between reported and actual occupations and duties.
Another issue relates to over or under insurance. On the one hand, clients need to understand that there is a ceiling on the total amount payable for disablement regardless of the number of policies they purchase. On the other, there is a real need for disability cover. According to The Society of Actuaries (1985), people between the ages of 25 and 55 have a 58% chance of suffering a long-term disability some time before retirement. Those who think that their company’s group disability benefit will cover their requirements might be mistaken. These benefits are generally based on defined pensionable income, which is usually far less than total income.
All players in the value chain have roles to play in ensuring clients are fully informed of their rights and duties before they commit to policies. Risk providers need to make information on their products available to their distributors; financial advisers need to ensure their clients have a good understanding of what they’re buying and why; and clients need to take responsibility for their choices and actions.
If clients select appropriate products; disclose the information required at application stage accurately; and are clear on the amounts, terms and conditions relating to the payment of claims, there would be less unhappiness during a time which is traumatic anyway.
ABSA Life – Road Accident Fund changes mean your injury has to be ‘serious’ in order for your claim to be considered.
The dramatic changes made to the Road Accident Fund last year were as a result of the costs involved in determining values for disability settlements.
Regulation 3 of the new Act provides specific criteria for determining if an injury is “serious” or not. Although the Minister of Health has not yet finalised the list of “non-serious” injuries, the intention of this clause is to provide a basis for settlements that is standard and consistent.
Thus a claim will only be considered under the Road Accident Fund if it meets the definition of a “serious” injury.
In addition, the fund will base the pay out on the American Medical Association’s Guides to the Evaluation of Permanent Impairment when determining severity of serious injuries.
This could result in cases where the sum paid out could be less than the maximum permitted based on the future income of the injured individual.
We can identify two distinct gaps where financial advisers need to ensure that clients’ needs are fulfilled:
- Filling the gap between coverage provided by RAF and cover required within limits of the claimants future income;
- Filling the gap to provide cover for claimant for ”non-serious” injuries.
Various forms of disability and impairment products exist in the industry. These products cover the full spectrum of needs, incomes and occupations.
Cover available in the market includes:
- Own occupational disability
- Own and Similar Disability
- Functional Impairment
- Physical Impairment
- Combinations of the above
Financial advisers have the option of providing a lump sum versus income benefit to clients. Income benefits have proven more beneficial as they are cost-effective for the client and are structured to encourage rehabilitation. Most income protection products are aimed at the professional markets. Of late, income based on impairment has been introduced. Physical impairment is still paid out as a lump sum because of the permanency of the impairment.
With the large array of disability products out there, and varying client needs and circumstances, financial advisers have some difficulty in providing best advice. The advice risk has been mitigated substantially over the last few years with the introduction of benefit comparison tools such as “Proplanner”. These tools allow all products to be compared and rated, allowing the financial adviser to highlight the differences in cover based on price.
Tools like these will form a larger part of the financial advisers practice, ensuring that clients are always given best advice when comparing cover against that provided by RAF.
The long-term insurance industry faces a more difficult challenge – how do we cater for the future possible disability needs of our clients?
Financial advisers are also required to ensure that clients are not over-insured. Institutions exist that can assist the broker in determining the amount of disability cover available in the market. Financial advisers should use these tools effectively to fill the insurance gap. Shortfalls do exist in the use of these tools. They do not include existing cover from group benefits and potential payouts from RAF. This is where judgement is required from the financial adviser as to the level of cover required.
It’s easy to spot a shortfall at the claim stage, but on complex disability products, need analysis and underwriting are done at the application stage – and we know from last year’s LOA Gap analysis that this needs to receive more focus.
Many Life companies have provided financial advisers with Financial Needs Analysis tools which assist the broker in determining the correct level of coverage required. Financial needs are relatively easy to determine with a wide range of analytical and advice giving tools available. This is because the models are all based on earning potential and expectations. Determining a Rand value for an unpredictable disabling event is a skill. These tools still require the financial adviser to do the necessary investigations into the client’s current level of cover and potential payouts with respect to RAF.
Advisers need to know their product offerings, benefits and respective benefit payouts. In today’s market of complex disability benefits, it is very difficult for advisers to understand the claim events and their relation to benefit payouts. Medical terminology within the claim events has become very technical, making it very difficult for an average financial adviser to understand and advise the client on the potential benefits that can be claimed for.
To illustrate the complexity, most life companies rely on a medical practitioner’s assessment reported on a standard scale of acuteness. The Clinical Dementia Rating Scale, The New York Heart Association Classification, The Glasgow Coma Scale are all examples of tools used by insurers to determine severity.
All these reference points, measurement tools, and guides are used in an attempt to reduce interpretation and to improve certainty. The vast number of tools available is indicative of how difficult a task this really is.
An adviser who is selling disability benefits without referring to these guides is doing himself, the client, and the insurance company a great injustice.
Disability or impairment? Or both!
The choice of a risk benefit must always be guided by a client’s needs. If the client needs to protect his earnings in the event of illness or injury, he needs a disability benefit. If he wants provision for lifestyle adjustments while working or living with a permanent impairment, a functional impairment benefit would be an appropriate solution.
Lump sum disability and impairment benefits both require the condition to be permanent. If the client needs to protect his income on temporary disability, it is crucial that he also has an income disability benefit in place.
Types of disability definitions
Occupational disability definitions can be divided into “own occupation” occupation, “own or similar” occupation and Activities of Daily Work (ADW). Of the three, the “own occupation” definition is superior.
With “own or similar” benefits, the life company needs to assess whether a client can perform a similar occupation based on his/her experience, education and training, which can be subjective. Someone who can perform a “similar” occupation will not receive a payout.
With an ADW benefit, the client needs to score a minimum amount of points in order to claim. This benefit is more objective than an “own or similar” benefit, as the client’s specific work tasks are taken into account. It is, however, still not as strong as an “own occupation” definition, as the inability over a range of work tasks is sometimes required to obtain the minimum points, while the inability to do only one of those work tasks may be sufficient for an “own occupation” claim.
The golden rule is: If the client qualifies for an “own occupation” benefit, this is what the intermediary should recommend. If he does not qualify, the choice is between ADW and “own and similar” benefits. ADW benefits are generally very well suited for manual occupations or professional sports people, as work categories like work posture, muscle power, and ability to use work tools are taken into account. A fitter and turner can for example qualify for a claim even for minor limb impairment if this significantly restricts his ability to use his work tools.
Types of impairment definitions
Impairment benefits can be divided into functional impairment and physical impairment definitions.
Physical impairment is basically just a small sub-set of functional impairment, covering mainly loss of use of limbs and loss of senses. This benefit should never be used as an alternative to a disability benefit.
In addition to physical impairments, functional impairment benefits include medical impairments (such as impairment as a result of a severe heart attack). Some companies also include activities of daily living (ADLs) as a “catch-all”. ADLs measure an individual’s ability to perform certain basic functions such as bathing or eating.
Functional impairment benefitsuse a tiered approach and cover both severe and moderate impairments. The severity of the permanent impairment determines the level of claim payable.
Under functional impairment benefits, payouts are made irrespective of the client’s ability to work. If theclient meets any of the defined criteria, a claim is paid.
These benefits have the advantage of being objective, with clients knowing in advance what they are covered for. However, by not considering the ability to work, each client’s unique circumstances in his working environment are not taken into account.
The relationship between impairment and disability
While impairment is often a good proxy for ability to work, there is not always a direct relationship. For example:
- A person may be significantly impaired, but not necessarily disabled, like a paraplegic accountant, and
- conversely, a minor impairment could lead to disability, like a mechanic who loses a thumb and an index finger from his dominant hand.
Over the last few years life companies have started to offer benefits that include both the occupational disability definition and the functional impairment definitions. Clients are thus getting the best of both worlds, being able to claim under either of these definitions.
The addition of functional impairment criteria has brought about two important advantages:
- Partial lump sum payments can be made in cases where a client is moderately impaired but not totally disabled, and
- claims are assessed against a set of objective medically defined criteria, resulting in more benefit certainty.
Combination benefits maximise the probability of a claim being paid, by using objective benefits definitions, while also giving claim assessors the ability to assess each claim based on its unique circumstances.
The Practical challenges of limited underwriting products
Sharon Coetzee, GenRe, LifeHealth, South Africa.
Prospective purchasers of insurance had, until recently, two types of products available to them. The first, while offering high levels of cover, sometimes has quite onerous underwriting requirements. The second offers no underwriting and is fast and easy to buy, but the levels of cover available are very low. Policyholders wanting higher levels of cover either had to take out multiple policies or resort to underwriting. Insurers realised there was a market for an affordable product that bridged the gap between these two products.
The new products had to be affordable and convenient but still have sufficient risk measures in place to minimise anti-selection and remain profitable. The limited underwriting products are simple in terms of definitions and design. They are easy for policyholders to understand and usually cover the whole family. Sums assured offered are well in excess of those offered under the non-underwritten products and offer meaningful levels of cover for the policyholder. These products mostly offer life cover, with some featuring additional benefits such as lump sum disability, physical impairment or funeral cover.
A variety of risk management measures are used in these products. These may include waiting periods or a tiering system whereby the sum insured increases over a period of time. For example, should a claim occur as a result of illness within the first twelve months after policy inception, a limited benefit may be payable. This feature is intended to minimise anti-selection from policyholders who are seriously or even terminally ill at the time of taking out the policy. Claims resulting from accidents are paid immediately.
Some products include a pre-existing conditions exclusion clause for a period of time for a similar reason. Should a claim occur as a result of a condition the policyholder had prior to taking out the policy, the claim will not be valid if it falls within the exclusion clause period.
The key feature of these products is that no medical examination or laboratory tests are required. In lieu of these, the policyholder is asked a limited number of questions regarding their state of health. It is expected that these questions will be answered honestly in line with the principle of good faith. Should the answers indicate any type of health concerns, the policy will not be issued, in most cases. In order to keep the premiums low, it is not possible to investigate or underwrite the applicants further, as with the standard risk products. The downside is that there may be some policyholders who could have been offered cover who will be turned away. The challenge for underwriters is to ensure that the underwriting questions are sufficiently specific to prevent too many healthy lives being declined whilst still gaining the information necessary to make an informed underwriting decision. However, as a broad screening tool, these questions fulfill the purpose.
The challenge for claims assessors lies in obtaining medical information regarding a suspected pre-existing medical condition. Medical information is difficult to obtain from state clinics and hospitals and assessors are sometimes unable to confirm that the condition existed before policy inception.
Despite the challenges, this remains an exciting development that meets the needs of a developing insurance market.