Without a new approach to managing risk, group income disability benefits are headed for extinction and, in the retail market, only the rich will be able to afford these benefits, says Reinier van Gijsen, the head of pricing at Sanlam Corporate.
In this year’s Sanlam Benchmark Survey, Van Gijsen said the industry is reaching a stage where continuous premium increases may no longer be viable or fair to meet the increase in permanent health insurance (PHI) claims.
“Until 2019, I cannot recall ever seeing a PHI premium rate in excess of 4% and certainly not breaching 5%. By stark contrast, since the start of 2022, I have seen between five and 10 schemes where their PHI premium rates have breached this level; that is, schemes where their PHI rates are getting to the same level as members’ employee fund contributions.
“This is clearly not an outcome that is sustainable and, remembering that most people will reach retirement, whereas only a relatively small number will become disabled, I question whether this is reasonable to the majority of the members,” Van Gijsen said.
He cited the case of a group scheme whose disability claim rate rose 105% between mid-2020 and mid-2021. It has seen a further increase of 168% since then. This is not a small scheme, or one with low claim numbers, where one claim distorts the analysis.
Van Gijsen said this was the most extreme case he has encountered, but “alarm bells are ringing”.
The Covid-19 pandemic has contributed to the increase in claims, but Van Gijsen points to several long-term trends that have contributed to the rise in premiums. In his view, the financial services industry has been ditching the protection and cost-containment mechanisms.
“It began with annual increases in cover maximums, which often exceeded inflation. At about the same time, intermediaries and clients began pushing for higher free cover limits and less underwriting. Again, insurers obliged, and we entered a cycle of competing on free cover limits as if this is a benefit instead of recognising that it is a vital risk management tool. To make matters worse, the tax treatment of PHI benefits changed.
“International and local experts warned against maintaining old, flat benefit structures because they had seen the horrors wrought by PHI in Australia. Yet again, under pressure from intermediaries and competitors, the market collectively failed to adhere to sound risk principles.”
More can be done to mitigate risk
If constantly increasing premiums is not the solution, what is Sanlam proposing?
Van Gijsen said the industry should reconsider its attitude towards traditional risk-mitigation measures.
His suggestions to contain costs include using free cover limits “appropriately and at reasonable levels”, maintaining current benefit maximums – or even reducing them, reducing replacement ratios and shortening initial periods.
I asked Sanlam whether it is likely that the life industry will significantly reduce free cover limits.
Michelle Jennings, the chief executive of Sanlam Group Risk, responded that in most cases this is not possible.
“Limits cannot be reduced for existing members, and when new schemes join, their cover limits are ‘taken over’ from the other insurer. Reducing free cover limits is therefore possible where insurers currently have very large limit amounts relative to other insurers, or where there is a consistent approach across the industry,” Jennings explained.
Sanlam does not foresee a reduction in free cover limits but expects them to remain stagnant rather than escalate annually to accommodate inflation.
On a related point, Jennings said many members who want cover that exceeds the free cover limit find the underwriting process cumbersome and so accept their restricted cover.
Sanlam intends to make medical underwriting less onerous in future, which should enable more people to participate in the process. This should result in better underwriting outcomes, in the form of more members getting their full potential cover or insurers making better use of restrictions and exclusions on pre-existing conditions to manage risk.
Changing member behaviour
Van Gijsen also said that Sanlam was “partnering with interested employer groups to invest in scalable managed healthcare options with the aim of preventing claims rather than having to price for claims”.
“Scalable managed healthcare options” refers to technology, such as health data aggregators and member engagement apps, that can enable healthcare providers and insurers to determine the health status of a scheme’s membership, Jennings said.
Through analysing this data, healthcare providers and insurers can identify targeted interventions to address health risk factors before these turn into claims.
“Insurers can then use mobile phones or online managed healthcare to change member behaviour towards living healthier lives, and since these interventions use technology rather than face-to-face interventions, it makes these solutions scalable and easily accessible to members, even those in remote areas,” she said.
The technology also enables insurers to monitor members’ adherence to treatments protocols and track health improvement towards set goals. Members can be rewarded for achieving these goals or milestones.
