Time To Take a Reality Check on LTD Pricing
Pricing long term disability (LTD) policies is complex enough, what with projecting incidence rates and claim termination rates, as well as Social Security and other offsets. But another increasingly crucial factor gets less attention - pricing for workforce aging and low interest rates.
Both have premium impacts on several fronts that lead to earnings pressure.
The American population is getting older and the workforce is aging. A common rule of thumb is that employer groups are aging one-quarter to one-third of a year for every calendar year. If the workforce were in a steady state with respect to age, there would be no pricing problem. But given that insured groups are getting older, aging should be considered in setting manual rates.
If aging impacts are ignored, companies will ultimately still price for them. As the increased cost from insuring underpriced groups works its way through incurred claims, the resulting earnings pressure will lead to higher prices for the block of business as a whole.
Rather than implement a broad-brush rate increase on the entire LTD block though, it may be better to take a more surgical approach and address aging impacts when cases are priced and sold.
In addition to aging, another source of LTD earnings pressure is low interest rates. Interest rates have been low for several years and remain at historically low levels.
Unlike aging, many companies have recognized today’s low interest rate environment in their rate structures - but some carriers’ pricing may not fully reflect current interest rates. Pricing appropriately for LTD interest earnings is crucial because investment income is a key driver of LTD profits, and it is more important now than ever. Our analysis shows that the LTD industry is currently earning more on investments than it is earning on the core business of insurance.
Overall, LTD industry profitability in 2012 was at its lowest level since 2004. Workforce aging and low interest rates contributed to this result and since neither of these phenomena appears to be going away anytime soon both need to be incorporated into the rate structure as strategically and as soon as possible.
Read my article on how aging and interest rates impact LTD pricing.