Thoughts on Disability Insurance - our addiction to social security
July 27, 2012| By Drew King | Disability | English
Over the past year or so, there has been a lot of talk - and a lot of anxiety - in group disability insurance circles about the Social Security Disability Insurance (SSDI) program. As most of you know, SSDI benefits are an offset to private group long term disability (LTD) benefits: The private insurer can deduct SSDI benefits from its monthly payments to disabled claimants. These deductions are a huge factor in the pricing and profitability of LTD insurance products - some actuarial studies suggest that the industry would have to increase rates by at least 20% without the offset for SSDI. I also remember that back in the early 1990s a change of 1% in a carrier's SSDI approval rate (the number of open claims with an offset) could mean millions of dollars to the bottom line. SSDI offsets have become a business of their own - six or seven private companies now assist claimants in the application process, and they get a percentage of the award amount if successful.
Why the anxiety? Two things come to mind: The first, as we've all read about, concerns the problems the Social Security Administration (SSA) is having with solvency in the coming years. The pressure on the disability program is actually more acute than on the retirement program; the SSA estimates that the disability program could be insolvent by as early as 2018, leading to an immediate decrease in benefit amounts of up to 20% and a corresponding decrease in LTD offsets. If the funding problems persist, it's conceivable that the disability program could stop accepting new claimants sometime in the next 10 to 15 years. The second issue causing concern is that SSDI new claim incidence went through the roof last year. Expecting to receive around 2.5 million new claims in 2011, state disability determination offices actually received over 3.2 million new claims - a 28% increase! In addition to swamping a process and people already suffering from budget and staffing cuts, this increase in newly disabled claimants has LTD insurers wondering, Is this the canary in the coal mine? Given persistent threats to the economy and stubborn unemployment, are private disability insurers going to see a similar increase in new claims? Opinions differ, but it has to make you wonder.
Our advice to LTD carrier clients is to prepare for some kind of reduction or cut back in SSDI benefits, and a good way to do this is to develop new, simpler products that stand on their own without depending on offsets from government programs like SSDI (individual disability income insurance usually doesn't offset for SSDI). They are easier to explain to potential buyers, and they avoid the "I paid FICA for all those years, and now you're taking my benefit?" objections that inevitably come from insureds at claim time. We also advise them to pay attention to both SSDI and short term disability (STD) incidence patterns, as a kind of "DEW Line" (Distant Early Warning for those who don't remember the Cold War) that will help them predict and manage increases in claim incidence. In a nutshell: Work on kicking the habit, and watch the skies.