Call to action: workplace dynamics are changing how disability insurance is underwritten.

Key Points

* The increased number of workers older than 55 foreshadows more costly disability leaves of greater duration.

* New products should be designed to provide greater employer and employee coverage and funding options.

* Carriers that can help ease the burden on human resources departments by making administrative assistance available will gain a competitive edge.

Today's employee-benefits environment is affected by several global trends that will continue to challenge the disability insurance market. An aging population, current health and lifestyle patterns, as well as rising health-care costs and pension expenses are influencing the direction of the industry. Four trends in particular are impacting disability income protection underwriting and risk dynamics.

Aging Work Force

Most brokers today are aware that the U.S. population is aging, but they may not realize the full significance of this demographic for their corporate business. Between 1990 and 2000, the median age of the U.S. working population increased from 40 to 42, with the largest proportional increase coming from the 45 to 54 age bracket, according to the U.S. Census Bureau. Aging trends in the current decade are significantly reshaping the work force. We are seeing a decline in mid-career workers, fewer younger workers entering the work force, and rapid growth in the over-55 segment.

The expected outlook for the coming decade is even more dramatic, with a projected increase of 73% in the number of employees between the ages of 55 and 64, and a 54% increase in the number of workers age 65 and over, according to U.S. Census Bureau data.

One reason for the graying of the U.S. work force is that life expectancy has significantly increased during the last century, growing by about 50%, according to the U.S. Social Security Administration. A child born today can expect to live to approximately age 75, thanks to advances in health care and treatment, early screening for critical illnesses such as heart disease and cancer that improve survival rates, and the reduction of smoking in the U.S. population, according to a November 2005 issue of the Centers for Disease Control and Prevention Morbidity and Mortality, Weekly Report.

Several other factors also arc contributing to an older work force:

* Overall population growth has slowed as families choose to have fewer or no children, resulting in less availability of younger workers.

* Older employees are having to work longer to save enough money to retire.

* Many active baby boomers are deciding to postpone their retirement and continue working part-time, which could help employers in the long run.

A Shrinking Work Force

Employers are being warned to expect a significant shortage of qualified workers in the future because of these aging trends. Experts now predict that the demand for labor may outstrip the supply by 35 million workers over the next 30 years, according to Employment Policy Foundation Analysis and projections of the U.S. Census Bureau. Most of these unfilled jobs are likely to be in the highly paid managerial and professional occupations--those that require skills usually found in more mature, experienced workers.

To close the coming labor gap, employers will have to find creative ways to manage their human resources issues:

They'll have to identify new ways to improve productivity, such as outsourcing or cutting-edge technology.

Some employers may want to lobby for increased levels of immigration or expanded guest worker programs so they will have access to employees with multilingual skills.

Incentives will be needed to attract mature, more experienced workers to re-enter the work force, perhaps on a part-time basis.

In addition to a growing labor shortage, the aging of the work force will create additional demands on employers, including escalating medical and pension costs, a need to shift a greater percentage of benefit costs to employees, and a new emphasis on general employee health and wellness, particularly for those over 40.

Rising Disability Claims

With the median age of the employee population continuing to rise well above 40 and creating a disproportional number of older workers, disability providers can expect to see a significant impact on the risk dynamics of their business. Insurers are already concerned about how this trend will affect claim incidence and duration, given the tact that aging along the disability curve can be steep--cost increases of 4% to 8% per age year are common, based on UnumProvident's Long-Term Disability block. Unfortunately, the inevitable result will be a need for ongoing price increases for all disability customers simply to cover the cost of the aging block of business.

With respect to short-term disability, statistics show that the incidence of all types of illness claims spikes for employees over 40. Depending on the specific impairment, an employee over age 40 can expect to be out on short-term disability an estimated 20% to 35% longer than an employee under age 40, based on UnumProvident's Disability Database.

The duration of short-term disability is also a function of age--data show that average lost days increase 15% for employees between ages 50 and 60, and rise another 15% for employees over age 60. This spike in short-term disability lost time suggests the importance of overall health for this age category and should signal employers to consider implementing a proactive wellness program when possible. Helping older employees stay healthy and on the job has clear advantages for both employers and disability insurers.

For long-term disability, distribution of claims is comparable to that of short-term disability for employees in their 40s. However, once an employee reaches the 50 to 59 age band, the distribution shifts dramatically to longterm disability. Since this is the age group that most likely will make up a very large percentage of the work force in the next 10 to 20 years, insurers expect claim incidence and durations to rise. Certainly, employers should recognize that workers over 40 will have a higher likelihood of going out on disability and staying out on disability longer than workers under age 40, and that those between 50 and 59 are most at risk.

Health Risks

A number of other health-related patterns also are affecting disability underwriting. The prevalence of obesity in the United States has increased 74% since 1991 and is now reaching epidemic proportions. Obesity creates additional health issues--the U.S. government has tracked the steady rise of diabetes, hypertension, musculoskeletal injuries and other conditions in young people that are often tied to the steady rise in obesity.

In fact, statistics show that between the mid-1980s and late 1990s, diabetes increased by 70% among people in their 30s, and by 40% among people in their 40s. Not surprisingly, over the past decade there has been a tenfold increase in the incidence of short-term disability claims attributed to obesity.

Another factor affecting disability costs is the fact that during the early 1990s, disability death rates were declining, but in recent years have been relatively stable. In addition, the increase in chronic illnesses such as allergies, asthma, depression, arthritis, and other medical conditions is having a profound impact on workplace absences, productivity and the continuing escalation in health-care costs.

Employer health-care costs have risen steadily since 1998. In 2005, premiums for employer-sponsored health insurance rose by 9.2%--after four consecutive years of double-digit growth, according to a 2005 Kaiser Family Foundation and Health Research and Educational Trust survey. This rate is more than three times the growth in workers' earnings, which last year was 2.7%, and more than double the rate of general inflation at 3.5%. National per capita health-care expenses are expected to continue to rise and are predicted to almost double by 2015.

Consequently, health-care costs now represent the largest portion of an employer's benefits program, consuming 55% of total expenditures, followed closely by retirement costs at 25%. Employer costs illustrated above exclude wages, paid-leave benefits, supplemental pay, legally required benefits such as Social Security and federal/state unemployment, and other benefits. Between 2000 and 2005, the average employer-cost-per-hour for retirement benefits in private industry rose from 59 cents to 90 cents, with future increases likely, according to the U.S. Bureau of Labor Statistics.

Benefits and Plan Designs

The ramifications of these trends--an aging population, negative health patterns, rising health-care expenses and increased retirement expenses--are worrisome for disability carriers, with even greater repercussions for employers. Because of growing cost pressures, employers are being forced to shift more responsibility for funding to employees, with the result that families now face tough choices regarding their major insurance needs.

Brokers, too, need to fully understand these trends and what they mean for employers, particularly when recommending disability coverage for their clients. They need to ask themselves, for example, what base level of ancillary benefits should and can an employer fund? Similarly, what plan design will help to stabilize an employer's costs? Can longer elimination periods and higher co-pays help ease expected cost increases?

Also, what coverage gaps will remain for employees, and what can be done to help them choose the benefits they'll need? Other considerations include how to communicate effectively with employees so they understand the benefit solutions available to them, as well as what employees will consider "affordable" when purchasing coverage.

Disability carriers must respond to these trends. It's clear they cannot continue to do business as they have in the past. The current environment requires them to be on the front line in developing new products that provide greater employer and employee choice with respect to both coverage and funding options. In addition, insurers need to offer enhanced enrollment support that includes improved education and communication for employees.

Those carriers that can help ease the burden on human resources departments by making administrative assistance available will gain a competitive edge, while those who can partner with employers to provide effective solutions such as disease management and return-to-work assistance programs will stay ahead of the competition.

Together, employers and insurers need to stay abreast of health-care and retirement trends as well as lifestyle patterns and the impacts they will have on the disability industry. No longer is risk management solely the province of insurers--today's trends and realities make it necessary for employers to work creatively with their carriers to develop effective solutions for managing costs while protecting employees' income.

Sharing the Risk

In today's changing disability market, everyone is seeking adequate spread of the risk. Carriers are incorporating techniques such as amount of coverage or duration limits, rate guarantees, modified guaranteed issue, expanded enrollment methods and others to achieve this goal. Increasingly, benefit offerings are being defined by who pays how much, and how insureds access the coverage, providing a new basis for underwriting characteristics.

For brokers, it may mean moving out of their comfort zone to embrace products with risk management tools that may be new to them, such as modified short-form evidence of insurability for group producers, or for participation requirements for individual producers.

In truth, the opportunities will be great for brokers who capitalize on the coming new array of product forms and underwriting techniques that will allow for a wide set of price points. Producers who align themselves with disability carriers who can provide products and services that address these macro trends can look forward to thriving in today's evolving disability market.

Disability providers and employers must take the following steps to change the direction of disability insurance:

* Continue to create flexibility in benefit plans to meet individual customers' needs, with more melding of group and individual features in a single offering.

* Reward employees who make positive health and lifestyle choices, thus reducing risk and disability expenses.

* Provide a balance of products and services that will meet the needs of all market segments.

* Further educate both employers and employees about the need for disability insurance and its vital importance in protecting income and assets.

Contributor Chris Jerome is senior vice president of group underwriting operations, UnumProvident Corp. He can be reached at [e-mail]