Disability's new day: group disability has become more competitive and has acquired a new emphasis on the small-case market.

Key Points

* UnumProvident's cutback in large-case group disability has opened the market to other large writers.

* UnumProvident and other companies are setting their sights on the small-case market, which is not much penetrated and offers good profitability.

* To reach the small-case market, writers are turning to supplemental products, often in the areas of health and accident rather than disability coverage.

* The changing landscape seems to have injected a new energy into the industry, including formation of an educational organization.

Disability insurance is undergoing a shake-up. Where it leads is open to debate, but there seems little doubt that leading industry writers are energizcd and eager to exploit the new positions they have created for themselves in the market.

So what is new? Most striking is that UnumProvident Corp., the unchallenged leader in disability since the 1970s, is headed in another direction. The company relinquished its top ranking in group disability sales in the first half of last year, according to JHA, a disability reinsurance, consulting and market-research firm. And in August, UnumProvident announced a workplace advertising campaign that focuses on accident and health supplemental products.

Rushing to fill the vacuum were Hartford Life and MetLife, both of which surged past UnumProvident in long-term disability sales in the first half of last year. Most other writers also improved their market share. And some, like UnumProvident, see great promise in the supplemental market with products that fill in widening gaps in basic employer-provided benefits.

Meanwhile, 12 of the top disability writers have founded and funded the Council of Disability Insurers, headed by 30-year industry veteran Robert Taylor, to spread a message about the value of disability insurance, especially as the working population ages. "When you look at the spectrum of employee benefits, clearly the focus is on health care and retirement," said Taylor, the council's executive director. "Too oren, disability insurance gets pushed aside in the decision-making and evaluation process."

These may sound like mixed messages from the industry, but that may not be the case. In fact, the market in which UnumProvident reduced its share, large employers, is the most penetrated, and always has been. About 95% to 98% of the large-case business is "passed around," said UnumProvident spokeswoman M.C. Guenther. "It's not new business." So both the company and the new industry council really have their sights set on the underpenetrated small-case market.

"Once you're over 1,000 lives, the penetration level is almost complete," said Mike Simonds, UnumProvident's vice president of marketing and product development. "But in small-case companies of less than 100 lives, only about 50% offer long-term disability."

In fact, it was UnumProvident's aggressive expansion of market share in the large-case market after Unum and Provident merged in 1998 that drove a lot of its very poor experience and losses in that block. Simonds said this aggressiveness during the 2000 to 2002 time frame is very well documented, but "you can overstate that a little, because at the same time we were doing that, the economic cycle was doing what it was doing, and interest rates were falling precipitously, so profitability in the block was impacted by all those factors." But Simonds said group sales the past year have been growing "at a healthy clip" in the small- and mid-case market, which is where the company is targeted for growth.

"It appears that UnumProvident is trying to move its business mix back to where it was pre-merger," said Drew King, president of JHA. "They are still very tough in the small-to-mid-sized market. They have a great sales force and good underwriters, and they still have the largest block, by far."

King added it will be interesting to see how UnumProvident's shift toward supplemental benefits will affect its disability business in the future, especially since disability insurance has not been one of the fastest-growing supplemental products.

From 2000 to 2002, the large-case market had risen to about 60% of UnumProvident's disability book, Simonds said. Now it is down to about 40% in large-case, 20% in mid-case, and 40% in the small-case. "We're pretty pleased with where it is," he said, adding that the company will try to retain the current mix.

The large-case disability market is highly competitive. King said the basic requirements are to provide customized services and be aggressive on price and terms. In recent years, that has meant guaranteeing rates for three years, but King said he has heard of requests for four- or five-year rate guarantees, which he categorized as "even more risky."

The risks of aggressive pricing are heightened when the economy turns bad, as it did from 2000 through 2002. Claims rise "almost like clockwork" when unemployment ticks up, said King. "Workers see layoffs coming, and many file for disability benefits instead of waiting for a pink slip," he said. Long-term disability also requires more capital (higher reserves) than short-term disability, because claim durations are longer. And when interest rates fall, as they do during recessions, insurers must hold more reserves to offset the loss of investment income.

UnumProvident would love to continue to be the sales leader, Simonds said, but it wants that business to be profitable. "In particular, we found that today in order to be the biggest writer in these group disability lines of business, you have to write a large number of very large employer groups, where it's very difficult to earn a return,' he said. Small-case markets tend to be more profitable because that's where an insurer reaches first-time buyers and is selling based on the need for the insurance, he said. The company's large-case success stories occur when it competes on strong service levels rather than just beating the in-force rate, he added.

Taking Up the Slack

Hartford blew past UnumProvident in the first half of last year in both long-term and short-term disability sales, though it still trails in total premium, including in-force business. A big part of the reason was Hartford's acquisition of CNA's group business in late 2003 and integration in 2004. But 2005's growth was more organic than the result of the merger, said Dick Mucci, executive vice president and director of the group benefits division. Mucci said the double-digit growth was due to a strengthening of capabilities that the market began to recognize.

Mucci was bullish about the profitability of Hartford's new business. "We think the marketplace is growing," he said. "Employment is rising in the country after a period of recession. Personal incomes are rising. With some abatement of medical premium increases, employers are starting to pay more attention to disability insurance programs. And the value we bring to the marketplace speaks to the needs of employers and employees."

Hartford's business is spread evenly among small-, mid- and large case segments, and all three are profitable, Mucci said. Playing in all three segments adds diversity to Hartford's marketing and risk characteristics, he said.

Particularly encouraging, according to Mucci, are increasing interest among employers and employees, the fact most Americans are underinsured, and Hartford's educational efforts. The company has introduced a Web site that teaches employees about disability benefits. In January, it launched the Vault Program, a weeklong school for producers and account managers. For employers, Hartford issues reports and provides services that analyze their programs. And Hartford is a founding member and strong proponent of the new industry organization.

Hartford has not introduced major changes to products since the CNA acquisition, but has enhanced its product-service offerings, Mucci said. In the next year or two, Mucci expects significant changes in the product line, especially in the voluntary arena.

Hartford distributes through brokers and consultants. Financial planners, insurance agents and even property/casualty agents help in the small-case market. About 30% crosssell other Hartford group products, Mucci said.

The Allure of Supplemental

Simonds said UnumProvident actually embarked on its supplemental-benefits strategy more than three years ago, when it focused on the large-case market. It gradually broadened the strategy in the past two years to the point it now aggressively seeks to penetrate companies with fewer than 2,000 employees, and even fewer than 500, he said. The in-force block of business is now growing at 15% to 20% a year, with the strongest growth among small companies. UnumProvident already ranks second in supplemental products behind Aflac, he said. Products include coverages for critical illness, accident, medical support, life insurance, long-term care and disability. Services include benefit communication, enrollment support, leave-man agement solutions, claims management, and health and productivity planning support.

Simonds said he likes UnumProvident's new market position. "We're going on five consecutive quarters of very strong operating-earnings improvements, the underlying business is a healthy one, and our capital position has never been stronger," said Simonds. "It's a much better feeling than the place we were in a few years ago. We've got reasonable growth expectations, but at the same time, we're adding lines of business that are really growing. It's a fun place to be."

Also seeing promise in the supplemental market are Assurant Employee Benefits and Jefferson Pilot Financial Life Insurance Co., which rank in the second tier of disability insurers, based on premium. Assurant's supplemental sales are in dental, life and disability, in order of sales. Jefferson Pilot's new product is Paycheck Pius, which combines long-term disability, short-term disability, life and accidental death and dismemberment in one product.

Assurant's sales rose more than 44% in the first half of last year in long-term disability and by a factor of nearly 2.5 in short-term. Assurant works with small companies; those with fewer than 100 employees are the heart of its market. John Roberts, senior vice president for disability and life products and president of Assurant's reinsurance division, said a program Assurant began in 2004 has helped it treat small companies like big companies, giving them access to a range of plans from employer-paid to employee-paid. It also has automated many of its functions with brokers, including centralized quoting and online billing. And the company has introduced products that cost a lot less than traditional products.

One of those products is Serious, which covers only severe disabilities but costs just $57 a year as compared with $210 for a traditional disability product. "Then we introduced a couple of other products at different price points," Roberts said. "Brokers and clients got very excited that they had these choices to make." The choices also led prospects to pick other, more expensive products, he added.

Serious is the fastest-growing part of Assurant's business, but being able to offer a variety of voluntary coverages has been key, Roberts said. These voluntary products have not cut into sales of traditional disability products. That's because voluntary offerings are attracting new buyers, said Roberts.

That's also why Paycheck Pius has succeeded for Jefferson Pilot Financial. "We've been very focused to try to get to those people, the employers who need to cost-share ancillary benefits," said Julie Fried, vice president of marketing. Simplicity of the offering and ease of enrollment have also helped, she said.

Paycheck Plus is a brochure-rated product, meaning Jefferson Pilot does not have to conduct a census and produce individual quotes for groups, but can use shelf pricing. A brochure explains the program, and individuals know what will be deducted from their paychecks.

"The primary target is new groups that don't have voluntary benefits in place," said Len Cavallaro, senior vice president in sales and marketing. "We want to penetrate that legendary unpenetrated part of the market.

"We don't see this product as a cannibalization because the chance it exactly mirrors and replaces an existing plan is slim," he added. "Employee-directed benefits will be the wave of the future. The employee will be the one to decide what slate of benefits they will want."

Jefferson Pilot Financial's lead product remains its Premier series, which provides the company's best value proposition, Cavallaro said.

Council To Promote Long-Term Disability Insurance

About 90 million workers are covered by group life insurance. Only 36 million or so have group long-term disability insurance. That's according to the Council of Disability Insurers, created in December 2005 by a coalition of 12 disability writers that want to see the latter number become bigger.

To help make that happen, the job of the new council, headed by Robert Taylor, is to educate employers, employees and distributors about the growing need for and value of disability insurance.

"When you look at the macro landscape, a large number of people don't have the product for a variety of reasons" said Taylor, a 30-year industry veteran who headed the reinsurance, consulting and research firm JHA for eight years. "Interestingly enough, we don't think it's as much affordability as it is awareness"

According to Taylor, an array of studies shows that employees haven't been approached or asked to buy disability protection. Few brokers or agents focus on it. "It's a complex, esoteric business," he said. "It's also clear that the number of people suffering from long-term disability is increasing. That correlates with the aging of the population and medical advances that help people live a lot longer with disabilities."

Two other trends also should make disability insurance appealing to workers. One is that the savings rate is low in America, with many people living paycheck-to-paycheck. Another is that the risk of long-term disability was covered through pension plans, but those plans are waning. "As we move toward defined contribution plans, all the pieces of risk have to be evaluated separately," said Taylor. "And one is the consequences of disability." But serious long-term disability is a low-occurrence, high-magnitude event, so decisions to buy are easy to postpone, he said.

The council's core service will be its educational Web site, disabilitycouncil.org. In February, the Web site was still under construction. But Taylor said the council is developing a public-relations campaign to provide good information to the media and the public. The new organization will focus on long-term disability, not long-term care or even short-term disability. And it will not be involved in any lobbying, Taylor said.

The good news is that premiums of about $200 per person a year buy into a "respectable" group disability plan, according to Taylor. That level of premium should provide 60% of salary in benefits payable to age 65, he said. He contends that given a comparison of benefits, group life-insurance vs. group long-term-disability, most employees would choose to spend $200 a year on disability because that amount can protect an income stream for decades, and they don't have to die to trigger a claim.

Founding Members, Council of Disability Insurers

Assurant Employee Benefits

Berkshire Life

Guardian Life

Hartford Financial Services

Jefferson Pilot Financial

MassMutual

MetLife

Mutual of Omaha

Principal Financial

Standard

Sun Life

UnumProvident

Contact with Small Employers
Lacking Disability Coverage
Regarding Purchase

Has your business ever been contacted by anyone
regarding the purchase of disability income insurance?

Yes                  64%
No                   30%
Don't Know/Refused    6%

If yes, who contacted you?

Agent or broker                        61%
Insurance company directly             27%
Trade group or business association    7
Attorney                               2
CPA                                    1
Other                                  2
Don't know/refused                    17

Note: table made from pie chart.

Source: American Council of Life Insuers, 2002

Expected vs. Actual Sources of Income During Disability

Expectations of what will replace income during a disability differ
substantially from the realities of those who experienced a disability
within the past five years.

                         Expected     Actual

Disability Insurance       49%          37%
Unemployment               27%           6%
Social Security            23%           6%
Medical Insurance          21%           0%
Workers' Comp              18%          12%
None                       17%          19%

Reasons for Having No Disability Coverage

Employees estimate that employers pay about $1,000 per year per
employee for disability insurance. The actual cost is close to $200.

Cost of disability insurance is too high                 42%
My employer doesn't offer disability insurance           17%
I am healthy and unlikely to become disabled             16%
Don't know enough about it to make the best decision     11%
Workers' Compensation would cover me                      4%
I could live on savings                                   3%

Source: The Hartford's Disability Literacy Study, August 2004

Note: Table made from bar graph

Long-Term Disability Sales Premium and Cases, Top Writers

                                          LTD Sales Premium

                                                               % Mkt
                                  Midyear         Midyear      Share
Company                              2004            2005    MY 2005

Hartford Life                $118,800,000    $163,400,000       19.2
MetLife                        98,000,000     155,000,000       18.2
UnumProvident                 156,730,000     111,178,144       13.0
Cigna                         106,700,000      78,806,000        9.2
Prudential                     51,011,675      55,628,182        6.5
Aetna                          56,192,041      43,699,000        5.1
Jefferson Pilot Financial      30,921,366      36,970,275        4.3
Reliance Standard              31,100,000      35,100,000        4.1
Sun Life                       17,604,288      24,194,802        2.8
Standard                       21,879,714      23,488,489        2.8
Industry Total               $788,648,263    $852,837,938

                                            LTD Sales Cases

                                                               % Mkt
                                  Midyear         Midyear      Share
Company                              2004            2005    MY 2005

Hartford Life                       1,770           1,756        8.4
MetLife                             1,816           1,851        8.9
UnumProvident                       3,301           2,360       11.3
Cigna                                 236             242        1.2
Prudential                            353             426        2.0
Aetna                                 505             267        1.3
Jefferson Pilot Financial           1,571           1,875        9.0
Reliance Standard                   1,057           1,479        7.1
Sun Life                              618             794        3.8
Standard                              904           1,077        5.2
Industry Total                     20,508          20,825

Sales premiums represent annualized premium from the sale of new cases
with effective dates between Jan. 1 and June 30. New cases represent
the number of new cases written with effective dates between Jan. 1 and
June 30.

Note: Market share is based on midyear 2005 sales premium and sales
cases. Source: JHA 2005 U.S. Group Disability Midyear Market Survey

Short-Term Disability Sales Premium and Cases, Top Writers

                                    STD Sales Premium
                                                             % Mkt
                                  Midyear        Midyear     Share
Company                              2004           2005   MY 2005

Hartford Life                 $47,600,000    $71,600,000      19.3
UnumProvident                  79,490,000     43,093,887      11.6
MetLife                        39,000,000     43,000,000      11.6
Aetna                          15,505,217     25,296,000       6.8
Jefferson Pilot Financial      20,603,174     24,535,736       6.6
Cigna                          15,400,000     19,278,000       5.2
Guardian Life                  19,712,000     17,200,000       4.6
Assurant Employee Benefits      6,529,023     16,813,000       4.5
Reliance Standard              10,400,000     13,800,000       3.7
Sun Life                       10,547,951     11,377,951       3.1
Industry Total               $349,657,152   $370,753,726

                                     STD Sales Cases
                                                             % Mkt
                                  Midyear        Midyear     Share
Company                              2004           2005   MY 2005

Hartford Life                       1,140          1,016       6.0
UnumProvident                       2,088          1,611       9.4
MetLife                             1,389          1,426       8.4
Aetna                                 174            154       0.9
Jefferson Pilot Financial             918          1,111       6.5
Cigna                                  86            114       0.7
Guardian Life                       3,473          3,704      21.7
Assurant Employee Benefits            604            739       4.3
Reliance Standard                     474            713       4.2
Sun Life                              429            544       3.2
Industry Total                     15,816         17,050

Sales premiums represent annualized premium from the sale of new cases
with effective dates between Jan. 1 and June 30. New cases represent
the number of new cases written with effective dates between Jan. 1 and
June 30.

Note: Market share is based on midyear 2005 sales premium and sales
cases. Source: JHA 2005 U.S. Group Disability Midyear Market Survey