The return of own-specialty: liberalized disability benefits for professional groups suggest that history might repeat itself, to the detriment of insurers.

Group long-term disability insurers and reinsurers have developed a lot of tools and technologies to help us price, underwrite and manage our business. Of all these, however, the one we have not developed is the time machine. If we had, I'd take you back to the late 1980s and early 1990s when generous long-term disability plans for doctors and lawyers were readily available in the marketplace. I remember those days and hope you do, too. However, I'm starting to see signs that those days, and the lessons we learned, may have been forgotten.

We used to assume that professional groups such as doctors and lawyers were great markets for long-term disability insurance because they were more apt to be highly motivated to return to work and their high-paying jobs (which also made these groups less price-sensitive).

Carriers targeted these groups with liberal benefits such as own-occupation and own-specialty coverage, high monthly benefit limits, indexed cost-of-living adjustments and other inducements, secure in the belief that these benefits would ultimately go unused. When market changes and pressures (HMOs, PPOs, etc.) hit, however, the groups reacted in much the same way as other groups when faced with a disability and offered an attractive alternative to working.

Own-specialty definitions were especially problematic because they removed the incentive for a disabled person, such as a thoracic surgeon with a hand disability, to move into another area of medicine where his or her disability wasn't a factor. This type of situation, coupled with indexed Cost-of-Living-Adjustment benefits that offered regular "raises" while on disability, made it difficult for carriers to manage these claims. By the mid-1990s, many had ongoing claims on their books that threatened to outstrip premiums. Several left this market segment, even as the insured groups showed a willingness to absorb dramatically higher premiums in order to renew the rich benefit plans.

The remaining carriers responded, however, and new groups needing disability coverage saw plans with lower monthly maximums, conservative COLA provisions and no own-specialty coverage. As a direct result of these changes, this market has stabilized and become profitable again. Recently, a few carriers have decided it makes sense to pursue more of this business, and they appear to be doing so by liberalizing benefits.

Paying a premium price is not much of an issue for these groups. What they want are monthly plan maximums up to $25,000 or $30,000, guaranteed issue without proof of good health, tax-free benefits, COLA indexation, and liberal definitions of disability for own-occupation and own-specialty to retirement age, but at group insurance rates. Some carriers appear willing to offer this in hopes of collecting a hefty-enough premium to offset increased claims.

Is our industry better able to price for this now than we were in the 1990s? What do we know today that we didn't know then? A carrier may have a mixed disability block with some old contracts that have own-specialty and new contracts without it. It may produce good results on the whole. Liberalizing benefits, however, could have a negative impact on the performance of this block, even with higher premiums.

If we are going to offer an own-specialty definition again, we really need to answer a few key questions first. What credible claims experience is there for a benefit that has largely disappeared from the market the last 20 years? As an industry, do we understand own-specialty well enough to really manage the claims? One might be able to control it by keeping monthly maximums to $10,000 to $15,000, hut I'm not aware anyone has a way to manage these claims effectively via return to work.

Furthermore, definitions are important. How do we define own-specialty vs. own-occupation in our current policies? Is this understanding consistent among both underwriting and claims personnel? Would our actuaries be surprised if it were not? Own-occupation definitions must be well-defined and understood by all.

A time machine would sure make our jobs easier. We could jump into the future to check on the results of the Underwriting decisions we make today. When it comes to liberalizing benefits for professional groups, I wonder if we'd like what we'd see.

Gerald T. Bannach is vice president, disability reinsurance, for ING Re, the reinsurance business of ReliaStar Life Insurance Co., Minneapolis. Bannach can be reached at [e-mail].