This is Part 1 of a two-part series on waiver of premium. Part 2 can be found here.
Insurance actuaries consider waiver of premium (WOP) a neglected liability — a supplemental benefit rider which has yet to be fully evaluated for risk exposure or cost containment, unknowingly costing individual and group life insurance carriers billions in liability every year.
The problem is the fact that many companies don't have accurate claim management systems capable of reporting what's really happening with the life waiver reserves that are sitting on their books. But with a 44 percent increase in disability claims by people formerly within the workplace1, it's time this largely ignored liability is organized to the light.
Why Companies Need To Pay Attention
Most life insurers aren't fully aware of how much of a liability they're carrying when it comes to their waiver of premium reserves. Moreover, they're even less likely to know critical information like the number of open life waiver claims, the percentage of approvals and denials, or claims still holding reserves that perhaps maxed out years ago.
Tom Penn-David, Principal from the actuarial consulting firm Ant Re, LLC explains: “There are generally two components to life waiver reserves. The first is active life reserves (for individual insurers only) and the second is disabled life reserves, that is by far the larger of the two. A business which has as few as 1,000 open waiver claims with a face value of $100,000 per policy, may be reserving $25+ million on their balance sheet, based on the age and terms of the benefits. This is a significant figure when coupled with the fact that many life insurers do not appear to be enforcing their contract provisions and have a higher than necessary claim load. Reserve reductions are both likely and substantial if the proper management systems have been in place.”
Unfortunately, by not knowing what's broken the situation can't be fixed. Companies need to examine their numbers to be able to recognize the level of reserve liability they're carrying, and to see on their own the significant financial and operational consequences of not paying attention. Furthermore, a company's senior financial management team may be underestimating the actual number of their block of waiver claims, thus downplaying the possibility of savings in this area. Typically, the block of existing claims is a lot larger than new claims added in any given year, and often represents the largest portion of overall liability.
“Life companies are primarily focused on life insurance reserves and not carefully taking a look at waiver of premium,” Oscar Scofield of Factor Re Services U.S. and former CEO of Scottish Re., says. “There could be a significant reserve redundancy or deficiency in disabled life reserves and companies need to pay attention to recognize the impact this has on their bottom line.”
To illustrate this time, let's take a quick look at the financial possibilities for a business with even a small block of life waiver claims:
|Example – Individual Life Carrier||Current Reserve Snapshot||With Proactive Management|
|Number of Open WOP Claims||1,000||1,000|
|(*) Average Disability Life Reserves (DLR)||$19,989,255||$19,989,255|
|(*) Average Mortality Reserves||$3,046,722||$3,046,722|
|Average Premiums Paid by Carrier on Approved WOP Claims||$754,427||$754,427|
|Average Total Reserve Liabilities||$23,790,404||$23,790,404|
|Claim Approval Percentage||90%||60%|
|Reserves Based on Approval Percentage||$21,411,364||$14,274,242|
|Potential Reserve Savings||$7,137,121|
As you can see, even underneath the most conservative scenarios, the reserve savings are substantial when a proactive waiver of premium claim management process is put into action.
The National Association of Insurance Commissioners (NAIC) requires life companies to report financials which include both the number of policyholders who aren't disabled with life waiver, as well as reserves for all those who're currently disabled and utilizing their life waiver benefits. But many items, like the amount of new claims or the quantity of benefit cost are not reported. Moreover, companies rarely move beyond these life waiver reporting touch-points to effectively monitor their life waiver claim management processes in order to identify the impact of contract definitions on their claim costs.
The new and ongoing volume of claim information, manual processing, and the truth that life waiver claims involve months if not years of consistent, close monitoring, is humanly challenging — if not impossible. For example, it's not from the ordinary to have just a few people assigned to process literally a large number of life waiver claims.
It's unfortunate, but this kind of manual claim reporting continues to remain unchanged as claim personnel (working primarily off of three main documents: the attending physician's statement, the employee statement, and the claim form), quickly push claims through the system. The process is such that once these documents are reviewed (and unless you will find any questionable red flags), the claim remains viewed as eligible, is paid, and then set-up for review another 12-months down the road. As long as the requests continue to come in and the attending physician still classifies the claimant as disabled and incapable of working, there isn't much done to proactively manage and advance the claim investigation.
An equally challenging part of the life waiver claim process is working off the attending physician statement — both when claims are initially processed, as well as when they're recertified. Typically very generic in nature, the statement often only indicates whether the claimant is or continues to be not able to work. This problematic approach essentially permits the physician to drive the course of the claim decision away from the management of the insurance company. The insurer, who is now needing to rely on the physician's are accountable to fully understand and evaluate the scope of the claimant's medical condition, has little information in which to manage the risk.
For example, did the evaluation accurately assess the claimant's ability to work infrequently or not at all? Are they able to sit, stand, walk, lift, or drive? If so, then do you know the specific measurable limitations? Is there potential to transition them back into their previous occupation or into an occupation that requires sedentary or light duty — either now or in the not too distant future? In order for companies to move beyond the face value of what has initially been reported, and to monitor where the claimant is in the process, they require to build better business models.
Closing The Technology Gap
The insurance industry in general has always been a slow responder when it comes to technology. But for companies to optimize profitability, closing the gaps in life waiver claim management and operational inefficiencies will need a combination of technology and human intervention. Purchasing the best blend of people, processes, and technology with real-time capabilities, can substantially reduce block loads and improve overall risk results.
Constructing a well-defined business model to apply standardized best practices that can support and monitor life waiver claims is critical. The adjudication process must move beyond obvious “low hanging fruit” to consistently evaluate the lifetime of the claim holistically. This means not only examining open claim blocks, but also those that are closed, to better identify learning and coaching opportunities to improve future claim outcomes.
Additionally, segmentation can offer great insight into specific areas within the block, by applying predictive modeling techniques. It may evaluate how claims were originally assessed, the estimated duration, and why a claim has been extended. For instance, was there something regarding the claim that occurred to warrant the extension of benefits for example change in diagnosis?
Predictive modeling also looks at how certain diagnoses are trending within the life waiver block, so if anything stands out regarding potential occupational training opportunities, benefit specialists can effectively introduce the right vocational resources at the best time for the insured.
Capabilities to improve outcomes in waiver of premium operations through technology and automation should include these three primary assessments:
- Financial: Companies have to start taking a look at waiver of premium differently. They need to continually evaluate the declining profit margins on in-force reserves to be able to identify the impact on profits. Even if your waiver of premium reserve block is somewhere between 10 and 200 million dollars, potential savings are prone to be 10 to 20%. Better risk management tools can substantially control internal costs and improve reserve balances.
- Operational: Current business models have to move beyond the manual process to steer the claim down the best path from start until liability determination. Standardized automation brings together fragmented, disparate information systematically across multiple platforms, essentially unifying communications between the attending physician and the insurance coverage company. This well-managed infrastructure gathers, updates, and integrates relevant data throughout the life of the claim.
- Availability: A critical way to improve the life waiver claim process is through accurate reporting. By breaking down the silos between the attending physician, case manager, and the insurance company, claim related information can immediately be uploaded and reported in real-time. Proactively enhancing the risk management process to enable companies to consistently receive updated claimant health evaluation and physical limitation reports, is critical for best determining return-to-work employment opportunities.
Three Technology Touch-Points in Waiver of Premium Operations
Front end: Assessment from the initial claim and determining the very best possible duration time.
Mid-point: An open claim should be reassessed to determine continued eligibility and to evaluate the direction of the claim if lasting longer than projected-and why.
End-point: The evaluation process continues to make sure claims are now being re-evaluated at regular intervals, examining the possibility of getting the claimant back to operate.
Why Waiver Of Premium Matters
What's typically happening is that most company's life claim blocks are managed around the same platform and in exactly the same manner as their life claims, so ultimately the life waiver block is improperly managed. Life companies have to recognize that a waiver of premium block isn't a life block but a disability block, and must be managed differently. For instance, older actuarial tables don't reflect the fact that people with disabilities are living longer, potentially leaving companies with under-stated reserve liabilities.
Ultimately, having a great handle on the life waiver block will prove beneficial for both the carrier and the insured.
Part 2 of this series will discuss specifically the way the introduction of process and technology into this manual and asynchronous area can deliver substantial benefits to life carriers.
1 Social Security Administration, April 2019.