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Individual Disability Insurance: What’s Past is Prologue

Opportunities for Growth in an Evolving Workforce

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    February 2022

    Individual Disability Income Insurance (IDI) has been available for over 60 years. In that time, as consumer needs and preferences changed, the product, pricing, underwriting, and claims management evolved from a simple accident policy to a total and permanent disability policy to the complex benefit-rich products we see in the market today. As we look to the future, where growth will be imperative, we see a workforce that is more heterogeneous than ever before, where new market dynamics may open the door to expanded reach and sales of disability products.

    As we look to the future, where growth will be imperative, we see a workforce that is more heterogeneous than ever before, where new market dynamics may open the door to expanded reach and sales of disability products.

    A brief history of IDI

    Viewed through the lens of risk and financial returns, the IDI industry has seen the pendulum swing from periods of losses to periods of significant returns. As an industry, we certainly remember the decade of the late 80s into the mid-90s, when most carriers saw negative returns on their IDI portfolios. Those sustained losses prompted some 30 carriers to re-evaluate their IDI exposure, with many carriers choosing to permanently exit the IDI marketplace.

    Beginning in the late 1990s, the cycle started to swing back, and over the past 20 years, product and pricing became more rational, underwriting became more conservative, and IDI profitability rebounded. Today, there are approximately 16 carriers active in the retail IDI space.

    Over the past ten years, the make-up of the IDI business has continued to evolve; pricing and underwriting have become more competitive, as seen with increases in issue & participation limits and increases in testing and requirement thresholds. Doctors and other medical occupations now comprise the largest occupational grouping; the employer-sponsored multi-life market has been growing faster than the individual retail market; and voluntary guaranteed standard issue underwriting has become more widely accepted by most IDI carriers.1

    Annual Non-Cancelable Statutory Margins After Dividends And Before FIT For 16 IDI Writers From 1988 Through 2017 As A Percentage of Earned Premium
    © Society of Actuaries’ Individual Disability Experience Committee
    Source: Society of Actuaries’ Individual Disability Experience Committee

    While IDI has seen sustained financial stability and profitability during the past decade, IDI sales growth over that same period has been lackluster. Based on the most recent sales data (and understanding this is skewed somewhat by the impacts of the COVID pandemic), disability sales struggled in 2020. Total annualized new sales premiums in 2020 were $381 million, a 5% drop from 2019, and the number of new policies issued decreased by 11% in 2020. In 2020, the proportion of annualized new premium issued in the employer-sponsored multi-life-life market was 44.7%, while the proportion of annualized new premium issued in the individually sold market was 49.9%.2

    The disability insurance identity crisis

    There are several reasons why IDI sales have been flat.  As a product, IDI has been challenged by what one might call an “identity crisis”. Terms such as “disability insurance”, “individual disability insurance”, and “disability income insurance” have not conveyed the importance of and the key solutions offered by the product. Recently the industry has begun adopting a moniker more aligned to the function of the solution being offered – “income protection”.

    Since the late 1990s, IDI has evolved into essentially a “feature-rich” niche product designed for the needs of an affluent buyer, at a price point largely affordable only by those with significant disposable incomes. As a result, the sales reach has primarily been limited to physicians, dentists, or highly compensated white-collar executives. Case in point: There are just under one million physicians in the U.S., yet in 2020 new premium from medical occupations (physicians) accounted for 34.1% of total IDI sales.2

    More broadly and most importantly, there remains a significant lack of consumer awareness around the importance of and the need for income protection solutions. In short, the design of today’s IDI product is overly complex, over-engineered, hard to understand, and in the end, too expensive for most consumers. The misalignment between the need for coverage and accessibility to solutions is, for most consumers, often summed up by the conventional wisdom that IDI is a product that is sold, not bought. 

    The current state of our workforce

    When assessing the future of income protection products, it is helpful to examine the dynamics of the U.S. workforce and use that data to define the potential scale and scope of the total income protection market.

    Total nonfarm payroll employment increased by 467,000 in January, compared with an average monthly gain of 555,000 in 2021. Nonfarm employment has increased by 19.1 million since April 2020 but is down by 2.9 million, or 1.9 percent, from its pre-pandemic level in February 2020. Notable job gains occurred in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing.3

    Nonfarm payroll employment, seasonally adjusted, January 2020 – January 2022
    U.S. Bureau of Labor Statistics
    © U.S. Bureau of Labor Statistics
    Source: U.S. Bureau of Labor Statistics
    While the total US workforce (which is about 155 million U.S. workers)  would represent the total universe of employed individuals, the true available IDI market space is more likely defined by the private sector employment of about 100 million workers. We can further stratify this into several discrete cohorts, which in many cases are significantly under-penetrated markets:
    • Businesses employing less than 5 workers – 12.41 million firms4
    • Business employing 5 to 19 workers -  2.66 million firms4
    • Businesses employing 20 to 99 workers -  566,00 firms4

    It is estimated one in three workers participate in what many now call the “gig economy”; a total of 51 million gig workers in 2021.5

    Between 2020 and 2030, total employment is projected to grow from 153.5 million to 165.4 million, an increase of 11.9 million jobs.6

    As of March 2021, only 35% of all private industry workers have access to employer-sponsored group Long Term Disability benefits (LTD). Access further varies by wage bands, with just 9% of workers in the lowest average wage band having access to LTD, while 64% of workers in the highest wage band have access to LTD. We also see a wide variance in access by the size of business7:
    Firm size by # of employees Percentage of firms offering LTD
    1-49 22%
    50-99 33%
    100-499 40%
    550+ 59%

    The opportunity for Income Protection can be found at the intersection of an under-served workforce and changing attitudes around benefits and protection.  

    Long before COVID-19, the nature of work was disrupted by a confluence of forces. This included outsourcing, automation, and high unemployment, all of which contributed to the rise of the gig economy. Technology advancements took the world from basic telecommuting to work-from-anywhere in a relatively short time. LIMRA research has found that 26% of workers participate in the gig economy, and 83% of gig-only workers say they are gig workers by choice. Nearly half of gig workers, or 47%, say that “lack of access to traditional benefits” is one of the top challenges of gig work.8

    How valuable do you view insurance benefits offered at work now compared with before the COVID-19 pandemic? (Employee perspective)
    Annual Non-Cancelable Statutory Margins After Dividends And Before FIT For 16 IDI Writes From 1988 Through 2017 As A Percentage of Earned Premium

    In the wake of the pandemic, more workers are rethinking their jobs and lifestyle priorities, as evidenced by the Great Resignation (also known as the Big Quit). Microsoft estimates that 40% of U.S. workers thought about quitting their jobs in 2020. In 2021, many did so; according to the U.S. Department of  Labor, in the month of December 2021, 4.3 million workers left their jobs.9

    Significant percentages of employees view benefits as more valuable today than they did before COVID-19. That perception is particularly prominent among millennials, with nearly half indicating that their benefits are “more valuable” today.8

    Wellness benefits are more appealing than in the past, and employees also showed renewed interest in income protection and insurance benefits (e.g., life, disability). But when surveyed about their benefit choices, most workers indicated they didn’t understand Disability Insurance at all or, at best, only somewhat.8

    How well do you understand the benefits available to you at work? (Employee perspective)
    Annual Non-Cancelable Statutory Margins After Dividends And Before FIT For 16 IDI Writes From 1988 Through 2017 As A Percentage of Earned Premium

    Reimagining Disability

    For IDI and Group LTD carriers these new market dynamics can open the door to expanded reach and sales. The workforce is more heterogeneous than ever before. Today, there are five generations of workers, more contingent workers, increased racial and ethnic diversity, and extensive remote working, creating different benefits, needs, and preferences.9 These are not obstacles but rather opportunities for growth in Disability benefits. 

    Reimagining disability offerings will mean having to lean into market realities and the needs of a growing, diverse, multi-generational workforce with a greater emphasis on consumer awareness, expanding the scope and type of products offered, as well as taking a fresh look at distribution and distribution costs. It is essential to balance risk and growth appropriately; however, for the overall health of the disability market, growth is imperative. 

    Growth and sales expansion will come from marketing and promotion focused on educating the consumer and building awareness around disability needs and solutions. A well-designed, price-sensitive, value-added product will be key. One that focuses on the income protection needs of the gig worker, the middle market/mass affluent buyer, and the employee of small and medium-sized firms in the employer-sponsored multi-life and guaranteed standard issue market. Expanded or alternative distribution channels, both digital and face-to-face, will be vital to driving awareness and sales expansion. Technology and automation will also play a critical role by facilitating the outreach and education of consumers (on the importance of income protection) and then creating a frictionless environment that allows for a simplified “click, quote, underwrite, and issue” process. Carriers could also consider positioning income protection less as a stand-alone sale and more as part of an integrated end-to-end income protection solution. By aligning IDI/Income Protection with retirement planning and cross-selling opportunities with Life, LTD, Critical Illness, and even Long Term Care, carriers can leverage the changing demographics and benefit attitudes of the evolving workforce.

    By focusing on consumer awareness, innovation, and the needs of these diverse workers, carriers will likely find creative ways to engage new customers and design, underwrite, and deliver attractive, affordable, and accessible solutions for these underserved market segments.

    When it comes to growth, the question is not IF but rather a question of HOW. Munich Re has the experience and expertise to help companies navigate this new normal. We are actively working with several companies on product, pricing, and underwriting solutions as those companies look to expand their disability reach into the gig economy and the middle market. Munich Re is also helping carriers grow and capitalize on disability opportunities with small to medium-sized employers in the employer-sponsored multi-life and GSI markets.

    Contact the author:

    Ron Graff, AVP Business Development, Group and Living Benefits


    References 1Society of Actuaries’ Individual Disability Experience Committee (2019). Analysis of Claim Incidence Experience from 2006 to 2014. Schaumburg, IL. Retrieved from https://www.soa.org

    2 Milliman (2021). 2021 Annual Survey of the U.S. Individual Disability Income Insurance Market.  Seattle, WA: Beal, R. W., Khan, T. S. Retrieved from https://us.milliman.com/-/media/milliman/pdfs/2021-articles/11-29-21-idi-market-survey-report.ashx

    3 Bureau of Labor Statistics (Feb 2022). The Employment Situation – January 2022.  Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf

    4 NAICS (2022). US Business Firmographics – Company Size. Retrieved from https://www.naics.com/business-lists/counts-by-company-size/

    5 Molla, R. (Sept 2021). More Americans are taking jobs without employer benefits like health care or paid vacation. Retrieved from https://www.vox.com/recode/22651953/americans-gig-independent-workers-benefits-vacation-health-care-inequality

    6 Bureau of Labor Statistics (Sept 2021). Employment Projections – 2020-2040. Retrieved from https://www.bls.gov/news.release/pdf/ecopro.pdf

    7 U.S. Dept of Labor, U.S. Bureau of Labor Statistics (Sept 2021). National Compensation Survey: Employee Benefits in the United States, March 2021. Washington, D.C. Retrieved from https://www.bls.gov/ncs/ebs/benefits/2021/employee-benefits-in-the-united-states-march-2021.pdf

    8 LIMRA, Ernst & Young LLP (2021). Harnessing growth and seizing opportunity: the future of workforce benefits. Retrieved from https://www.limra.com/siteassets/research/research-abstracts-shared/2021/harnessing-growth-and-seizing-opportunity-the-future-of-workforce-benefits/2021_limra-ey_workforcebenefitsstudy.pdf

    9 Bureau of Labor Statistics (Feb 2022). Job Openings and Labor Turnover – December 2021.  Retrieved from https://www.bls.gov/news.release/pdf/jolts.pdf 

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