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HOW INSURERS MAKE MONEY FROM DISABILITY POLICIES

The basic principles of insurance companies is the promise of coverage for a defined risk in exchange for payment of a premium for that coverage. In return, insurers pay out claims in accordance with the terms of insurance when certain events happen to a policyholder.

Insurance companies insure large numbers of people in order that they will garner profits through their statistical analyses of risk. This is the basis of the concept of shared risk. The insurer knows how many claims and the average amount that will be paid for each claim. Therefore, the actuaries at the insurer will run statistical packages to determine the amount of premium to charge so that the insurer will profit the most while keeping its premium costs competitive with other insurers doing similar business. This is made more profitable by determining factors which result in more advantageous coverage selection and rejection of insureds. For example, many insurers have ceased to write homeowners coverage in coastal areas prone to hurricane damage. In such cases, the mode for spreading risk among a pool of insureds simply does not result in desired profitability. This process is further complicated by the fact that many insurance policies are long-term with known profitability only becoming known many years down the line.

As insurers earn premiums and pay limited number of claims, they accrue profits. This is enhanced by the higher the premium charges which can result in fee income in itself. These profits are kept in reserves which can be invested to create a return to the company. In addition, insurers create revenue from a “float” which is money temporarily in hand when premiums come in earlier than when payment for claims are covered by the received premiums. It is the combination of charging profitable premiums, investment return income on reserves, and float investment profits which produce income for insurers.

The insurance company needs to earn sufficient income to pay for its operations which include marketing, administration, underwriting, employee salaries and benefits, office space, etc., and have funds left over (“profit margin”) to pay stockholders profits in the form of dividends.

This model is readily applied to disability policies. It is where corporate division profitability comes in where things go astray. A insurance claims department does not take sell policies are invest monies. In fact, it is source of the largest source of expense for an insurer: the payment of claims. So, for an insurer to create profits from its claims department requires that the claims department limit the payment of claims as much as possible, thus lowering expenses and creating more profit. Insurers attempt to achieve this end through various means. The insurance company can create claims guidelines which make it difficult for policyholders to quality for payment of their claims. At times, insurers will offer incentives for denial of claims by its personnel. Another approach is tying employee compensation or bonuses to company profitability. So, employees become very aware of the simple equation that claims denied result in increased compensation to them. The other way insurers limit claims payments is to force litigation. During the process of litigation, insurers will seek a buy-out of the policy (a settlement amount which is worth far less than the value of the actual claim over the long term). By offering buy-outs to litigants, the litigants will reduce their risk by accepting a settlement rather than losing everything should an adverse outcome occur. In this context, the insurer has far more leverage. The largest disability claim only has a very small effect on multibillion dollar corporations whereas a loss of a disability claim will put most individuals into bankruptcy.

The disability insurance industry has gone through a major transition. This industry has become more profitable than it was ten years ago as younger, healthier persons are buying policies while replacing older, more disability prone insureds. Continued advances in medical treatment are also assisting in helping people live longer, more productive lives. Unfortunately, the “Baby Boomer” generation will continue to drain disability insurer resources as they make record number of claims for the next decade or so. Disability policies when underwritten well tend to render the highest margin of profitability. Profits are further enhanced by recategorizing risk, raising premiums when possible, refining (incorporating stricter) policy language, and investing in better underwriting, and enforcing harsher claims management guidelines. Further income is being procured through development of new markets which provide opportunities for growth and risk diversification. In the past, there was an inordinate concentration of medical professionals which had been targeted by disability insurers. Today’s dangers are high employment which prevents workers from becoming eligible for group policies or purchasing and/or affording individual coverage. As only 7% of newly unemployed apply for private disability benefits, this is not a substantial factor. In addition, low yields on investments will be responsible for continued unfair claims activities so as to maximize profits from insurer claims divisions.

Unfortunately, a worker’s income is often his/her greatest asset. Without disability coverage, there is no way to secure potential financial security should disability occur. Saavy workers realize the financial hardship that will befall them should they become disabled. So, choosing to take out disability insurance is absolutely necessary. There is just no other game in town for this type of protection. Therefore, the machinations of insurers are further promoted by this very real need for people to secure their finances. So, when you engage in the disability claims process, it is important for you to choose a counsel who is completely familiar with the rules of the game.

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