Waiver Of Premium: The Unmanaged Liability

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 that 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 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 in the workplace¹, it's time this largely ignored liability is held up 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 such as 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 of 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, which is by far the larger of the two. A company that 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, depending 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 are in place."

Unfortunately, by not knowing what's broken the situation can't be fixed. Companies need to examine their numbers in order to recognize the level of reserve liability they're carrying, and to see for themselves 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 potential for savings in this area. Typically, the block of existing claims is much 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 looking 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 point, let's take a quick look at the financial possibilities for a company with even a small block of life waiver claims:

* The above reserve data is based on Statutory Annual Statements.

As you can see, even under the most conservative scenarios, the reserve savings are substantial when a proactive waiver of premium claim management process is put into action.

Industry Challenges
The National Association of Insurance Commissioners (NAIC) requires life companies to report financials that include both the number of policyholders who aren't disabled with life waiver, as well as reserves for those who are currently disabled and utilizing their life waiver benefits. But many items, like the number of new claims or the amount 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 or to identify the impact of contract definitions on their claim costs.

The new and ongoing volume of claim information, manual processing, and the fact that life waiver claims involve months if not years of consistent, close monitoring, is humanly challenging — if not impossible. For example, it's not out of the ordinary to have only a few people assigned to process literally thousands of life waiver claims.

It's unfortunate, but this type 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 there are any questionable red flags), the claim continues to be 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 are recertified. Typically very generic in nature, the statement often only indicates whether or not the claimant is or continues to be unable 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 having to rely on the physician's report 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 what are 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 near 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 need to build better business models.

Closing The Technology Gap
The insurance industry as a whole 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 require a combination of technology and human intervention. Investing in the right 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 life of the claim holistically. It 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 provide great insight into specific areas within the block, by applying predictive modeling techniques. It can evaluate how claims were originally assessed, the estimated duration, and why a claim has been extended. For example, was there something regarding the claim that occurred to warrant the extension of benefits such as 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 appropriate vocational resources at the right 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 need to start looking at waiver of premium differently. They need to continually evaluate the declining profit margins on in-force reserves in order to identify the impact on profits. Even if a waiver of premium reserve block is somewhere between 10 and 200 million dollars, potential savings are likely 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 right 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 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 of the initial claim and determining the 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 ensure claims are being re-evaluated at regular intervals, examining the possibility of getting the claimant back to work.

Why Waiver Of Premium Matters
What's typically happening is that most company's life claim blocks are managed on the same platform and in the same manner as their life claims, so ultimately the life waiver block is improperly managed. Life companies need to recognize that a waiver of premium block is not a life block but a disability block, and needs to be managed differently. For example, older actuarial tables do not reflect the fact that people with disabilities are living longer, potentially leaving companies with under-stated reserve liabilities.

Ultimately, having a good handle on the life waiver block will prove beneficial for both the carrier and the insured.

Part 2 of this series will discuss specifically how the introduction of process and technology into this manual and asynchronous area can deliver substantial benefits to life carriers.

¹ Social Security Administration, April 2013.