Effect of the Economy on Group Long Term Disability Claims

Abstract

This article seeks to isolate the effect of selected economic variables on group long-term disability claims. It demonstrates quantitatively that disability claims are responsive to shifts in the economy and suggests a model for predicting changes in disability claim rates. This model may be useful in designing and costing a viable group long-term disability insurance program. Provisions for income continuation during lengthy disabilities recently have been added to the fringe benefit package of many firms. A study by Towvers, Perrin, Forster and Crosby (TPF /C) reveals that in top industrial companies surveyed in 1973, 77 had group long-term disability programs. TPF/C reports a substantial increase in the number of companies with long-term disability plans since 1970.1 In another study, Fortune found that 86 percent of major industrial corporations had longterm disability plans in 1975.2 While there is increasing activity in the long-term disability market, there is recurring anxiety about both public and private disability experience. Because of adverse experience with the first long-term disability plans in the 1930's, some insurer executives consider the long-term disability risk to be uninsurable. Over the years, the product has gained guarded acceptance by providers, but recent experience has raised a number of questions concerning the feasibility of long-term disability coverage. Many insurers have lost large amounts of money on LTD insurance, and relatively few insurers have written the product profitably. 3 The magnitude of the loss associated with disability protection, however, is uncertain. Donald J. Doudna is an Assistant Professor at Central Michigan University where he directs the academic insurance program in the College of Business Administration. The author acknowledges the assistance of Professors J. David Cummins and Dan McGill in preparation of the research leading to this paper. I Survey of Benefit Plans TPF/C Top 100 Industrial Companies, Research Department of Towers, Perrin, Forster & Crosby, May 1973. 2 How Major Industrial Corporations View Employee Benefit Programs, Fortune: Market Research (New York: Time Inc., 1975), p. 15. 3 Theodore W. Garrison, Group Long-Term Disability Insurance, Part 9E Study Notes of Education and Examination Committee of the Society of Actuaries, 1973, n14