As an advisor selling disability income insurance (DI), it will help you to understand the claims process for this valuable product. In this article, we will attempt to step a bit into the shoes of the claim examiner. We will dig a little deeper into DI claims in three areas: (1) claims procedures, (2) recessions and claims experience, and (3) accident versus sickness disabilities.
1. Claims procedures
The specific procedures that a DI policyholder must follow at claim time are spelled out in the DI contract. The "notice of claim," the time allowed to notify the company of a claim, and other procedures are defined in some detail.
As a DI professional, you should know those basic requirements for each policy you offer. The notice of claim includes identifying information, dates, and nature of the disability, physicians and hospitals who have given treatment, the expected length of disability, and so on. Disabilities that will continue for several months will not normally require a physician's statement each month, but the insurer will generally require a continuance of disability report completed by the claimant.
The claim examiner must make a careful assessment of the claim at its first handling. Similar to the importance of an underwriter determining what information or investigation is need to first evaluate an insurance application, the claim examiner must determine if the claim is legitimate and how severe the disability is likely to be. To do otherwise could establish a pattern of claim payments that would be difficult to contest and control later on.
Once the company is committed to paying a claim, it is much more difficult (understandably) to later question the claim's legitimacy. The number of problem DI claims is an extremely small percentage of the total amount handled by a department, but the examiner's initial handling of problem claims can have a huge impact. Consider that a 35-year-old claimant with a $5,000 per month policy and a benefit period to age 65 represents a potential total liability of nearly $2 million. It is easy to see why each individual claim is of great importance!
2. Recessions and claims experience
Economic recessions and unemployment have a serious effect on disability claims experience. Typically, recessions tend to cause both an increase in the frequency of claims and a general slowdown in the average recovery rate for those making claims. Obviously, these effects are bad news for a DI company's claims experience. The unemployed worker, the worker whose hours are reduced, and the self-employed person whose revenues have decreased sharply may all be motivated differently during a recessionary period than during healthy economic times.
During the initial selection process, underwriters should screen out those risks most highly prone to unemployment during recessions. However, not all such risks can be identified, and the longer a recession lasts, the worse the claims experience is likely to become. The change in physicians' behaviors during the 1990s is the best example of how motivation can deteriorate as economic and social situations change. Very high claims rates among physicians were a huge drain on DI companies and led to a rethinking of many basic assumptions about the DI product. The DI industry is still living with the fallout from the physician debacle some two decades ago.
Claim examiners play a very critical role in a recessionary period. They must be alert to identify potential claims abuse caused by malingering. Claim departments may wish to increase investigative procedures because of the increased potential for claims abuse.
Even if all obvious abuses could be identified, however, there will still tend to be an increase in legitimate claims during economic downturns. An individual who has a physical impairment that requires surgery, such as a rotator cuff injury, may choose this time to elect a surgical procedure that results in a period of disability. The pressures of recessionary times tend to increase DI claims for such subjective impairments as emotional and nervous problems and digestive problems. Although those impairments may well result from economic pressures from a recession, they are in fact legitimate disabilities.
At the same time, their subjective nature makes the claims examiner's job very difficult in determining the degree of disability and the continuing length of the disability.
3. Accident vs. sickness disabilities
Another very interesting facet of a claim examiner's analysis is the important task of determining whether a disability is the result of an accident or an illness. Contrary to what you may think, it is not always a straightforward process!
Because the elimination period and the benefit period under the contract may be different for accident and sickness disabilities, this distinction must be established early in the claim process. An individual, say, who has a 180-day elimination period for illnesses but only a seven-day elimination period for accidents will understandably be motivated to have a claim considered as an accident vs. an illness.
Although the difference may appear quite simple on the surface, a claim examiner will tell you this is not the case. A claimant who has chronic lower back problems and who suffers a disability caused by low back pain, but without a specific accident, can often legitimately be considered a sickness claim with its longer elimination period.
It is interesting to note that the most carefully worded contracts with precise definitions cannot entirely clarify how a particular set of circumstances should be treated at claim time. The claim examiner must collect the specific details necessary before making the initial claim decision by relying on experience, knowing the intent of the contract language, and adding a generous dose of common sense.
Some of this might seem mundane and well outside your area of interest as you are focused on your next DI sale. However, as an advisor, it will help you to better appreciate the wonderful product of disability income insurance if you understand the workings of a DI claim. Good luck and good selling!
Allen C. McLellan, LUTCF, CLU, ChFC, CASL, CFP, is Assistant Professor of Insurance at The American College in Bryn Mawr, Pa.
