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Unit Economics

Delivered January 16th, 2018. Contributors: Hitesh G., Jennifer L., Cassandra K., Biswashree D. and

Part
01
of four
Part
01

Loss Ratios - Long Term Individual Disability Insurance

Overview

As per the 2017 annual report of National Association of Insurance Commissioners (NAIC), the average loss ratio for individual long term disability insurance, for top 118 insurance companies, is 81.92%. Loss ratios for the year 2016 ranged from a low of 0% to a high of 5806.34%. The top ten insurers have a market share of around 90% and the loss ratios for these insurance companies range from a low of 28.49% to a high of 124.46%. Further, details of the loss ratios of individual long term disability insurance are given below.

Findings

The 2017 NAIC report, which covers data for 2016, provides a detailed report on the loss ratios of top 118 companies. As per the report, the average loss ratio for long term disability is 81.92% (page 102). This overall average was a bit lower than 2015, which was 82.34% (page 102).
As per a September 2016 survey by Millman, which covers top 15 individual disability insurers, loss ratios have been lower over the recent six months period.
Another 2016 report from Society of Actuaries, mentions a lowering trend in the loss ratios, from the highs of 109% in the early 2000s.

As per the 2017 NAIC report, loss ratios for the year 2016, ranged from a low of 0% to a high of 5806.34% (page 99-102). If we consider the top ten insurers, with around 90% of the market share, the range of loss ratios varies from a low of 28.49% (for Ameriprise Fin group) to a high of 124.46% (for Unum group).
For the year 2015, the range of loss ratios for top ten insurers varied from a low of 25.03% (Ameriprise Fin group) to a high of 130.32% (Unum Provident Corp group). [Page 99-102]
The top three companies, which constitutes a market share of more than 50%, have loss ratios viz. 50.37% (Northwestern Mutual group), 124.46% (Unum group), and 80.97% (Guardian Life group).

Conclusion

The average loss ratio for individual long term disability is 81.92%. If we consider all the 118 insurers, the range of loss ratios is very wide (0% — 5806.34%) but for top ten insurers, with 90% of the market share, the range varies from a low of 28.49% to a high of 124.46%.
Part
02
of four
Part
02

Loss Ratios - Short Term Individual Disability Insurance

According to a 2017 NAIC survey of the top 109 insurance companies which provide short term disability insurance, the average loss ratio for short term disability in 2016 was 50.74%. The range of loss ratios for this many companies, is quite large, from 0 - 4,030.55%, and a range using the top companies may be more useful. A breakdown of the loss ratios is below.

LOSS RATIOS

The 2017 NAIC report, which covers 2016 data, found that the average loss ratio for short term disability insurance for the individual business segment was 49.39% (page 13) and the group segment was 67.99% (page 15), with the overall average at 50.74% (page 98). The overall average was up slightly from 2015, when the NAIC report calculated it to be 49.42% (page 98). A September 2016 survey of 15 short term disability insurance companies by Milliman found that those insurers were seeing better loss ratios compared to the prior six months, and a 2016 Ibis report suggests that disability insurance providers have been helped by lower unemployment and higher demand, while a 2016 report from the Society of Actuaries asserts that an increase in elimination periods to 90-180 days has contributed to the improved loss ratios, down significantly from highs of 109% in the early 2000s.

Loss ratios in 2016 ranged from 0-4,030.55% (pages 95-98) when considering all 109 companies included in their short term disability analysis. However, the market is concentrated, with the top ten companies accounting for 85.48% of the market, as shown in the last column on page 95 of the NAIC report. Using just the top ten companies, all shown on page 95, 2016 loss ratios ranged from 23.39% (Northwestern Mutual) to 175.05% (Tokio Marine Holdings). Tokio Marine's high loss ratio was an outlier in the top ten, with the next highest ratio Principal Financial Group's 74.20%. The top two companies by market share, AFLAC and Unum, accounted for 65.56% of the market, and had loss ratios of 49.06% and 48.99% respectively. Loss ratios for the top ten in 2015, found on page 95 of the 2016 NAIC report, had a similar range, with Northwestern's the lowest again, at 17.05%, while the Guardian Group's 74.4% was the highest. AFLAC and Unum were at 50.34% and 49.42% respectively.

CONCLUSION

Short term disability insurance loss ratios can have a very wide range from 0% to over 4000% when considering every player in the market, but when looking at the companies that make up over 85% of the market, the range is less dramatic, from a low of 23.39% to a high of 175.05%. Overall, the average 2016 loss ratio was 50.74%, barely changed from 2015's 49.42%.




Part
03
of four
Part
03

Unit Economics - Long Term Disability insurance

Introduction

In my research, I found that Disability Insurance is talked about as a whole, and usually not further broken down into Short Term and Long Term specific information. So while there is no publicly available, pre-existing information to fully answer your questions about LTD, I've used the available data to pull together key findings:
*In the combined Disability Insurance market, LTD accounted for 45.5% of industry revenue in 2016. Total STD/LTD Revenue was $29bn, of which $13bn was LTD.
*There are 305 businesses in the U.S. that offer Disability Insurance.
*In 2015, a first-year agent at Colonial Life could expect to earn $53,000 total compensation ($33,000 commissions + $20,000 bonuses).
*In 2016, "Accident, Sickness, and Disability" premiums accounted for 58.6%, or $830m, of Colonial Life's Premium Income.
Below you'll find an outline of my research methodology to better understand why the information you've requested is publicly unavailable, as well as a deep dive into what I did find.

Methodology

The first item I found in my research was a paywalled report, "Disability Insurance in the US." The summary states that there are over 300 businesses that offer DI, so I needed to narrow down a couple of companies to research. I first looked for leading LTD providers by revenue and by the number of enrollees, and did not find recent information.
Then I looked at Consumer Affairs website and found their top two “Best Rated” LTD companies are MassMutual and Colonial Life & Accident Insurance Co. From there, I took a look at each company’s financials, specifically Margins and Direct Revenues & Costs. I also researched commissions and bonuses for brokers/agents. Company specific information is detailed below.

MassMutual

Profit and Commission Structure For Agents/Brokers

I was unable to find hard numbers for agent/broker profit and commission. MassMutual’s website states: “MassMutual offers performance-based incentive compensation for its Financial Services Representatives (FSR). Your specific compensation is based on your particular product mix and production level. Compensation varies by product line.”
Margins and Direct Revenues & Costs

Due to the consolidated nature of MassMutual’s Financial Statement, I was unable to determine Margins or Direct Revenues and Cost specifically for LTD. For example, MassMutual lists "Premium income," but does not break down into subcategories.

 Page 76 of the Financial Statement does list combined net expense Disability Insurance information. “The net expense recognized in the Consolidated Statutory Statements of Operations for all employee and agent benefit plans is as follows:”

Disability Insurance
2016
 $4m (0.012% of $ 331m total expense)
2015
 $3m
(0.011% of $ 261m total expense)

Colonial Life

Profit and Commission Structure For Agents/Brokers
A recruiting brochure from 2015 details what an agency sales representative could expect to earn. This information is older than what Wonder typically provides, but it’s the only source I could find with actual figures, and still gives insight into earnings.
In an agent’s first year, if they opened 12 accounts, they would earn $53,000 total compensation. Commissions account for $33,000 and bonuses for $20,000.
Margins and Direct Revenues & Costs
Unum Group is Colonial Life's parent company. Due to the consolidated nature of Unum Group’s 2016 10-K Form, LTD specific information was not listed.
 Pages 7 and 8 of the 10-K say that "Accident, Sickness, and Disability" premiums accounted for 58.6% of Colonial Life's Premium Income. Page 66 lists the actual dollar amount as $830m, with Total Premium Income being $1,417.1m.

Conclusion

While I was unable to find LTD specific information, I did present some helpful findings. For example, there are 305 businesses in the U.S. that offer Disability Insurance. In 2016, Long Term Disability Insurance revenue was $13 Billion. A first-year agent at Colonial Life could expect to earn $53,000 total compensation. And I identified a paywalled report, "Disability Insurance in the US," that may you find useful.
Part
04
of four
Part
04

Unit Economics - Short Term Disability insurance

According to IBIS World, the market size of the disability insurance industry was $29 billion in 2016 with short-term disability insurance making up 54.5 percent of the total industry. The industry has been growing at an annual rate of 0.7 percent between 2011 and 2016. This is a growing market as it is estimated that over one in four of today’s 20-year-olds will become disabled before reaching age 67. In US, the states offering mandatory short term disability insurance are California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island. The unit economics, especially profitability, of short-term disability insurance can be calculated using various formulas like internal rate of return, return on equity and return on assets. Choosing the appropriate formula depends on the variables of the business.

An employer who has fully insured the short-term disability insurance plan of its employees, the total expense is 25 percent with the cost breakdown being:

Brokerage commission = 1 percent 
Premium Tax = 2 percent 
Profit = 7 percent 
Claim Administration = 14 percent 
Other expenses like eligibility determination = 1 percent 

An employer who has self-funds the short-term disability insurance plan of its employees, the total expense is 20 percent with the cost breakdown being:

Profit = 3 percent (risk margin)
Claim Administration = 15 percent 
Other expenses like eligibility determination = 2 percent 

Almost 38 percent of all civilian workers, including those working in the private industry and government offices, in the U.S. have access to short-term disability. Out of these, almost 97 percent employees participate in short-term disability insurance plan. These percentages vary according to the industry, income range, and geographic region of the employee. In 2015, there were 15 insurance companies that controlled 95 percent of the total market share and received premium of $392 million.

Did this report spark your curiosity?

Sources
Sources
From Part 01
n

Long-term loss ratio 2017 report

naic.org
n

Long-term loss ratio 2016 report

naic.org
m

Favorable loss ratios

milliman.com

pd-2016-06-health-session-25.pdf

drive.google.com

Disability Insurance in the US Market Research | IBISWorld

ibisworld.com
From Part 02
n

2017 National Association of Insurance Commissioners Accident and Health Policy Experience Report

naic.org
m

Milliman 2016 Survey of the Individual Disability Insurance Market

milliman.com
n

2016 National Association of Insurance Commissioners Accident and Health Policy Experience Report

naic.org

Disability Insurance in the US Market Research | IBISWorld

ibisworld.com

Individual Disability Insurance Experience Trends

drive.google.com
From Part 03

Disability Insurance in the US: Market Research 2016

ibisworld.com
c

Best Disability Insurance Companies | ConsumerAffairs

consumeraffairs.com
m

MassMutual: Consolidated Statutory Financial Statements 2016 & 2015

massmutual.com

MassMutual: Profit and commission structure for agents / brokers

careers.massmutual.com
s

Colonial Life: 2016 FORM 10-K

sec.gov
p

Colonial Life: Recruiting Brochure

pmainsur.net
From Part 04
g

2016 SOA Annual Meeting and Exhibit - Session 175 PD, Measuring Profitability for Group Life and Disability Insurance | October 2016

google.co.in

Disability Insurance in the US Market Research | IBISWorld | August 2016

ibisworld.com
m

To be or not to be (self-funded)? | Milliman March 2014

milliman.com
b

National Compensation Survey: Employee Benefits in the United States, March 2016 | U.S. Bureau of Labor Statistics | September 2016

bls.gov

Short-term disability insurance is a key to workers’ financial plans | Aflac - accessed Jan. 15, 2018

aflac.com

Survey finds only one-third of Americans have disability insurance policies | Benefitspro.com | May 2017

benefitspro.com
g

Statutory Disability Benefits | Prudential July 2017

groupinsurance.prudential.com
m

2016 Annual Survey of the U.S. Individual Disability Income Insurance Market | Milliman September 2016

milliman.com