With each passing month, it seems that more and more cases without age reductions or with requests to remove existing age reductions find their way into my inbox.
A pang of apprehension accompanies approval of such cases as I ask myself if I signed RGA up for claims that could have been avoided or at least mitigated with a more conventional plan design. At some point I realized I didn’t really know much about age reductions other than having them was “good” and not having them was “bad.” Here I take a look into the origins of age reductions and the demographic and mortality trends driving the basic term group life insurance market’s treatment of older-age workers.
Age reduction schedules are a product of the Age Discrimination in Employment Act (ADEA). As originally passed in 1967, ADEA had very little impact on basic group term life insurance, as the law covered only employees aged 40 to 65. Given that ADEA provided no protection for employees aged 65 and older, it was common for plans in that era to see either reducing benefits to $1,000-$2,000 at age 65, as an amount sufficient to pay for burial expenses, or the outright termination of basic life benefits. Interestingly, such steep reductions were driven not by insurance company risk considerations, but rather by employers’ desire to minimize benefit expenditures on behalf of older employees. At the time, the deterioration of mortality at ages above 65 could drive up group term life costs substantially, especially in a group with an older employee age mix.
In 1978, ADEA was amended to cover employees from age 40 to 70 and was again amended in 1986 to remove the age cap altogether. These ADEA amendments led to the creation of the age reduction schedules we are familiar with today. Absent the age cap, ADEA applies broadly to group life insurance and structures the relative cost of employer-paid benefits between older and younger workers as the justification for reducing benefits due to age. Section 623 of ADEA states:
"... where, for each benefit or benefit package, the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker.”
The specifics of how this statute is to be applied are laid out in section 1625.10, title 29 of the Code of Federal Regulations (CFR), which says:
“... a particular benefit may be reduced for employees of any age within the protected age group by an amount no greater than which could be justified by the additional cost to provide them with the same level of the benefit of younger employees within a specified five-year age group immediately preceding theirs.”
With risk assumed to be reflected in price, insurers backed into an additional level of risk protection through what was by legal design an equitable way for employers to contain their benefit costs.
Today, age reductions are typically thought of as a way to reduce insurer risk rather than employer cost. From the date of ADEA’s original passage in 1967 to now, mortality has improved for all, but especially among those actively at work. With those improvements in mortality, the cost of providing basic life insurance for older employees has declined. This reduction in cost relative to historical prices dampens employers’ incentive to keep reductions in place. Still, cost and premium considerations only tell part of the story when it comes to the movement away from age reductions in group life insurance plans. Major demographic shifts in the American labor force have undoubtedly played a significant role as well. The percentage of the total labor force that is 65 and older has increased from 2.55% at the time of the removal of the age cap from ADEA in 1986, to 5.82% in 2016. Put another way, over that time span, the labor force as a whole has grown from 119.9 million to 159.2 million, while the labor force over 65 has grown from 3.1 million to 9.3 million. That is 35% growth for the labor force as a whole and 208% growth for the labor force over 65. The absolute and proportional growth of the working population over 65 shows no signs of stopping, with the Bureau of Labor Statistics (BLS) projecting there will be 13.4 million individuals aged 65 and over in 2024, representing 8.2% of the total labor force.
As the proportion of the labor force over 65 continues to grow, plans with age reductions will be maligned by an increasing percentage of current and prospective employees in that age group. Employers will seek to mold their benefits packages to be competitive at attracting super-65 talent to their firms. This already appears to be bearing itself out in the number of facultative requests from RGA’s clients for cases with age reductions outside of insurance guidelines.
Since we began tracking “age reductions” as a reason for facultative submission in RGA’s database in 2006, the proportion of all requests attributable to age reductions has increased from under 1% of all requests in 2006, to more than 10% of all requests in 2017 through the second quarter. Further, the number of requests for “age reductions” through the first six months of 2017 is greater than any other observed full year other than 2016, which set the previous high water mark.
The erosion and elimination of age reduction provisions is a cause for concern for insurers, but working in the industry’s favor are the significant improvements in mortality among employees most likely to be age-reduced. Comparing the 1996 SOA Group Term Life Mortality Study (1985-1989 experience period) with that from 2016 (2010-2013 experience period), the mortality rate for employees aged 62 to 72 has been cut in half.
On its face, the removal of the ADEA age cap in 1986 might have looked troubling. With the benefit of hindsight, we can see that insurers ended up having some breathing room among older-age employees due to the great strides in mortality that happened to occur in the years following the age cap’s removal. While these studies are not perfectly comparable because of slight differences in their methodology, they are certainly closely related enough to draw big-picture conclusions.
In spite of the mortality improvements seen among the demographic most likely to be both still at work and subject to traditional age reductions, insurers need to tread carefully when it comes to easing or removing them. Rates have decreased in response to mortality improvements, so improved mortality does not necessarily bear itself out in improved experience. Further, it is very often difficult to enforce actively at work policy provisions for certain high-earning and thus highly insured employees, including (but not limited to) company owners, long-tenured executives, and partners at law firms. As result, removing or weakening age reductions allows such individuals to select against insurers with far greater severity.
With the greying of the workforce showing no signs of stopping, the importance of understanding the influence and effect of age reductions on claims experience, at both the case and block level, is more important than ever. Insurers need to know the amount of protection afforded by all variations of age reductions and how those age reductions interact with other underwriting considerations. In order to continue writing good, profitable business into the future while meeting the needs of a changing market, the insurance industry should proactively evaluate age reduction guidelines, reconfiguring them to fit current market conditions. The alternative is to passively follow the market, wherever that may lead.