The Group Market's Seven Fat Cows: Mortality Experience and Assumptions

Seven Cows and Technicolor Dreamcoat

Prediction is a fickle business. And yet, much like the temptation to buy lottery tickets, we possess an inherent need to pit our wisdom against the future.

In the theatrical story of “Joseph and the Amazing Technicolor Dreamcoat,” the Pharaoh dreams about seven fat cows and seven thin ones, which Joseph correctly interprets as a prediction of seven good harvests followed by seven bad ones. As a result, the Pharaoh is able to store enough grain during the good years to survive the famine.

The group risk market in South Africa is competitive and dynamic, and we have had several years of good, generally profitable experience. Can we be as bright, bold and optimistic as Joseph’s coat in predicting that this will continue, or does it warn us to be alert for darker omens? Taking the past as a guide, one aspect is clear: it will remain fiercely competitive.

The AIDS epidemic is the first clue, however, that the past is not always helpful when discerning disruptive trends. Because of the typical underwriting-free cover provided under group policies, HIV has not been excluded from these products. As a result, the claims experience of some employers (especially in industries such as mining) deteriorated significantly in the late 1990s and early 2000s.

In 2009, South Africa extensively expanded its anti-retroviral programme, and with it the tide of AIDS began to turn. According to UNAIDS, between 2004 and 2014 there was 42% reduction in global AIDS-related deaths. For some employers this meant year-on-year improvements in claims experience – some of which continue to today.

This trend, along with general mortality improvements, has arguably provided unexpected profits for some insurers. RGA’s annual Profitability Survey shows that over the last three years the majority of insurers met or exceeded profitability targets – despite the competitive environment.

While the seven years of good harvest are welcome, what does it mean for the next seven? Humans are fallible to predicting the future based on current conditions – something linked to the recency bias in behavioural economics. The danger of this is the mind-set it creates.

Pricing decisions on quotes could stray into loss-making territory with the justification that “group life is profitable.” Further, the last four RGA Profitability Surveys reveal that the majority of insurers are not happy with their income protection books. Poor performance of one product is more readily tolerated when another product is outperforming. Ultimately risk appetite can shift in practice where recent experience is unusually positive.

In the meantime, mortality improvements should plateau as AIDS mortality normalises. While there is an expectation of general mortality improvements going forward, is it possible that trends in obesity and lifestyle could offset this? Could we see death rates increase for some groups? Could there be a resurgence of AIDS deaths if treatment is not well managed or resistance develops?

Additionally, the outlook for disability is gloomy. In 2015, the South African tax regime was changed and disability income benefits are no longer taxed. This has effectively led to higher replacement ratios and is likely to have a negative impact on claims costs. There is an increased incentive for mid-to-high income earners to claim, while existing claimants are less likely to return to work.

The South African economy also continues to struggle. Although this doesn’t necessarily mean higher claim rates, it will continue to affect the working environment and the availability of jobs. This can materially affect claims management. For example, in a weak economy employers may not be willing or able to accommodate employees who need reduced workloads or hours.

The complexity of claims is also increasing. More claimants are presenting with co-morbidities – many of which are intertwined with performance issues. The economic context further aggravates this. Many employees are under increased pressure in the workplace, leading to stress and anxiety – both potentially increasing the likelihood of claims and making returning to work more difficult.

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Apart from the implications for profitability, there is an increased strain on claims assessors. Even where the number of claims has not increased, the complexity of cases leads to more time-consuming investigations. This in turn can negatively affect the claims process, with longer assessment periods accentuated by legal challenges.

Where claimant advocates become involved, as seen in Australia and to some extent in South Africa, the nature of the relationship between insurer and claimant changes to a legalistic one – not the best starting position for collaborative rehabilitation. This could lead to an increase in claim incidence and the duration, as claimants resist the termination of their benefits.

An additional unseen danger potentially lurks in a weaker economy. Employers are likely to become more price-sensitive or cut back on certain benefits. Both of these factors could lead to heightened price tension between insurers as they seek to retain business while achieving new business growth targets in a stagnant or shrinking market.

To mitigate this, insurers may need to be prepared to respond with alternative product options that reduce the overall cost to the employer. For example, in the face of increasing Income Protection costs employers may prefer to reduce the replacement ratio (e.g., shift from 75% to 60%) or move to a tiered structure. Although not as comprehensive, this option enables employers to offer at least some protection to staff. In these cases, it would be ideal to offer voluntary group benefits so that employees could increase their cover to replace the lost benefits.

If these forces – reduced group life profits and poor disability experience – combine with a bright, bold technicolour risk appetite, we could be in for seven poor harvests.

The Pharaoh had Joseph’s help to decipher dreams, and so avoided years of famine. Group risk products are remarkable – offering affordable premiums, minimal underwriting and access to much-needed insurance. At a time when most group insurers report profits above target, it is perhaps opportune to consider risk appetite. Do we need to eat a little less so that we have enough for the next famine?

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