Alternatives to Disability Rider Benefits: Brazilian Update
Alternatives To Disability Rider Benefits: Brazilian Update
As a result of the Brazilian insurance authority's ban of the life rider benefit, companies will need to develop creative and inexpensive replacements that offer lump-sum payouts, have limited underwriting and avoid any benefit offered by a social security agency.
In September, 2005, the Brazilian insurance authority, SUSEP, made the decision to prohibit the commonly sold life rider benefit that covers Total and Permanent Disability as a result of Illness (TPD) as of Jan. 1, 2006. In practice, this rider was only sold in conjunction with Group plans, so this change only affects the Group market.
The background behind this decision is surprisingly simple. SUSEP was receiving too many complaints from clients regarding the refusal of claim payments. Clients argued that the coverage was not clear to them and they were being unjustly denied claims. To add to the confusion, the Brazilian Social Security Institute, INSS, also provided a modest payment on the contingency of total and permanent disability as a result of illness. However, the Social Security department was known to be rather generous in declaring a person as totally disabled due to illness. Such INSS claimants would then sue (and would usually win) the insurance company when denied a disability claim. The client would expect the insurance company to pay once Social Security approved the claim. In Brazil, the disability payment is a one-time lump sum (equal to the Sum Insured under the main Life plan) which motivated the claimants to vigorously pursue such benefits. In many legal departments, it is not uncommon for 50 percent of policyholder litigious claims to be derived from rejected disability claims.
This new development begs some immediate questions.
First, why did insurance companies continue to offer this problematic coverage? There was really no market discipline and no one wanted to take the high road and simply exclude this litigious benefit. Everyone wanted to protect their market share and every opportunity to quote on a competitors' portfolio included this problematic benefit.
Second, why did SUSEP simply prohibit TPD? SUSEP probably decided that it was better to ban it since it was a pretty inexpensive benefit (Brazilian companies loaded their mortality tables with an additional 15 percent load to cover this benefit), any alternatives would have been pricier, so the way to kill this benefit once and for all was to place an outright ban on it.
Third, is there an alternative to this TPD coverage? SUSEP has suggested that companies may wish to now provide disability coverage based on either "own occupation" or a "functional" definition. However, SUSEP has offered no guidance regarding the definitions, terms and conditions or pricing of these alternatives. Thankfully, companies may also choose to offer additional disability type coverage. It's my opinion that the suggestion of "own occupation" may not be the best replacement. In Group plans where there is limited underwriting, the "own occupation" benefit is much harder to define when you are working with a very wide range of occupational functions. In addition to which, this definition can lead to disagreements or legal problems due to the difficulty of properly assessing the claims criterion. In my opinion (SUSEP has not defined anything) a functional definition could consider two types of coverage; they are:
- The use of Activity of Daily Living (ADL). Benefit will be payable if a client cannot undertake a defined number of the following functions: eating, dressing, bathing, using the bathroom ("toileting"), moving back and forth from a bed to a chair ("transferring"), climbing stairs, shopping. However, these impairments are more likely to occur with advanced age.
- The use of Activities of Daily Working (ADW) or Functional Assessment Tests (FATS). Benefit will be paid if a client cannot undertake a defined number of the following functions:
- Walking: The ability to walk 200 meters on a level surface without stopping or severe discomfort.
- Lifting and Carrying: The ability to pick up a one kilogram weight from table height and carry it for five meters.
- Manual Dexterity: The ability to use a pen, pencil or keyboard with your left or right hand.
- Hearing: The ability to hear well enough to understand someone speaking your native language in a normal voice.
- Speech: The ability to be understood in your native language in a normal voice.
- Vision: The ability to see well enough to read 16-point large print at arm's length.
Fourth, are companies happy that the end had come for this disability benefit? The answer is no, and that's largely because the legislation also provides rules regarding how this transition must be implemented. The law prescribes that as of Jan. 1, 2006, all Group renewals must cancel this current TPD benefit. Insurance companies have the obligation to contact each insured individual employee to advise of the cancellation of this rider and provide details of any alternative rider benefits. If less than 75 percent of the insured employees accept, then the entire contract is cancelled (even the Life portion). If more than 75 percent of the insured employees accept, then the contract is renewed, but only for those willing employees–the dissenters will have the option to opt out completely or continue with the altered coverage. The law does not differentiate between contribution and non-contributory plans, which I think it should have done. Not only does this proposed administrative solution incorporate a bizarre and convoluted logic, but it disregards the fact that Group carriers in Brazil usually don't have full mailing details of their Group Life insurer clients. And the onus is on the insurance company to contact each insured employee, not the Human Resource Department of the client company.
What are the alternative benefits that could be offered as replacements?
This change may give rise to some innovative solutions. I have set down a list of possibilities that companies could consider. Keep in mind though, that the "ideal" replacement option needs to have the following characteristics if it is to successfully replace the outgoing TPD benefit. It needs to be inexpensive; make a lump sum pay out; have limited underwriting, if at all; have a low claims frequency; a clear definition to minimize legal claims; reinsurers should be willing to participate; and most importantly, the new rider should not offer any benefit/definition that is offered by any Social Security agency.
The list below is not a complete list and not all of these suggestions meet all of the ideal characteristics set out above.
- Disability coverage making use of Long Term Care Activity of Daily living (as suggested by SUSEP). While this is usually a very expensive benefit, it may be that offering it to a youngish population and excluding continuation options (upon leaving the company) may provide a low cost. And one can always reduce the payout to a percentage of the basic Life coverage. However, the costs will be expensive for higher ages.
- Disability coverage making use of Activities of Daily Working or Functional Assessment Tests. This benefit is less popular and there are fewer reinsurers with experience.
- Critical Illness coverage. This is likely to have a higher claim frequency than the other options in this list. Once again, the coverage would need to be limited to a fairly low percentage of the sum insured. The main problems would be complex policy wording and many exclusions.
- Transplant coverage. Very popular rider coverage in Argentina and there exists an official donor list in Brazil which will reduce fraud. Would be great for large groups and on a compulsory basis. One claim from a small group can eat away profits for many years; as a result would need to be reinsured.
- Specific Cancer policies. Popular in Puerto Rico. Could be quite expensive compared to TPD-type covers, so may need to reduce benefits. Ideally the cover should be annually renewable with the insurer having the possibility to terminate cover. Could also consider introducing graduating plans that pay different percentages depending on the severity of the cancer, i.e., lower benefits for more frequent and less life threatening cancers. This is common in South Africa.
- Surgical coverage. Very popular in Israel. Provides a lump sum after a specific surgical procedure is performed. Usually will allow the client to have an upgrade to a more comfortable room/wider choice of a healthcare provider.
- Hospital Cash. Ideal benefit design would incorporate both a waiting period and deductible (number of days of hospitalization) to limit the number of claims.
In considering possible options, I have specifically excluded Short Term Disability (high claims frequency) and the use of a Graduated Definition of Disability product (starts off with "own occupation" for the first 12 months, then switches to "any occupation for which is compatible with his/her education" for a further 12 months, then finally "any occupation"); the Graduated Disability Product is really not compatible with the payment of a single lump sum.
All in all, it would appear that this new change in legislation will certainly give companies the opportunity to show innovation in the short term and assist in reducing legal disability claims in the future.
Ronald Poon-Affat, BSc(Hons), FSA, FIA, MAAA, CFA, is the chief financial officer of Icatu-Hartford Insurance Company (Hart-ford's Brazilian joint venture partner) and is based in Rio de Janeiro, Brazil.
The views expressed in this article are personal and do not necessarily reflect those of the author's employer. The author would like to thank Ms. Lourdes Guedes (Compliance Officer of Icatu-Hartford) and Dr. Karsten Kroll of Gen Re Life & Health for their assistance in preparing this article.