March 19th, 2010

Renewals of Long Term Disability Programs

Posted at 12:00 PM ET

Growth for primary writers is extremely challenging in the current economic environment. Organic growth due to higher incomes has slowed and, in some cases, is actually negative as higher paid workforces have been declining in number. Also, economic conditions aren’t ideal for generating new insured policies. Against this need for growth, experience for most plans has been unexpectedly good. These two factors have led issuers to consider or implement higher retentions, driving marked reductions in ceded reinsurance. In this environment, reinsurers have to compete strongly to win business.

Against these factors, there are forces supporting current rate levels as well. Despite cedents’ interest in retaining more business, reinsurers and managing general underwriters in this space have done a good job providing consulting value that might not be sustainable if cessions drop precipitously. Also, the proliferation of European accounting standards could increase European reinsurers’ cost of capital supporting this business, pushing rates upwards. Finally, disability rates have historically been difficult to predict due to the ability of covered lives to decide, in some cases, whether to claim or not. Many participants in this business feel the better-than-expected experience could turn downward, particularly given policyholders’ reactions to the economic environment.

The net results of the opposing forces are price reductions year over year of about 5 percent, but with non-price terms slightly more favorable to reinsurers.

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