Insurance

Disability insurance is as much a commodity as physicians are commodities, interchangeable with little consideration to education, training, experience, reputation, or most importantly, the probability of a favorable outcome, call it success rate.

For example, presume that you need a very specialized, life-saving procedure; you research the marketplace and find that a distant hospital with a renowned physician represents your best probability for survival.

But on the day of your treatment, you are advised that a different physician will be treating you.

Your expectation of performance may be abruptly drastically altered because the reality of performance is in question. Everything may work out just fine, but in the moment, your peace of mind is undermined by uncertainty.

Disability insurance is no different. Despite perceived and presumed similarities in policy language, one insurer’s claims’ department’s interpretations of policy language by may be very different from another. No two policies are alike; there are similarities but they are not identical. To presume that they are same, denies the written language, deliberately crafted by the insurer.

An insurer’s managerial continuity over generations informs and guides the current culture of the claims people that interpret policy language and pay claims. It is the insurer’s reputation. Policyholders come to rely on that reputation as we do with other businesses and professions.

When an insurer acquires a block of business, much like in every business, the acquiring insurer's philosophy and practices dictate how claims will be paid moving forward which may be very different from the former insurer. Open claims are often reconsidered given new mandates and methodologies. Welcome the new sheriff in town.

I have witnessed several claims, where claimants owned two or more policies from different insurers and despite similar contract language (and the expectation of similar treatment), differing claims-paying philosophies and practices, interpretations and determinations resulted in very difference outcomes; for example, one insurer pays total disability and the other denies the claim entirely. Hello.

For the benefit of consumers, rating agencies expertly assess and report on insurer financial strength but the dominant prevailing commodity product shopping orientation (exacerbated by internet marketers) discounts (often ignores) the importance of financial strength and the insurer’s incumbent management’s responsibility for it.

Policy nuances (most disability insurance specimen policies are over 50 pages long) are de-emphasized, in some cases misrepresented, in favor of brief, oversimplified, single page yes/no spreadsheets that focus on price, reinforcing the universally understandable mantra: Cheaper is better; drowning out the other mantra: You get what you pay for.

Presuming that financial strength is important to you, and you agree that the culture of insurer’s management is what actually determines how a disability contract language is interpreted and paid, let’s consider your choices using the same methodology you may use to buy a mutual fund: Style box (fixed income), Star rating, and historical performance.

For brevity (but I encourage you to compare in detail, given what’s a stake), I will compare only three holdings: Bonds, Stock, Mortgages.

MassMutual: Bonds: 56%/ Stock: 7%/ Mortgages: 15% Comdex rating: 98/100
Principal: 71%/2%/18% Rating: 89/100
Standard: 72%/6%/41% Rating: 78/100

If these were mutual funds, the style box objective would inform you about expected risks and returns and you would likely have more questions/concerns regarding management’s long-term strategy when you identify significant deviations from the norm. For example, glaringly, double the exposure to mortgages and a 78/100 Comdex rating.

Incongruously, many investors reassess their holdings periodically and critically, and become increasingly intolerant of substandard performance and managerial ineptitude; but despite being quick to sell marginally rated or poor performing mutual funds, they are ignorant of, or forgiving of, insurers in steady decline, despite owning policies that represent potentially millions in income if/when a claim is payable. Whatever interests you is what holds your attention.

But to your question about financial strength's significance in practice?

Disability insurance is a capital intensive business with comparatively narrow margins, and intensive regulatory scrutiny and reporting, justifiably so, given what’s at stake.

As margins become constrained due to increasing capital demands of a toxic block (increasing claims losses not offset by new business and the flight of insurable policyholders, increasing the concentration of uninsurable policyholders with a higher probability of claim, known as a "death spiral"), an insurer’s incentive to remain in the disability business, possibly adversely affecting other more predictable and profitable lines of business, can result in the wayward path your policy has staggered. Where it stops no one knows. Presumably that was not your expectation when you selected Chubb to protect your income and your lifestyle. That is not my definition of peace of mind.

Insurers do fail outright and their obligations are usually assumed by other insurers and reinsurers, and as a steward of last resort, state guaranty funds. Generally there is enough incentive (margin) for some insurer to acquire a wayward, even toxic, block. But as an insurer's risk tolerance wanes and margins predictably narrow, the likelihood of the block going back on the block increases, as was the case repeatedly with your policy.

But as a policyholder, with an expectation of performance set years ago, and in your case, several insurer ago, you don’t want just any insurer acquiring the block.

Going back to my opening remarks, your expectation of what the policy language means to you, and how the current insurer interprets that language, may be substantially different, based on the insurer’s claims department’s experience, culture and corporate mandate.

Consider this analogy: You frequent a nearby family-owned restaurant with reliably excellent food and service; abruptly, the restaurant goes out of business despite being very popular with the patrons, but reopens shortly thereafter under new management, using the same name and purporting the same theme but with a new chef. The new owners are more focused on profit margin than customer satisfaction. They have already implied their intention to sell if the right price is offered. What is the likelihood that food/experience will be identical to the former?

But we’re not talking about a meal. We’re talking about a disability insurance policy that could be worth millions in potential benefits, which may be the only thing maintaining your lifestyle and your dependents’ lifestyles, during a period of disability.

What you expect and what you ultimately receive may be very different.

Your choice of insurer deserves at least as much scrutiny as your investment portfolio, and on an on-going periodic basis. If you willfully choose a less certain path with greater risks, you can’t be surprised when things become less predictable.

Lastly, what is your relative’s occupation? The premium spread seems unusually wide for a non-physician.

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Insurance