Summer 2007 / No. 72

The largest brokers in the United States are beginning to embrace voluntary coverages, but a recent Eastbridge study of 25 of the largest 100 firms showed disappointing results.

Like all brokers, the largest firms are being attracted by the growth in voluntary. The attached chart shows the inroads voluntary has made into all forms of traditional benefit designs. And watching the yellow and green bars march to the left year after year leaves no doubt as to how this game will end. The blue bars (and some green) are where the traditional firms live. Of the twenty-five firms in our study, if you exclude six that have some focus on voluntary, the rest average only 3% of their benefits sales from voluntary coverages.

The largest firms know this is happening.

Of all 100 top firms, 94 percent currently offer voluntary products and only two companies have no plans to offer them in the future .

But they don’t know how to go about it.

Of the 25 firms in the detailed study, only six sell more than $1 million in voluntary premium. But these high-selling voluntary firms are much more likely to have voluntary sales goals, dedicated staff, and high benefits sales as well as high voluntary sales. They averaged $17 million in voluntary premium sales, 11% of their total benefits sales.

The others were doing almost nothing. Those that knew their results averaged $400,000 in voluntary sales. Nine didn’t have any idea. Of the 19 low-selling voluntary firms, one had a formal voluntary goal, and only three had any staff dedicated to supporting voluntary. In short, they have no strategy for voluntary--and the results show it.

What does it mean?

Possibly, firms understand that the shift is taking place but don’t realize that voluntary is different and that it takes a concerted, separate effort to be successful. That would explain the lack of developed voluntary strategies and structures. Or maybe they understand they need to do something different, but don’t know how to go about it.

In either case, these large firms have tremendous potential and those that can help them achieve it stand to benefit.

To evaluate your voluntary strategy, contact one of our worksite consultants at (860) 676-9633 or email them at info@eastbridge.com.

The distributor of the future

By Bonnie Brazzell

Our recently released 2006 U.S. Worksite Sales Study showed that the Benefit Broker segment continues to increase its share of new voluntary sales. According to the report, 46 percent of all voluntary/worksite sales in 2006 came from benefit brokers. The segment also had double-digit (10 percent) sales growth compared to 2005. The growth rate in 2005 was about 20 percent. But how long will this continue?

We expect to see continued growth in this segment as benefit brokers get more and more comfortable with voluntary. In fact, we recently did some projections about the market share we might expect from the various segments over the next five years. By 2012, we expect the Benefit Broker segment to account for nearly 60 percent of total sales.

Sales By Distributor Segment

As can be seen from the graph, we expect market share for all other segments to decrease. However, all but the Occasional Producer segment will still have year-over-year increases.

This most likely reflects the fact that Benefit Brokers are important and fast growing players in the voluntary arena. They regularly offer voluntary as an add-on to employer-funded coverages, and we expect this to accelerate. We are already seeing this segment move voluntary to larger accounts and experiment with different voluntary products, enrollment methods, and platforms.

For more information on how to prepare for the future distribution changes, call us at (860) 676-9633.

2006 – A very good year for voluntary sales

Voluntary sales growth accelerated again in 2006, the third straight year of increasing growth rates. Since Eastbridge first published detailed results in 1999, the industry has never had a year with declining sales. Since 2003, the growth rates have increased each year (as measured by the percent growth over the prior year). The last year that growth rates, while still positive, were below the previous year was in 2003. Since then, sales growth has been both positive and increasing each year. The sales growth rate for 2006 reached eight percent, making voluntary/worksite sales one of the fastest growing segments of the insurance industry. Total worksite sales for 2006 are estimated at $4.715 billion. In addition:

• Just 20 companies out of the 61 in our sales study had decreases in 2006.
• Most carriers that had increases reported double-digit sales growth.
• The sales growth for the top 15 companies as a group was 10 percent over the 2005 figure.

Many product lines also saw solid growth in 2006, with voluntary disability sales showing robust growth. Total disability sales were over $1 billion last year, an increase of 25 percent over 2005 levels. In fact, disability moved ahead of life insurance in 2006 in terms of overall market share (23 percent vs. 21 percent). Other lines with strong, double-digit sales included cancer and hospital indemnity/voluntary medical. In 2006, the cancer line also grew at about 25 percent while the hospital indemnity/voluntary medical line grew at 12 percent.

By distribution segment, we saw the greatest increase in new sales from the Career Agent segment. This is a rebound from the decrease we saw in 2005. The positive sales results posted by both Aflac and Colonial are likely strong contributors to this increase. The Benefit Broker segment saw almost a 10 percent increase. The Classic Worksite Broker segment increased at about 5 percent, while the Specialists were about level with 2005.

Finally, inforce premiums increased by about 10 percent in 2006 to bring total inforce to $19.5 billion (based on our high estimate).

While some are seeing a glass half empty when looking at 2006 results, we see the glass as being rather full!

2007 voluntary sales growth leaders

For the second year, Eastbridge recognizes those companies that led the industry in voluntary sales growth.

Among large companies ($25 million or more in voluntary sales), the fastest growing companies were:

• Principal Financial Group (a Sales Growth Leader two years in a row)
• Reliance Standard (a Sales Growth Leader two years in a row)
• Genworth, including PIC (a Sales Growth Leader two years in a row)

Among the small companies ($5 million to $25 million in voluntary sales), the fastest growing companies were:

• Ft. Dearborn
• USAble (a Sales Growth Leader two years in a row)
• Texas Life (a Sales Growth Leader two years in a row)

Congratulations to all six companies.

All companies in the Eastbridge annual sales survey are eligible to win the Sales Growth Leader recognition. Leaders must have had sales growth exceeding the industry average for each of the last three years, and then be in the top three in 2006 sales growth (in either size group) in order to be recognized.

The annual Eastbridge Sales Survey is free to all participants. For information about the survey, call (860) 676-9633.

Don’t ruin your client’s HSA

By our guest contributor, Keith A. Prettyman

The advent of high deductible health plans (HDHP) and their tax deferred health savings accounts (HSA) has been both praised and reviled. Many insurance companies and insurance brokers have, (a) tried to capitalize on an opportunity; (b) tried to help clients establish pre-HDHP levels of coverage; or (c) both. They have done so with a variety of worksite products. The purpose of this article is to alert companies and brokers that their best efforts to be helpful may be putting their client’s HSAs at risk. In your attempt to help your clients fill the coverage gap, don’t make the cure worse than the disease.

Internal Revenue Code §223 establishes and regulates HSAs. In general, taxpayers are allowed a deduction equal to the amount paid in cash to an HSA (§223(a)). To be eligible for the deduction, the taxpayer must be an “eligible individual” under §223(c)(1). An eligible individual is a person covered by an HDHP but not covered at the same time by any health plan that is not an HDHP or that provides any benefit covered under the HDHP (§223 (c)(1)(B). This allows the taxpayer covered under a HDHP to remain an “eligible individual” even though he or she has what is referred to as “permitted coverage” or “permitted insurance”. Thus, any insurance product offered to a client with an HSA must fall under either “permitted coverage” or “permitted insurance.”

§223(c)(1)(B)(ii) defines permitted coverage as, “coverage…for accidents, disability, dental care, vision care, or long term care.” §223(c)(3)(B) and (C) are the applicable definitions of permitted insurance as they apply to the types of coverage which might be sold to fill the HDHP gap. §223(c)(3)(B) provides that permitted insurance includes, “insurance for a specified disease or illness” and §223(c)(3)(C) includes, “insurance paying a fixed amount per day (or other period) of hospitalization” as permitted insurance. Finally, meriting consideration and discussion, is §223(c)(3)(C), which allows the HDHP to provide preventive care without a deductible (i.e., allows first-dollar payment for prevention).

All of this information has been available for analysis since the HSA law was passed as part of the Medicare Prescription Drug Improvement Act in 2003. However, even with several IRS notices, insurers and insureds were left to personal or independent third-party interpretation to determine the extent to which the laws various definitions allowed coverage in addition to the HDHP without disqualifying eligibility for an HSA. On January 26, 2007, the IRS released Private Letter Ruling (PLR) 123396-06 that provides clarification of the government’s view of the proper or allowable interrelationship of HDHPs, HSAs, and supplemental coverages. While the PLR cannot be relied on as the precedent for any other taxpayer, the general direction provided is very helpful.

Given the law and the helpful direction of the PLR, what products can you safely provide your HSA-covered clients without disqualifying the tax-favored status of the HSA? Broadly speaking, there are four categories of products that could be used to fill the gap in coverage created by high deductibles: mini-meds, specified disease (cancer, critical illness and heart/stroke), hospital indemnity, and accident policies.

The PLR examines six policies and 38 riders. Six of the policies are specified disease policies covering first occurrence of cancer, heart attacks/heart disease/stroke or “disease specified in the policy.” Two of the policies are hospital indemnity and three are accident policies. None of the 11 policies is a mini-med. The reason is obvious (at least as it applies to traditional mini-meds). A mini-med is essentially a major medical policy with a lower maximum annual or lifetime benefit. As such, mini-meds not only do not fit within the definition of either permitted coverage or permitted insurance, but such policies would qualify as a health plan (which is not a HDHP and provides benefits which are covered under the HDHP). In other words, your client, if covered by a mini-med, is not an “eligible individual” under §223.

In general, the PLR finds the other three categories of products safe for your HSA-covered client to own. There are, however, both clarifications of some past concerns and some clear warnings about specific benefits within each generally safe product category. First the good news, which relates to specified disease. Prior to the PLR, questions informally hovered about what “specified disease or illness” meant in §223(c)(3)(B). Specifically, must the policy cover only one (i.e. “specified”) illness and what is the meaning of “disease” or “illness” and does that differ from a condition? As to the first, the PLR clearly allows as “specified disease or illness” multi-sickness policies. Further, the PLR eliminated the previous worry about whether something like “heart attack” or “stroke” was a condition resulting from a disease or illness rather than a specified disease or illness and was, thus, disqualified from consideration as permitted insurance.

With this, it is now safe for you to offer specified disease, hospital indemnity, and accident policies to your HSA-covered clients, right? Not so fast! There are limits and pitfalls in the various riders and optional benefits associated with these products. That is, depending on the total package being provided, the HSA-covered client may be disqualified as an eligible individual. While the specific application of §223 to the total package of benefits is beyond the scope of this article (and in any case, qualified counsel should be consulted), the following general guidelines are useful.

• Avoid specific provider benefits even if tied into hospital confinement (e.g.: private duty nursing or inpatient physician visits).
• If diagnostic or wellness benefits are to be provided (under the safe harbor for “preventive care”) be sure the services qualify under §1871 of the Social Security Act or IRS Notice 2004-23.
• Do not include outpatient benefits as part of a hospital indemnity policy’s specified diseases and illnesses.
• Avoid surgical benefits, except in connection with accidents or specified diseases or illnesses.

Keith A. Prettyman is an attorney with Woods & Aitken, LLP. He can be reached at kprettyman@woodsaitken.com.

Predictions by Eastbridge Consulting Group echoed in recent ERISA Industry Committee proposal

On June 9, 2007, ERIC (The ERISA Industry Committee) unveiled a proposal that included the establishment of a new form of intermediary in the benefits industry. The proposal calls these new institutions “Benefit Administrators” and describes them as offering “lifetime security benefits—health, retirement, and short-term savings.” The industry group hopes the proposal will become part of future legislation.

In 2002, Eastbridge Consulting Group published 2020: A Clearer Vision of the Future. This report described the benefits industry in the year 2020 and included detailed predictions by Eastbridge consultants. It covered distribution, carriers, products, financing and intermediaries.

In the section on intermediaries, we predicted a new type of intermediary, the “Benefit Administrator.” These new types of companies would combine the functions of today’s benefit TPA, HRIS company, and broker-dealer in order to offer a full array of benefit products: protection (life and health), savings (short-term accounts), and retirement plans.

“While the ERIC proposal goes on to other topics, it’s amazing that the name of the institution, its primary function, and its business lines are exactly as we predicted five years ago,” commented Bonnie Brazzell, vice president at Eastbridge.

Eastbridge president Gil Lowerre explained, “Of the dozens of predictions captured in the 2020 Report, many have already arrived in the marketplace, and this ERIC proposal represents the emergence of another important aspect. While seen as very controversial in 2002, the predictions in 2020: A Clearer Vision of the Future are coming into focus.”

Takeovers in the voluntary market

We have written on many occasions about the changes that have occurred in the voluntary/ worksite market. We’ve called this change - groupification ã . One of the characteristics of groupification is the increase of takeover business.

Historically, there has been little “takeover” business in the worksite market. While a new carrier might come into a case, often the older coverages (because they were individual, guaranteed renewable contracts) were not disturbed, and the new carrier simply began writing coverage on those who were not already insured. Today, however, there is a significant amount of true takeovers—both among group and individual platform products. Instead of leaving another carrier’s product on the payroll deduction billing, the new carrier re-writes the case, including those already insured. (In the case of individual products, an existing insured may continue coverage on an individual billing basis but often does not.)

The prevalence of takeovers has led us to question how much of the new business annualized premium (NBAP) reported as sales each year is actually premium that was reported by another carrier in a previous year. For the first time, our 2006 sales study attempted to estimate this. In our survey, we asked carriers: “What percentage of your new sales do you estimate comes from takeovers (i.e., you are replacing or taking over voluntary business from another carrier)?” Many carriers said they do not track this number and, therefore, did not know. However, 21 companies (just over one-third) reported a number. The average percentage reported was 20 percent, but many responses were significantly higher. We applied the percentage for each of the reporting companies against their NBAP and then divided the overall result by the total NBAP represented by these companies. We then analyzed the rest of the carriers by the type of company and their target market as well as product portfolio and estimated their percent of takeover premium using the results from the reporting group. On this basis, we estimate that roughly 12 percent of the NBAP for 2006 or $566 million was takeover premium.

We will continue to track this number in future studies and will report the results as well as any trends we see.

Critical Illness—what’s taking so long?

Many in the industry agree—critical illness insurance is a better value for the consumer than traditional cancer insurance. But, new cancer sales in 2006 were over double the critical illness sales (about $450 million versus just under $160 million), and the annual growth rate for the cancer line was almost 25 percent while critical illness sales declined by four percent. So, if it’s true that CI is a better value, why then do cancer sales continue to grow and critical illness sales just limp along?

We believe the answer is largely the producer. Many producers that have sold cancer insurance for years continue to be more comfortable with that product. They believe that the gaps left in covering the cost of combating cancer are best filled by the traditional cancer plans. Some quotes from producer interviews illustrate this:

“As cancer treatments evolve and become more beneficial to cancer patients, cancer plans will continue to offer support in a person’s time of need.”

“I think that the available money that employees have to spend will keep going down as they are required to pay more and more for their major med coverage. This puts more pressure on voluntary benefits. I think cancer insurance is a coverage that most people can easily identify with and will continue to appeal to employees.”

“As we see more transfer of benefit costs to employees, cancer will continue to be the leader as it is requested by more employees.”

Many producers also say they are unlikely to sell both cancer and critical illness in the same account. Instead, they often stay with cancer when it has already been introduced in an account. Because cancer has been in the market much longer than CI, that’s a huge number of accounts! And while some carriers offer CI without a cancer benefit (just for these situations), producers may still not introduce the CI product.

Further evidence that the selection of cancer vs. critical illness is producer driven can be seen when we look at the sales without Aflac’s numbers. Interestingly, the differential between the market share of cancer versus critical illness is much less. Cancer sales were only 25 percent higher than CI sales in 2006 without Aflac’s numbers and compared to the same base in 2005, both lines had double-digit sales increases.

All of this is not to say that cancer insurance should not be sold. The product has been around for years, and one only has to look at the letters that carriers have from cancer claimants or their families to know that the product pays out. But as newer producers (especially the Benefit Brokers) in the voluntary market who are more comfortable with critical illness sell a greater share of the market’s volume, we expect that CI sales will increase and gradually gain more of a market share.

Eastbridge has just published an updated spotlight report on voluntary critical illness products. For more information on Worksite Critical Illness Products—2007, call us or email info@eastbridge.com.

Can technology drive the bus?

While working with a client recently, they described their interest in a new enrollment platform. The IT officer had led the search and they were nearing the negotiation stage. As we talked about the system, it became clear that the technology was becoming the enrollment strategy rather than supporting the enrollment strategy. The technology might be great, but that software buzz fades.

Companies need to set enrollment (and other) strategies before embarking on expeditions to find solutions. The technology needs to support the strategy, not the other way around.

Too many group companies don’t “get” enrollment

Group carriers are often too willing to pass the enrollment function off to third parties, often without a clear appreciation for the importance of that decision or the dangers that accompany it.

In the employer-paid business, enrollment is a post-sale function, part of the administrative process of installing a case that has already been sold. In the voluntary world, enrollment is the sales process. Yes, it’s the last of the famous three sales, but it’s the most important, it’s the one that counts!

We need to appreciate that the employee is the customer who is buying, and that the enrollment process is the primary way that potential customer experiences us. To simply delegate it away as an inconsequential part of administration is to say that we do not care what experience our customers have.

We need to understand the importance of enrollment as the heart of the selling process, design the experience we want our customers to have, and then deliver it relentlessly. With that mind set, third parties can become a valuable marketing tool rather than simply taking a burden off our shoulders.