OLD Mutual Corporate says for a number of large employers
and retirement funds that Old Mutual [JSE:OML] insures there has been a marked
reduction in the number of deaths in recent years. However while Aids deaths
are decreasing, disability claims due to Aids have been increasing steadily.
Employers could therefore take advantage of lower group life premiums by
focussing on improving disability benefits for employees.
Neil Parkin, Group Assurance Actuary at Old Mutual
Corporate, says the experience of Old Mutual's group risk schemes has shown
that Aids is changing from a certain death sentence to a chronic and manageable
"There is much speculation about the future of Aids, but one
thing is clear – although its effects may be changing, the disease has had and
will continue to have a profound impact and employers are well-advised to plan
for this,” he says.
According to Parkin, while there are various options in
terms of utilising the savings in group life premiums as a results of declining
Aids deaths, disability insurance is arguably the most pressing need. He refers
to the Asisa insurance gap study which showed that South African families are
underinsured by R6 trillion of disability cover.
"The focus on death cover, and the rising costs of that
cover, has diverted focus and money from disability insurance. The result is
that many disability arrangements are based on insurance that was available in
the market a decade ago. A reduction in group life premiums is an excellent
opportunity to re-evaluate a group’s disability needs,” he says.
Parkin says disability insurance has evolved considerably
over the past decade, and there are a number of new generation products
available, such as Old Mutual’s full salary replacement for the entire duration
of a claim.
Parkin explains that a key factor for disability income
cover is the replacement ratio - the level of income an employee gets if they
become a claimant. "Traditionally this is set at 75% of pre-disability
earnings. By increasing this to 100% the employee will have their full salary
replaced and will be able to cope with the reduced ability to earn an income
and any additional expenses as a result of the disability," he says.
Parkin warns that the annual increase of the benefit a
claimant receives is another often overlooked option, which can rapidly erode the
person's purchasing power. He advises employers to help retain the real value,
one can consider including inflation-linked (CPI) increases, but says people
should beware of products with limits on the increase (e.g. 5%).
“Some products even offer increases at above CPI to mirror
salary inflation,” he says.
Disability policies typically require a period of time to
elapse before benefit payments start. This is commonly known as a 'waiting
period'. Employers can customise products to pay earlier (as short as 1 month)
or later (e.g. 6 months), according to their budget and ability to cope with
paying extra sick leave before the benefit starts.
“By using some of these levers, employers can significantly
add value and protection through disability insurance,” says Parkin.