South African employees are claiming more than ever on their group disability benefits, and the most significant rise has been among higher earners on the corporate ladder.
In a recent presentation to representatives of the pension funds that Sanlam administers, Michele Jennings, chief executive of Sanlam Group Risk, looked at research to explain why group risk-cover premiums, specifically those for income protection – a form of disability cover – had increased sharply over the past few years.
In the 2019 Sanlam Benchmark Survey, an industry-wide study of pension funds in South Africa, 52% of consultants in the sector indicated that their pension-fund clients had experienced large rate increases over the past three years, and 19% had seen a trend towards more claims being declined.
Jennings said Sanlam’s own group disability claims history showed that since 2013 not only were claims higher across the board, both in the number and value of claims, but there were some surprising deviations from established claims patterns:
Disability claims typically increase with age, peaking at about 60. However, actual claims versus expected claims were higher in the 40-50 age bracket than in the 50-60 bracket.
Contrary to the expected pattern of lower-income bands showing higher claims, the highest increases above expected claims were from employees earning between R500 000 and R1 million a year.
Professionals and people employed in the financial services industry had the highest increases above what was expected.
In the Benchmark Survey, when pension fund consultants were asked whether their clients would be prepared to reduce cover to members, most indicated they would be reluctant to do so, preferring to explore other ways of keeping premiums at manageable levels.
So what is driving higher claims, and what can be done to stem this trend?
One thing that happened in the past few years was a change in the tax laws relating to employee benefits.
Before 2015, contributions by employers to group risk-cover were not taxed in the hands of employees, but benefits received by claimants were subject to tax. Premiums on private disability cover were also tax-deductible.
With the change in 2015, employer contributions were bundled into your taxable income, but any benefits you received on claiming became tax free.
As a consequence, employees’ take-home pay has declined slightly, but the benefits they would receive on claiming have increased substantially, effectively boosting their net replacement ratios, especially among higher earners. ("Net replacement ratio" refers to the percentage of your income you would receive if you became disabled and received an income-protection benefit.)
Jennings quoted research that found that the higher the replacement ratio, the less likely people on disability benefits were to recover and go back to work after two years. She also noted that the tax change had not had the effect of people reducing their cover.
But while the tax change could partially explain some of the changes in claims trends, Jennings said other factors were at play.
Again citing Sanlam’s claims experience from 2010 to 2018, she pointed out that there had been increases in claims for cancer, musculoskeletal conditions, vehicle accidents, and genito-urinary conditions.
Violence and assault was another cause showing a rising trend.
“Lifestyle-related claims such as violence and accidents are increasing, and these incidents are most prevalent over weekends,” Jennings said. “This trend can be linked to the Indigo Wellness Index finding that South Africa has one of highest alcohol-consumption levels globally.”
She said some suggested ways for employers, pension funds and insurers to manage claims were to:
Reduce benefits to align with the tax-change outcomes.
Insure only the targeted net replacement ratio.
Introduce stricter tapering of benefits for older members.
Introduce stricter conditions for lifestyle injuries, such as making it a condition that people would not be covered for injuries sustained over weekends.
Introduce higher pricing for high-income earners.
Increase assessments and return-to-work efforts, and include all key role players.
Increase employer awareness of their responsibilities to disabled employees.
Proactively identify potential claimants and manage their health.
“It’s widely accepted that being employed increases quality of life,” Jennings said. “If we aim to improve employees’ quality of life, it would have the knock-on effect of keeping claims – and premiums – sustainable.”