Spring 2009 / No. 79

Group Company Myopia

By Gil Lowerre

For years, we’ve detailed the disappearing (and now invisible) differences between the traditional worksite business and the group voluntary business. For most readers, the question is settled. The distinctions have vanished. For those that can’t see the forest, they risk doing themselves and their company significant damage. Unable to see beyond the trees, they develop strategies for the 1990’s, sideswiped by the competitors they refused to see. So, what are those trees?

We’re on a group platform; they’re on an individual platform.

Look again. Most of the traditional “worksite” companies now offer group platform products, some transitioning completely to group while others offering a mixed platform portfolio. And hybrid products (individual-like products filed on a group chassis) continue to gain market share. You can’t identify a competitor by its filing platform.

We enroll in group meetings; they do one-on-ones.

Not true. We now have individual companies offering group meetings, web and call center enrollments, and we have group companies promoting one-on-one enrollments as their base system. You can’t identify a competitor by its enrollment process.

We use employee benefit brokers; they don’t.

Very wrong. Employee benefit brokers are key targets for all traditional players and when asked with which voluntary carrier they place their business, the largest benefit brokers name a traditional individual platform carrier as two of the three they use most often. You can’t identify a competitor by its broker population.

We sell large cases; they sell small cases.

Aflac competes for the largest cases in the market, and several micro-market leaders are group companies. You can’t identify a competitor by its case size.

Just when we think this issue has been put to bed, it seems that a new cadre of group executives enters the voluntary business. And some fall into the same old trap. Group company executives need to understand that the absence of the distinctions discussed above means that all voluntary/worksite companies now compete side by side, for the same accounts and the same brokers. What matters is whether the company is competing for the same consumer dollars that you are.

Executives coming into the business from the group side need to focus on today’s real competitors, not the traditional companies they wrestled with for their employer-paid benefit business. This is a different world and those who can’t take off their blinders and see the pitfalls are likely to run themselves and their company into one.

To learn how Eastbridge can help your company’s voluntary program, contact one of our consultants today.

Employer Attitudes toward Voluntary during the Recession

By Bonnie Brazzell

We have been conducting several different surveys recently of both brokers and carriers in the voluntary market and keep hearing some individuals (on both sides) saying that employers are not looking to add voluntary benefits right now or that employers have too many concerns and issues to even think about voluntary benefits. But, at a recent trade show, we heard quite a few carriers and brokers saying that their results so far this year have been above where they were in 2008. So what’s happening? Why are voluntary sales still growing if employers are not interested?

We believe the key is how you position things with the employer. At face value, employers may see voluntary benefits as something else to take away employee dollars—dollars that are being stretched more and more every day. But employees don’t always see it that way, and there are ways to even help free up dollars for employees.

MetLife just released their annual study on Employee Benefits Trends. This study has some very interesting findings:

• 56 percent of employees said they appreciate workplace benefits more than ever before
• 41 percent consider workplace benefits to be their financial safety net
• 33 percent are afraid that, over the next 12 months, their employer will reduce the workplace benefits they offer

These are important messages for employers to hear. And employers need to hear that voluntary products play an important role in workplace benefits. By offering voluntary benefits (and adding new ones), the employer is telling employees that their benefit needs are still at the forefront, and simply, that he/she cares about their well-being. And, to top that off, offering this value to employees adds no cost to the employer. Employers can offer robust benefits packages—usually at “group” prices—to help employees build and maintain their own personal financial safety net.

Voluntary benefit reps can also use tools such as benefits communications and benefit statements to help employers make certain that employees know exactly what benefits are offered and the value of those that are employer-funded. Voluntary benefit reps can also work with the employer and the account’s broker to free up dollars through medical benefit plan redesign and by using flexible spending accounts, healthcare reimbursements accounts, or health saving accounts.

So, are employers not interested in voluntary benefits today? If they aren’t, it may be because no one has explained how these benefits help them and their employees solve problems.

For help in evaluating how well your marketing messages are working in today’s environment, call us at (860) 676-9633.

Tough Economy? It’s Conservation Time

As an industry, our conservation efforts are embarrassing. While account-level conservation gets attention from most reps and brokers, individual conservation efforts rarely do. Brokers often feel that it’s not profitable to conserve individual business, and companies rarely give it the priority it deserves.

An informal poll suggests that less than 10 percent of companies have a meaningful conservation program in place. And “meaningful” here excludes leaving brochures with the HR staff to hand out to departing employees. We know that rarely happens and we know it’s rarely effective. As a result, the conversion rate is terribly low for most companies, hovering around the five percent industry average. (That is the percentage of employees coming off of list bill who successfully port, convert, or otherwise retain their coverage on a non-payroll premium-paying basis.) Aside from the obvious advantage of retaining this business (it’s a very large premium amount, and has already paid most, if not all of the acquisition costs and commissions involved in getting it on the books), there are three other factors to consider.

The five percent you now retain is probably a text book example of adverse selection. From a risk standpoint, it’s probably the worst business you could retain. Every dollar of premium you add to that group sweetens the overall pool. Some observers with true conservation programs report loss ratio results in line with their in force block. Why keep only the most suspect risks?

In hard economic times, the value of conserving existing business and the associated customers grows. While we all agree that conservation is a worthy goal, in a recession, its value proportionate to new sales is likely to increase. And anecdotal evidence from other industries confirms that investments in retention and conservation are important strategies during difficult economic times. Why not learn from experience?

Conservation works. During our 20 years of work with carriers, we have installed a variety of conservation programs. Our best effort brought a national carrier from an average of five percent to a high of 28 percent successfully converted. Do the math. What could quadrupling your successfully retained customers do for you?

For more information on improving your conservation program and retention results, contact Eastbridge at (860) 676-9633 or email the company at info@eastbridge.com.

The Product that was Supposed to Have Died!

What happened to cancer coverage? Ten years ago many said that cancer sales were likely to diminish to practically nothing as “everyone” would switch over to critical illness. But here we are in 2009, and cancer sales have not gone away. In fact, cancer sales outnumber critical illness by as much as four to one (based on new business annualized premium for the industry). In a recent study of cancer products, we asked carriers about the whole cancer versus critical illness question.

All but two of the carriers surveyed offer both cancer and critical illness products. And all of these carriers agree that they need to provide both products going forward. The reasons, say the carriers, is that the market and producers (primarily) demand both products. Indeed, many producers who have always sold cancer plans continue to do so. They may also sell critical illness so about half of the carriers offer critical illness products both with or without cancer. Some even offer a cancer-only option.

Among carriers that offer both plans, not surprisingly, more said they sell more cancer than critical illness. They believe this is because the product line is more mature and the benefits (for cancer) are more comprehensive. On the other hand, those selling more critical illness said that is because the market sees the financial risk that can result from any critical illness event and the product is not just limited to cancer.

The debate is likely to continue for years but will be decided by producers. As long as producers demand cancer products, carriers will offer them. Today, many group carriers are looking at the possibility of cancer insurance. In addition, we seem to be getting past the days where people believe that cancer insurance is sold to individuals in lieu of medical insurance. Producers and carriers alike position cancer insurance as helping pay for out-of-pocket expenses—both medical and non-medical—that are not covered by medical insurance. This improves the credibility of the product and helps position it more effectively.

The spotlight report, Worksite Cancer Products 2009, helps carriers see how their cancer product “stacks up” to the competition. For more information on the report, give us a call or go to our website.

Are We in the Voluntary Business or the Benefits Business?

Companies that have been selling employer-paid benefits have historically developed their strategies around traditional lines: the medical business, the non-medical benefits, or simply the benefits business. Voluntary was an awkward addition.

It’s similar to, but not quite the same as the traditional business of these carriers. Up until 10 years ago, many of these companies lumped voluntary into their core strategy. And many wondered why their results were so disappointing. Today, almost all companies realize that voluntary is different and requires a distinct strategy. That shift has paralleled the explosion of group company sales and their growing importance on an industry level.

But core and voluntary strategies need to be tightly connected, even if they are different. And it doesn’t matter whether they are two documents, two efforts, or one. The key is that they recognize the uniqueness as well as the similarities inherent in the two businesses. This is an issue of substance, not form. While different companies may have more or less separation between their core and voluntary strategies, all need to integrate three key differences into their thinking.

The competition is different.

The people you compete against in your core lines are not the only ones you compete against in your voluntary business. See the article in this issue, Group Company Myopia, for more on this topic.

The products are different.

Voluntary products are not one-offs from employer-paid group products. They are different in design, features, choices, pricing, and underwriting.

The processes are different.

Issue, billing, enrollment, and even service and conservation are unique in the voluntary world.

Other aspects may or may not be different, but losing sight of these basic distinctions signals that you don’t understand the voluntary business and its subtle but vital differences.

For more information on strategies that work in the voluntary market, talk to one of our Eastbridge consultants at (860) 676-9633.

Economic Lessons

Historically, some companies have taken advantage of economic weakness and emerged as much stronger players once the economy recovered. Others have retrenched and emerged smaller and battered. While all of the lessons from these “opportunistic leaders” may not be applicable (“double down on your R&D”), three may be perfectly appropriate. And we add one more specifically for voluntary business.

Expand marketing and advertising.

Opportunistic leaders speak of weak economies as the ideal time to build market share. Competitors may be retrenching and their marketing budgets may be under pressure. This may be the time when gaining market share is least expensive.

Invest in your sales team.

In order to capitalize on the first lesson, opportunistic leaders say that it’s important not to cut back on sales efforts. While adding staff may or may not be feasible, investing in new skills, processes, and technology may give your team an edge.

Expand service and customer retention efforts.

All of the opportunistic leaders agree that customer retention is a key to profitable growth in weak economic times. Better people, methods, contact points, and conservation all are seen as keys to weathering the storm.

Manage the voluntary risks.

Utilization of certain product benefits may be accelerating, and disability claims may or may not increase. Regardless, you need to be increasing your vigilance on the risk side. Participation rates, rate changes, and guaranteed issue management are key. Little deviations from plan can make a major difference. These issues all start with the same basic voluntary underwriting discipline: underwriting the broker. Know your broker, the quality of the broker’s business, and the broker’s business practices—now more than ever.

For more information on how your company can expand and thrive despite the current economy, contact Eastbridge at info@eastbridge.com.

Managing the Budget in Uncertain Times

Times are certainly interesting these days! One of the most common questions we get asked is what is going to happen to voluntary sales considering the economic downturn. We’re doing a number of things to stay on top of the answer to this question, but the bottom line is that we probably won’t know for some time. One thing we do know, however, is that many of those in our business are feeling the pinch in the form of reduced budgets. In fact, 71 percent of the respondents in a recent Eastbridge Frontline Report survey said they have experienced a budget reduction due to the economy.

New positions appear to be most impacted so far in terms of budget reductions. Four in ten respondents in the survey have seen new sales and non-sales positions suspended or postponed due to pressures from the current economic situation.

New product development is another area that has been impacted. Again, 40 percent of the respondents said their company has delayed/postponed new product introductions. But, only a few have cancelled their product plans.

In terms of the level of reductions in specific areas, travel seems to be the hardest hit. Over three-quarters (79 percent) of respondents have had reductions in their travel budget with travel for industry meetings and visits with field staff seeing the largest decreases (over 20 percent).

Interestingly, the advertising budgets have not been impacted as much as travel. About 45 percent of respondents said their advertising budget has been cut, but the level of reduction tended to be under 20 percent. This is good news for those who believe that now is the time to expand marketing and advertising (see article Economic Lessons in this issue).

The fact that about half of the companies said their recruiting budgets have not been cut is also good news. Among those who have seen recruiting reductions, the majority were under 20 percent.

Who Will Serve the Micro Group Market?

We’ve seen increased interest over the past few months in the very small group market (under 25 employees). Voluntary/worksite carriers are interested in how they can tap into this vast market. Indeed the numbers are huge. According to the U.S. Census, over 78 percent of all businesses in the country have fewer than 10 employees. That’s 4.7 million businesses. There is another 700,000 or more in the 11-25 employee market.

The problem with going after this market, for most carriers, is that they do not have a way to reach these businesses. For the most part, worksite/voluntary producers have moved away from this market, preferring to deal with businesses with 25 or more employees (where there are fewer concerns over participation minimums and the profit potential for the producer is greater). Sure, there are still producers in this market but, over time, many who start in the micro market tend to move up-market as they gain experience. The market tends (for many) to be a training ground.

So, who can serve this very large market? Medical producers are certainly one option. There are medical brokers who regularly serve this market. Maybe individual producers? Will direct marketing (telephone, web) work? From a carrier standpoint, there are challenges in managing the risk but for the carrier that can figure out both the access and the risk management, this market appears to be untapped.

Return of Premium Term – Implications of a New Actuarial Guideline

By guest contributor Dominique LeBel, Tillinghast

Periodically, we feature articles written by guest contributors. The following article is from our friends at Towers Perrin. Return of Premium term is a product that we have been very interested in over the past few years because of its ability to differentiate itself as a non-commodity product and one that is not sold primarily on price. Towers Perrin has been very active in the Return of Premium term market—both worksite and individual.

Return of Premium (ROP) term is one of the hot products in the worksite market for several reasons:

It is easy for consumers and producers to understand.

• Sales pitches such as “money-back term,” “did you know that very few policies mature as death claims,” and “win-win: insurance protection if you need it, return of premiums paid if you don’t” resonate with buyers.
• Quoted after-tax rates of return are often higher than alternative investments (e.g.: bank certificates of deposit).
• Additional premium for ROP term translates into more commissions for the producer.
• It works for a variety of strategic sales situations (e.g.: mortgage funding, college funding, alimony funding, key-man, and buy-sell).

But in light of a new actuarial guideline, “AG XLV” (formerly known as AG CCC), there may be an impact on this “hot” product’s premium rates—something for which carriers and producers should be mindful.

AG XLV was adopted in the fall of 2008 by the NAIC. It sets guidelines for minimum cash values for ROP term policy forms filed after December 31, 2008 and policies issued after December 31, 2009. Under AG XLV, cash values prior to the end of the level term period will generally need to be increased for most current ROP term products (for some products, current cash values at certain durations could be decreased, but overall, cash values under AG XLV are generally higher than current cash values). This general increase in cash values will likely necessitate an increase in premium rates. The higher the lapse rates assumed, the greater the impact on premium rates. And, since worksite products generally have higher lapse rates than products sold in other distribution channels, the impact on worksite ROP term premiums may be significant.

AG XLV will have other consequences:

It will cause ROP term products to have cash values that vary by underwriting class (i.e., by issue age, smoking class, etc.).

• It will make it easier to have these products available in all states (interpretation of the Standard Non-forfeiture Law used to make it difficult to get ROP term policy forms approved in all states).

It will eliminate the benefits obtained from ROP rider and indeterminate designs. As a result, fully guaranteed integrated designs may replace these designs.

Dominique LeBel, FSA, MAAA, FCIA, is a Senior Consultant for Towers Perrin. He can be reached at (415) 836-1081 or dominique.lebel@towersperrin.com.