Sounding Board: The link between oil prices and rising disability claims [Benefits Canada]
It was 2009, and I was standing in shock on the north shore of Oahu, Hawaii. A sandy-blonde surfer had casually admitted how he scammed the system in order to fund his lifestyle.
Everyone seems to have an anecdote of their own: the mover who asks for payment in cash in order to avoid any impact on Employment Insurance or the seasonal worker who seems to have a disability every year around July and August.
Whenever there’s a risk employees may lose their livelihood, there’s a chance they’ll look to disability benefits to try to supplement their loss of income.
With the downturn in the Canadian economy, disability claims seem to have increased. We noticed an uptick in 2014, paralleling the time when oil began to crash to $50 a barrel. We couldn’t help but wonder whether the incidence of disability claims is the economist’s canary in the coalmine.
Our in-house disability adjusters have seen that even without a concrete pink slip, the very fear that an employee may face an impending termination could be a tipping point for a claim. Economic factors we’ve seen that could lead to an increase in disability claims include temporary layoffs, mergers and acquisitions, restructuring, and closing a business unit.
We’ve even had our clients tell us they’ve heard through the grapevine that an entire group of employees has decided to claim disability when their department shuts down. We’ve also witnessed unwitting employers balk at the resulting increase in their long-term disability rates. One or two claims may not affect the group’s disability premiums, but once you start seeing patterns, underwriters are apt to adjust the rate to match the group’s risk profile.
Since we handle the administration for our members’ group health and dental plans, we can see when there’s an increase in layoffs and terminations. Plotting that against disability claims, we begin to observe a pattern with a 10% increase in disability claims per capita in 2015 over the previous year.
Further, with low interest rates, insurance companies aren’t making the same profit they used to. Therefore, premiums are increasing not just because of experience but also due to the need to hit profitability targets in a low interest rate environment. It’s important to remember that insurers invest the premiums in highly rated bonds and other secure instruments, and also need to use today’s interest rates to calculate their reserve requirements to satisfy future claims. As soon as interest rates increase, not only will the profit from the float increase, but there will be less money needed today to satisfy future payments.
So what can employers do? They should ask all of their disability providers the following questions: What do you do if you discover the disability is a result of a layoff? What early intervention strategies do you employ to prevent a short-term disability claim from going into the long term? Is it possible there are cultural practices at the workplace that are contributing to a culture of stress or sick leave? How do you calculate the rates and how do they compare to other groups of a similar size? How can we use emerging trends such as pharmacogenetics to reduce our disability claims?
Although it may be some time before we see oil prices rise to their previous highs, employers can do a lot to prevent disability premiums from climbing any higher.
This article was originally publised on Benefits Canada on February 11th, 2016