DOL's Automatic Enrollment Decision Could Boost LTD Participation

A rule clarification that allows employers the option to provide long-term disability coverage to their employees through automatic enrollment should benefit insurers by increasing participation rates, and increased marketing efforts and evolving employee attitudes may increase penetration rates, according to AM Best.

In a recent decision, the US Department of Labor (DOL) expanded automatic enrollment programs in all states to include disability insurance plans, with an opt-out choice, preempting any state laws specifically banning auto-enrollment for the product. AM Best found that from 2012 to 2017, net premiums written for group long-term disability (LTD) rose more than 30 percent, to $12.6 billion from $9.7 billion, while the number of covered lives grew 28 percent. Based on the experience of some insurers already offering the automatic enrollment option in certain states, participation rates could grow by 10 percent to 15 percent, with continued growth opportunities in the employer group space according to the rating agency.

AM Best believes the rule clarification likely will have a greater impact on insurers with more of a focus on larger accounts. Although the business loss ratio trend has been favorable, a large number of people who previously might have been declined coverage now may be included in the larger pool of guaranteed-issue policies, which could drive up insurers' loss ratios over the near term. However, insurers also would have a larger population to spread the risk. In addition, insurers focusing on national companies with employees in numerous states will face a more-complex environment as it relates to compliance with Paid Family Leave laws, AM Best said.

Most adults in the US workforce have no disability coverage beyond the basic coverage provided through Social Security. However, the Social Security Administration's strict definition of disability has resulted in just 35 percent of claimants receiving the benefit, and the appeals process can take years, said AM Best.

Given the potential for more covered lives, insurers may increase their marketing efforts to make employers and employees more aware of the need for long-term disability insurance. Overall, AM Best believes automatic enrollment could have a favorable impact on insurers, as well as the general population, by offering better income protection.

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