GUAA :: Risk Review

Basic Monthly Earnings Definition (BME) – There is nothing basic about this provision!

The very name Basic Monthly Earnings makes you think the provision is unimportant and easy to understand. If you are involved in the underwriting or claims management area, you know nothing could be farther from the truth. Ask someone what their BME is and you are likely to get a variety of answers that may or may not include commissions, bonuses, deferred compensation, or other extraordinary income items. Rest assured at claim time, folks assume that everything should be included.

It does make sense for an individual to want to include as much income as possible in the BME definition. With leveraged compensation plans continuing to increase in popularity over the years, the traditional monthly salary may not be an accurate reflection of someone’s income. Claims management was easier when the standard BME definition was the average monthly income from the prior year’s W-2. Times have changed and we need to make sure our definitions and processes for validating the income have changed as well.

This is not a new issue for the Disability industry. BME projects were happening at many carriers back in the mid 80’s. We have done a good job of writing clearer standard definitions, but unfortunately a mismatch of policy wording with a policyholder’s intent or understanding is still quite common. At claim time, we often discover that the income used to pay premium does not accurately reflect the income used to calculate the benefit. The mismatch works in both directions. Sometimes the premiums being paid are too high because bonuses or commissions were included in calculating the premium, but excluded from the BME definition. The opposite can be true when premiums are too low. The end result is that you now have a billing, policy and potentially a claim issue that needs to be resolved.

The BME definition is the starting point for the entire financial calculation of a claim. We need to make sure that the BME definition is correct and appropriate as other key provisions such as benefit percentage and maximum are triggered from the definition. Swings in income of 10-20% due to bonuses being included or not are significant. At a minimum, we create a customer service problem as we have to research discrepancies in the monthly benefit.

A few questions come to mind when working on the BME definition:

1. Can the policyholder administer the definition? It may seem like a strange question, but often times the person making the benefits decision isn’t the same person that will have to calculate the monthly premium (another potential source of a mismatch). A definition that requires several separate calculations to complete may not be easy to administer on a monthly basis.

2. Do you understand the definition? Before anything is printed in the contract, the sales rep, service rep or underwriter working with the account should do this initial screen. If you don’t understand it, there is a good chance someone at the policyholder or in your own claim department will have a question as well.

3. Are there several different occupations covered by the plan? Does one definition work for all occupations? Are there sales reps, partners, or other occupations that may have unique compensation structures?

4. At claim time, will the policyholder be able to produce reports validating the income listed on the claim form? It has become standard claim practice to request tax forms, payroll records, and other forms of documentation to confirm the BME.

5. Did the census and corresponding salary or income listed for each employee that was used to rate the plan match the BME definition? We have seen situations where the original census sent out for obtaining quotes was salary only, but the BME definition included bonuses. The difference in income could impact your manual rate.

We will never eliminate the mismatch of policyholder intent and the contract completely. Hopefully by asking yourself the few questions noted above, we can cut down on the number of cases that require additional research and cause potential customer service issues.

One of my favorite movies is “Chariots of Fire;” a story about two British sprinters training for the 1924 Olympics. Eric Liddell runs because he believes he has been given the “gift” of speed, and should use that gift. Harold Abrahams is a driven man, and runs in part to prove his place in society. Both are world class sprinters. When Eric defeats Harold in a pre-Olympic race, Harold is devastated. He comes to understand that his best chance to defeat Eric at the Olympics is to join forces with a professional trainer rather than continuing to train on his own. The trainer, Sam Mussabini, has also been trying to win Olympic gold for 30 years. He sees Harold as a tremendously gifted athlete who can be even faster with coaching. By working together Harold and Sam win Olympic gold. Eric wins a gold medal, too, but in a different race.

Just as Harold Abrahams was defeated by Eric Liddell when he was training on his own, underwriters often get beat out by the competition when they try to put together LTD renewal packages on their own. Underwriters could more successfully place LTD renewals if they collaborate with others within their own organizations, specifically benefit analysts.

Any LTD policyholder with a benefits analyst, or team of benefits analysts, assigned to manage claims submitted by the policyholder is a good candidate to team up with at renewal time. The analysts can provide the underwriter with a wealth of information that can be used to formulate the best renewal package both for the policyholder and the insurer. The benefits analyst not only has a unique perspective, most are also genuinely interested in sharing their insights with an underwriter and impacting the renewal package offered Discussions with a benefits analyst can provide insight into the following issues:

• Claim Trends
While you, as the underwriter, most likely already have a claim listing report to use in your renewal under writing, the benefits analyst should be able to provide color commentary that will paint a more comprehensive picture of the policyholder’s claim trends. For example, benefits analysts should be able to confirm if there has been an increase or decrease in LTD claim incidence, including filed claims that were not approved.

The benefits analyst should also be able to provide you with insight regarding possible changes to the types of disabilities reported.

More importantly, they may be able to shed light on the causes contributing to the trends. Benefits analysts have regular conversations with the policyholder’s administrator and with claimants themselves. These conversations provide a unique insight into the causes driving the level of claim incidence. How are labor relations? Has there been, or is there rumor of, a merger or acquisition?

Finally, the benefits analyst may be able to tell you if the claim activity is coming from a specific department or location.

This kind of information can help you formulate the renewal offering.

• Policyholder Claim Filing Practices
Depending upon the number and frequency of claims filed, the benefits analyst may have a good idea of the policyholder’s claim practices. For example, does the policyholder file claims in a timely manner or are claims typically filed late? If they are typically filed late, how late are they? As an underwriter, you can use this information in your renewal underwriting experience evaluation.

The benefits analyst can tell you if it is easy to work with the policyholder or if extra time and effort are required to obtain all the information necessary to make a claim determination. This information helps you evaluate if the claim administration expenses attributed to the policyholder are an accurate reflection of the actual cost of administering claims for the policyholder.

• Return to Work Opportunities
Does the policyholder routinely terminate employment of disabled employees after a specific period of time? If so, when? Are there disincentives to claimants who would otherwise want to return to work with the policyholder? The LTD benefits analyst may be able to share these insights with you.

Conversely, does the policyholder encourage disabled employees to return to work as quickly as they are able? The benefits analyst may even be able to provide insight concerning details of the return to work program such as:
• Light duty return to work opportunities and part-time work assignments offered by the policyholder.
• Whether or not the policyholder requires a full medical release before a claimant can return to work.

You can use this information to help determine if past claim experience reflects what can be expected in the future.

• Policy Provisions Impacting Claim Experience
Specific policy provisions can have a significant impact on a policyholder’s claim experience. Benefits analysts administer claims according to the provisions found in the policyholder’s LTD policy, putting them in the best position to offer suggestions on provisions that could be added or removed to help improve claim experience.

Additionally, the benefits analyst may be able to offer suggestions forincluding policy provisions perceived by the policyholder as adding value to the renewal offer, making it easier to place the renewal. For example, the benefits analyst may have learned that the policyholder is very concerned with providing an optimal level of income replacement to those employees who are severely disabled and unable to care for themselves. You can use this information to include a provision in the renewal offer that pays a higher level of income replacement for claimants classified as severely disabled.

The benefits analyst may also be able to provide the renewal underwriter with information on LTD policy provisions that make claim administration difficult. You may use this information to price for the provision, or offer renewal options that encourage amendments to the policy that result in smoother claim administration.

Finally, the availability of sources of income to claimants that you weren’t aware of might be identified through discussions with the benefits analyst. This information will help you better evaluate the insurance risk and develop a renewal offer that reflects the true insurance risk.

• Claim Services
Does the policyholder require customized claim reporting or other specialized services? If so, what is the frequency and what is the cost of providing these services? Does the rate account for these services? You can also use this information in the renewal packaging by reminding the policyholder of the special services being offered.

• Other Benefits Analyst
Recommendations It never hurts to ask the benefits analyst if he or she has any suggestions or recommendations that should be included as a part of the renewal package. You may be surprised by the value that can be added to your renewal offer by asking this question.

The moral of the story is that, just as Harold Abrahams was only able to become a champion by teaming up with a trainer, underwriters will successfully place more LTD renewals if they tap the expertise and knowledge of the benefits analysts who administer the claims of the policyholder.

Jim Ojala, FLMI, CEBS, is Chief Underwriter for Standard Insurance Company, a leading provider of group disability, life and dental insurance. Jim has 22 years of group LTD experience, primarily in underwriting, but also including two years in LTD benefits.