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Trends in the Disability Market

Chris JeromeVice President, Group Underwriting Operations

March 21, 2006

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Trends in Disability Market

• Disability Costs

• Cyclical and Non-Cyclical Cost Drivers

• Workforce Implications of Non-Cyclical Factors

• Implications for Our Market

• Key Questions to Consider

3

Overview of the Current Disability Industry

Many external factors have been working against the health of the disability industry…

DisabilityAging

Interest Rates

Economic Factors

Other Risk Factors

All providers impacted by above trends…..

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• Between 1990 and 2000, the median age of the US “working age” population increased from 40 to 42 and it will continue to rise

Changes in Risk Dynamic - Aging

Source: US Census Bureau. Statistical Abstract of the US: 2006, Section I, Table 12

Distribution of "Working Age" US Population

0%

20%

40%

60%

80%

100%

1980 1990 2000 2005 2010

25-34

35-44

45-54

55-64

• The largest proportional increase came from the 45-54 age bracket, as the “baby boomers” continue aging

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Changes in Risk Dynamic

Source: UnumProvident Rate Basis

Mo

nth

ly L

TD

cla

im

cost

/in

sure

d l

ife

32 35 38 41 44 47 50 53 56age

Monthly LTD claim cost per age

• The population and workforce are aging

• Impact of aging along the disability curve can be steep – cost increases of 4 – 8% per age year are common.

Source: UnumProvident LTD Block

• UnumProvident block and new sales have been aging by 4-6 months each year

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Interest Rates

• Declining rates impact new money invested, and therefore Net Investment Income as well as reserves

Source: Federal Reserve Board: H15

• Interest has a direct and significant impact on cost (100bp shift requires approximately 4% shift in rates)

• Interest rates affect all players and all sizes and segments of cases

Yield on 10 Year Constant Maturity Treasuries

3.03.54.04.55.05.56.06.57.0

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

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Disability Incidence and Economic Recessions

• Submitted incidence increased more steeply, initially, in the most recent recession. Now 4 years later, it continues to exhibit a similar pattern as observed in 1990-91 recession.

• Submitted incidence continued to climb long after the recessions officially ended. In 1990–1991 recession, ending in March 1991, incidence reached its peak 19 quarters later.

Source: UnumProvident LTD Block Qtr End of Recession

The horizontal axis above is quarters since the recession

with 0 being the end of the

recession.

Submitted IncidenceDuring Last Two US Recessions

(indexed to the end of each recession)

0.8

0.9

1.0

1.1

1.2

-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24

1990-91 2001

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Other Risk Factor Trends

0

5

10

15

20

25

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

OBESITY - Nationwide % overweight, measured by BMI

• Prevalence of obesity has increased over the last several years

• Over past decade there has been a tenfold increase in the incidence of STD claims attributed to obesity

• Growing body of scientific evidence demonstrating significant associations between obesity and other chronic diseases (e.g. diabetes, stroke, hypertension, etc.)

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Change in Disability Deaths

While aging is currently a secular trend impacting disability costs for US private insurers, due to the demographic profile of US employees, other secular costs such as disability death rates also affect disability cost.

The actual rates of disability death in recent years have been relatively stable;however, in the early 1990’s the disability death rates were declining.

Source: UnumProvident LTD Block

Disabled death rates by year

-

1

2

3

4

5

6

7

8

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

pe

r 1

,00

0 E

xp

os

ed

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Disability Costs Summary

• Costs Are rising

– Interest rates

– Economy

– Obesity

– Aging

– Even mortality

• Which are cyclical?

• What are workforce implications of non-cyclical?

All contributing to higher disability costs

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Work Force Dynamics

Source: Employment Policy Foundation analysis and projections of Census/BLS and BEA data.

Millions of People

Expected Labor Force and Labor Force Demand Palpable by the End of This Decade

0

50

100

150

200

250

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Labor Needed

Labor Available

A Growing Shortage of Workers in the US:

12

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Age of Workers

Percent Growth in U.S. Population by Age: 2000-2010

Dramatically Different Patterns of Growth by Age

1. Declining number of mid-career workers

2. Few younger workers entering the work force

3. Rapid growth in the over-55 workforce

Source: US Census Bureau International Data Base

5% 5%

-9%

18%

48%

15%

-20%

0%

20%

40%

60%

80%

16-24 25-34 35-44 45-54 55-64 65+

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. . . Continuing for Our Working Lives!

Age of Workers

Percent Growth in U.S. Workforce by Age: 2000-2020

7% 8% 7%

-10%

3%

73%

54%

-20%

0%

20%

40%

60%

80%

under 14 15-24 25-34 35-44 45-55 55-64 65+

Source: US Census Bureau International Data Base

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Why? Dramatic Increase in Life Expectancy

1900 1950 1970 1980 1990 20001910 1920 1930 1940 1960

75

70

65

60

55

50

45

40

80

Source: U.S. Social Security Administration

Average Life Expectancy at Birth in the U.S.

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Aging, Disability and Healthcare Costs

Patterns & Trends

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Median age of employed population by selected industry

Source: 2003 Current Population Survey, U.S. Department of Labor

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Distribution of short (STD) and long (LTD) term disability by age

Source: UnumProvident Disability Database, 2002-2004.

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Risk dynamics-STD duration of lost time by age group

Source: UnumProvident Disability Database, 2002-2004.

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Risk dynamics-STD by major impairment category

Source: UnumProvident Disability Database, 2002-2004.

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Risk Dynamics-STD lost days by selected impairments

Source: UnumProvident Disability Database, 2002-2004.

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AmbiguousImpairmentsAmbiguousImpairments

High ScoresHigh Scores

Prevalence =% of ee’sreporting condition

Prevalence =% of ee’sreporting condition

Medical Conditions & Productivity Connections

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Healthcare costs by age x risk

Source: Musich, McDonald, Hirschland, Edington, Disease Managements & Health Outcomes 2002; 10(4): 251-258; University of Michigan Health Management Research Center.

Used with permission. Dee Edington, Ph.D. University of Michigan, Ann Arbor, Michigan

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Implications for Benefits Design

• Productivity Increasing need for Disease/”Condition” Management

• Aging Increasing incidence, duration cost pressures

• Cost pressures Increasing Medical costs Ancillary Benefits??

• Decision Pressure Shift from Employer to Employee funding

+ ?

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• What base level of ancillary benefits will employers fund?

• What design will “stabilize” employer costs?

• What gaps will remain for employees?

• How will employees choose what to add?

• What will employees consider understandable?

• What will employees consider affordable?

Things to Consider

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Critical Illness

LTC

Medical

Dental

STDIIP

LTD

• Generally Er Funded

• Choices made by Er

Old Choices New Approach?

ConsumerChoice

DiseaseMgmt.

Medical

VisionDental

LTD

IIP

• Greater Employee Responsibility

• Reduced Employer Funding

• Longer EPs for disability

• Higher co-pays if “unmanaged

• Greater Need for support service

• Greater Need for asset consideration

HSAHRA

Co-pay

STD