As an employer, you sponsor a disability plan (short-term and/or long-term) as an added safety net for your employees, just in case they end up unable to work because of an accident or illness. You’ve been lucky up to now, and none of your employees have had to file a claim for disability benefits. But you just got your renewal, and the rate you’re being charged has increased – not a lot, but still. If your employees haven’t filed any claims, why’s the cost going up?
Demographics, for one.
If you have more than ten or twenty employees, your disability premium is probably calculated as a flat rate (per $10 of covered benefit for short-term disability, or per $100 of covered payroll for long-term disability). To arrive at that rate originally, the insurance carrier’s actuaries looked at your group census, paying special attention to the ages shown. Actuarially speaking, an older employee is more likely to become disabled, either temporarily or permanently.
Since your policy was put in place, your demographics may have changed. Maybe some older employees have retired and you’ve brought on some young blood to train. Or maybe there hasn’t been any turnover at all, but in the three or four years since you first began the disability policy… well, everyone who works there has gotten three or four years older. (Everyone else has too, in fact.)
You may have had a two- or three-year rate guarantee when you first bought the policy, which means that the insurance carrier promised not to raise your rates for that guarantee term. If you’re just coming off that rate guarantee, you might be seeing the cumulative effect of your demographic changes all at once, rather than incrementally for the past few years.
(For employers under ten or twenty employees, you’re more likely to have a disability policy with age-banded rates – that is, where the rate is different depending on any given employee’s age. This protects both you and the insurance carrier, as it only takes a couple of hires or terminations to skew your demographics dramatically from when you originally put the policy in place.)
