Empire Life President and CEO Mark Sylvia explains utilization and cost drivers, and offers outlook for the next year
Decades ago, costs in insurance products, including group benefits, might have been driven by claims made after catastrophic events like accidents or deaths. But look at the makeup of cost drivers in the group benefits industry, and you’ll get an idea of just how much things have changed.
“Nowadays, what's driving product costs are disease state and disease management, and mental health,” said Mark Sylvia, President and CEO at Empire Life.
As opposed to the catastrophically oriented design of most insurance products, including life insurance and long-term disability, Sylvia noted that group benefit plans have more prevention built into them. They do a lot to support not only when someone gets ill, but also to maintain their good health.
The upshot is that the more the prevention component gets used, the more it has an impact on the expense curve. And because group benefits are a composite product that includes different subcategories of coverage, utilization might come from members taking advantage of their drug benefits, paramedical benefits, out-of-country medical benefits, or a variety of other areas.
“We're seeing starting to see some cost pressures from disability insurance claims, and it's related to mental health. And that's not surprising in the current environment,” Sylvia says. “We're going through a time when people's lives really have been changed in a way that nobody anticipated. But it's also having an impact on how they feel about things and their outlook, and these things could manifest themselves in people needing some assistance to cope.”
Another source of increasing expenses, he says, is prescription drugs. He says expenses in that aspect of group benefits coverage have been more affected by the cost of the drugs themselves, which have tended to respond more dramatically to inflation than many other pieces of the group benefits package. That includes specialty drugs, which despite showing low utilization rates from a broad aggregate perspective, are “a big area, and it’s getting bigger all the time.”
Plan administration at the claims level is another area that could drive increased costs in the group benefits space, and some industry insiders argue that the pressure to invest in automation and digitization is pushing the expense curve up significantly. But Sylvia maintains that those initiatives are investments that pay for themselves.
“I don't want to say that it's not a factor, because all of us are gearing up our administrative capabilities to make data accessible, and to make claims transactions more efficient. That's a source of investment, but it's a source of investment that generally pays off in lowering the cost of doing business,” he says.
Looking ahead, Sylvia says the outlook for group benefits across the industry is relatively stable, but cost inflation is on the horizon.
“Costs related to the drug and the dental industries have come up, because a higher average inflation charge is built into the products,” he said. “You'll see those costs of benefits show up in 2023. You’ll probably see rate increases at the tail end of 2022, but definitely in 2023.”
Sylvia has a similar outlook for long-term disability benefits, where he says costs will be driven higher by an increase in claims.
“LTD claims levels are up. Mental health claims are on the rise, and return to work is slower,” he says. “It's not as easy to get back to work right now for a number of reasons. And so this means there will be cost pressure on LTD benefits coming.”