March 13, 2010
By Neesa Moodley-isaacs
The rate at which policyholders claim disability benefits in South Africa tends to increase when the economy is going through a recession, according to a study presented this week at the International Congress of Actuaries.
The study, carried out by Karl Schriek and Paul Lewis of General Reinsurance Africa, shows that unemployment and consumer confidence are two factors that have the strongest correlation with the rate of disability claims. The study, which is based on disability rates and economic indicators such as consumer confidence, from January 1995 to December 2008, shows that disability rates tend to react a year after a change occurs in consumer confidence and three months after a change in unemployment figures.
Lewis says initial indications are that South Africa is coming out of the recession and, if this is the case, there should be a decrease in the number of disability claims.
Schriek says some of the reasons for the increase in disability claims during a recession include:
The "hidden disabled". These are people who technically qualify for disability benefits but who choose to continue working. They are more likely to claim "during an economic downturn when job availability, salary increases and bonuses decline", Schriek says;
More frequent claims for minor causes. More policyholders tend to enter disability claims for minor causes during a recession. However, this also leads to an increase in declined claims;
Employer cost control. During a recession, employers may encourage their staff to apply for disability benefits as this is cheaper for the company than the cost of retrenchment packages. Cost cutting may result in reduced safety standards and lower expenditure on staff training which may, in certain industries, lead to a greater prevalence of occupational injuries. However, this is a long-term effect and is not thought to be influenced by short-term economic movements.
Lewis says that over the past 15 years there has been a significant increase in the disability benefits being requested by consumers.
"Ten years ago, maximum lump-sum disability benefits were around R4 million. Currently, benefits of R20 million and more are not uncommon. On the income replacement side, maximum benefits have increased from around R75 000 to R200 000 a month," he says.
Lewis says over the 15-year period, South Africa's economy has been characterised by:
Consistent economic growth, at an average annual growth of 3.5 percent in real gross domestic product;
High, albeit relatively unstable levels of unemployment, averaging around 25 percent of job seekers;
Medium inflation, averaging around six percent;
High and generally volatile interest rates (fluctuating between roughly seven and 12 percent).
"The first major downturn in the economy occurred during 2008/2009 in the wake of the global subprime crisis. To a certain extent, South Africa was initially insulated against the worst of the fallout because its banks and investors had very little exposure to any of the subprime debt. However, South Africa is very much part of the global economy and its markets did eventually recede into the same spectacular slump that was already being experienced by many developed countries," Lewis says.
He says the study will have to be revisited sometime next year for a full analysis of how disability rates have reacted to the recession. However, based on the initial study results, Lewis and Schriek say that for every one-percent increase in unemployment, a six-percent increase in disability claims rates can be expected.
Schriek says the disability rates for 2008 were generally low but somewhat volatile, and further increases are expected when the rates for 2009 are taken into account.
The study predicted an increase of seven percent in disability rates in 2008 and an increase of 11 percent in 2009. However, actual experience in 2008 showed a lower increase than predicted.
Schriek says we may see a 10 percent increase in disability claims over the next four or five years.
  
 
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