EXHIBIT 1

EXHIBIT II.-GROUP LONG-TERM DISABILITY INSURANCE

[6-month elimination period; calendar year of issue excluded; all ages, males, females, and sex unknown combined-calendar years of experience

In underwriting commercial disability insurance, insurance companies try to insure no more than about three forths of net after tax income of workers. Where the benefits are a higher proportion of earnings, incentive to recovery is seriously reduced, because normal living expenses during disability are often reduced by the decreased need for transportation, clothing, meals away from home, etc. Taxes are somewhat lowered due to lower net income. Personally purchased disability income benefits and Social Security benefits are not subject to income tax. (During 1969 through 1973 when the attached table was put together, the first $100 per week of sick pay provided by employers was generally tax exempt also).

To accomplish this, most employee disability plans seek to insure between 50 percent and 60 percent of gross pay, acting on the assumption that this will usually amount to about 75 percent to 80 percent of net after tax earnings.

The table demonstrates that, in general, the higher the percentage of pre-tax earnings provided by disability insurance, the higher the ratio of claims actually experienced to those expected. Expected claims means the claims anticipated in developing the premium rates. Therefore, a ratio of 100 percent would indicate that the planned levels of claims had been experienced. Notice that the range of difference is from 52 percent to 219 percent in a pretty consistent relationship to the percentage of earnings insured.

The second part of the table analyzes the effect of integration with Social Security and income form other sources. The more the disability benefits are reduced by integration as other benefits become payable, the lower the ratio of the actual to expected claims. Where there is no integration or reduciton of benefits on account of Social Security and other sources, the level of claims was 10 percent higher than expected.

(1)

Per IRS statistics for 1976 as reported in CCH Rewrite Bulletins, 2 August 1978, smoothed

(2)

Uses Virginia as an estimated average:

Exemptions: Four @ $600
Deductions:

Rates on taxable incomes

(3)

Next
Excess

Basis of AIME Assumptions 1977 and 'prior earnings of those earnong $17,000 p/a or less indexed according to the AIME adjustment factors

15- all incomes
(ignoring $2,000 limit for stand-
ard deduction if not itemized)

in 1978 were

Those earning $20,000 or more in 1978 always had maximum taxable wage or more.

(4)

80% of AIME. Above this income, 150% of PIA applies

EXHIBIT V

COMPARISON OF DUTCH WITH UNITED STATES STATISTICS ON DISABILITY

In Table 1 a comparison is made between the 1974 disability incidence rates in the Netherlands and the corresponding rates in the United States by sex and age group. Overall, the disability experience in Holland is more than three and a half times that of the Social Security DI system in the United States, a nearly incredible statistic. The Netherlands plan involves an elimination or deferment period of twelve months compared to the five months under the DI program. On the other hand the Dutch workers are entitled to parital benefits, which account for about one sixth of the total claims, roughly offsetting the effect of the longer deferment of benefits.

The plan in the Netherlands has a fixed replacement ratio of 80 percent based on gross earnings. Since the benefits are taxable, this probably corresponds to an aftertax replacement ratio of about 82 percent, the tax rate or 80 percent of a given level of income being somewhat less than that on 100 percent. It has been shown on Exhibit II that, according to United States group disability experience, such ratios give rise to an excessive number of claims.

The data from Holland also support the proposition that an analysis of claims by diagnosis can be used to ferret out areas where malingering, fraudulent claims, lax administration, or biased adjudication of claims may be a problem. In Table 2 a comparison is made between the two countries for important diagnostic groups, viz. musculoskeletal disorders, mental disorders, diseases of the circulatory system, and neoplasms (cancer). It will be noted that, whereas the incidence of cancer in Holland is less than that in the United States, and that of circulatory disease is also 75 percent higher, the incidence of musculoskeletal disorders, which include back pain, is 5-6 times that in the United States. The corresponding ratio for mental disorders is 5 to 1. In many cases of these latter conditions, disability can neither be proved nor disproved by clinical tests. On the other hand, cancer and many circulatory diseases are subject to much more precise diagnosis, supported by laboratory tests and other objective means.

TABLE 1.-COMPARISION OF DISABILITY INCIDENCE RATES PER 1,000 IN THE UNITED STATES AND THE NETHERLANDS

* Standardized average claim rates based on United States 1974 estimated exposures.

Sources: USA-Unpublished rates furnished by the Office of the Acturary, SSA; The Netherlands-published report for 1974.

TABLE 2.-COMPARISON OF UNITED STATES AND DUTCH DISABILITIES BY DIAGNOSTIC GROUP