In the News section of this website I’ve posted an article about discretionary clauses in insurance policies and how they create an unfair advantage for insurers by encouraging them to deny claims that should be paid. Briefly, under ERISA, clauses in insurance policies that give insurers discretion to interpret the terms of the policy and determine eligibility for benefits are enforceable and prevent judges from reversing an insurer’s denial of benefits unless the consumer can show that the insurer was arbitrary and capricious. That’s a tough standard for consumers to satisfy.
Insurers argue that these clauses aren’t bad because they result in a lower cost insurance product for consumers. This assumes that the money insurers save from denying claims based on the existence of discretionary clauses that would otherwise be paid to a claimant flows through to consumers in the form of lower premiums. It’s difficult to know the degree to which that is true but let’s assume, for the purposes of argument, that these savings do flow through to consumers to a significant degree. So, by how much are insurance premiums lower due to use of discretionary clauses than they would be if these clauses were prohibited?
Milliman, Inc., a national business consulting and actuarial firm, released a report about six months ago that analyzes that question in the context of disability policies. I’ve put a copy of it in the library section of the website and you can read it here. Milliman’s conclusion is that eliminating discretionary clauses would have the effect of increasing disability insurance premiums from 3 to 4%. The analysis and conclusions about discretionary clauses (as opposed to other modifications to disability insurance policies) are found in the first eleven pages of the 26 page PDF document.