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Employee Benefits
Sunday, February 1, 2004
Making the choice

“Contrary to some popular opinion, there is no right or wrong when it comes to choosing between ‘occupational disability’ and ‘impairment’ policies,” says Ralph Richardson, Head of Momentum Collective Benefits. “It depends on what the policy holder is trying to insure. Given that most disability policies are bought by employers, it is worth looking at the factors they need to keep in mind.”

The traditional approach has been to buy occupational disability policies. In contrast, impairment policies don’t ask how the impairment affects the person’s ability to work, they simply look at the level of impairment and pay out according to a prescribed scale of benefits. Both types are now being offered as group risk solutions and decisions need to be made based on what is best for the company.
First, employers want to encourage good people to work for them by offering attractive benefits. Secondly, they want to provide cover for employees whose disability prevents them from working. They want cover to be as comprehensive as they can afford, but usually do not want to go beyond their responsibilities as employers. Thirdly, under the Labour Relations Act, employers are expected to accommodate a disabled employee by either adapting the job or offering an alternative position.
The first requirement can be satisfied by either occupational disability or impairment policies. Both are of real value to employees, albeit under slightly different terms. The requirement to insure disabilities, which prevent employees from working, distinguishes the two types of policy more clearly.
Occupational disability products are designed to pay out only when a thorough assessment determines that the insured person is unable to continue working as before. The intention is to compensate the disabled person for the loss of income associated with their occupation.
Impairment policies are not designed to do this. They offer compensation when certain measurable events happen, regardless of whether or not they affect a person’s ability to work. The loss of a finger, for example, can be quickly assessed without long deliberation over the effect it might have in the workplace. There are pros and cons to both approaches.
If an accountant loses a foot but is able to return to work, it is unlikely that an occupational disability policy would pay. This suits the employer and will not compromise his claims experience. The individual might be disappointed, reasoning that while her income is unaffected, her ability to play with her children most certainly is not.
Conversely, impairment policies typically use a sliding ‘scale of benefits’ and an injury, which could lose you your job, might not qualify for a disability benefit. For example, a receptionist who lost 60% of her hearing, making her job impossible, might not be deemed sufficiently ‘impaired’ to get significant compensation. An occupational disability policy is designed to cover exactly this sort of situation.
“It is largely the scale of benefits methodology which makes some impairment policies look cheaper than occupational disability products. Of course, lower premiums generally mean lower pay outs,” notes Mr Richardson. “There is nothing inherently wrong with that, it is just important to recognise the limitations. For instance, mental health problems are not easily measurable and a chronic depressive may find it easier to claim under an occupational disability policy.”
There is no legislative obligation for employers to insure their employees against disability, but there is one to make a reasonable effort to re-employ disabled staff. By definition, an occupational disability claim involves investigating the ability of the claimant to work. A policy, which includes a vocational rehabilitation programme, fits this process much better than an impairment policy claim, which could be divorced from the workplace.
Most large employers are continuing to buy group occupational disability policies, according to Mr Richardson, and for good reason. “In some cases, impairment policies are being considered as fair replacement for this traditional cover, but employers need to be careful. Apparently simple, no-quibble, impairment policies are attractive to individuals and perhaps to smaller employers wanting to offer basic levels of disability cover.”
However, occupational disability products still match the needs of most employers far more closely, by including non-work related claims and giving claimants full value when their livelihoods are threatened. Given the relative strengths of both approaches, the industry will doubtless be offering more creative combinations of the two.

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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