Why income protection models should not be blind to economic cycles
The introduction of the mandatory basic disability insurance for the self-employed (BAZ) is setting the income protection market in motion. More self-employed professionals will take out insurance, insured populations will change, and assumptions in pricing models will come under pressure.
However, one factor often remains underexposed: the economic climate.
Does the disability incident rate move in line with the economic cycle? And if so, what does this mean for income protection insurers?
Health and the economy: more than a theoretical link
International research has long shown that economic growth is associated with health outcomes. Yet in practice, this relationship is rarely explicitly incorporated into disability insurance models.
In earlier research, Rachel Bonsel analysed the relationship between the economic climate and the incidence of disability among the self-employed. The study examined whether macroeconomic indicators, such as GDP, contribute to a better estimation of morbidity.
The results show that a relationship between the economic cycle and disability does exist, but not in the same way for all causes. It is precisely this nuance that makes the topic actuarially and strategically relevant.
What does this mean for insurers?
If economic fluctuations affect disability incidence, this directly impacts:
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income protection pricing
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reserving and long-term projections
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economic scenarios in the ORSA
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portfolio development and selection behaviour
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the impact of the BAZ on the insured population
Should models become more sensitive to the economic cycle? And could the risk actually be greater if this factor is not taken into account?
For insurers that want to look ahead rather than simply extrapolate from the past, this is a fundamental question.