Economic and Industry Conditions: Considerations and Tools for Disability Claim Assessment

In recent years the news headlines have been filled with stories about the global financial crisis. Fears of a double-dip recession, the ongoing U.S. and European debt crisis, mortgage foreclosures and lingering high unemployment are issues that continue to dominate the headlines. The global nature of today’s economy not only unites us in trade but also in each other’s economic woes. The subprime mortgage collapse in the U.S. during the summer of 2007 and the Lehman Brothers’ bankruptcy in September 2008 significantly impacted world markets, sending many of the world’s economies into recession. But does any of this economic news impact your assessment of a disability claim? Absolutely! Disability claimants are located around the world. Having a thorough understanding of the economic and industry conditions affecting your claimant’s income can provide valuable information and insight during the claim assessment.

Let’s first take a look at how the recent global financial crisis affected employment in some of the world’s key markets.

In the United States certain professions fared worse than others. For example, production supervisors experienced a significant reduction in jobs and the future looks equally bleak as manufacturing operations are streamlined and consolidated. Construction workers and real estate professionals saw a marked reduction in jobs and income due to the sharp downturn in new construction and the decline in sales of existing homes. As the economy rebounds, real estate professionals and construction workers are expected to benefit from an improved job outlook. Other financial services occupations, such as bank tellers and loan officers, found their positions eliminated due to bank failures and consolidations.

Even individuals in the medical and dental professions were impacted. In times of economic downturn, patients are more likely to consider lower cost treatment plans, such as pulling a tooth rather than the more expensive option of having a crown put in. Specialities like cosmetic dentistry and plastic surgery, procedures which are often paid for with the patient’s discretionary income, frequently experience a decline in business during tough economic times. Additionally, as people lose their jobs they also lose their medical and dental benefits. Routine, preventive care is put off, resulting in a loss of revenue to the providers.

In 2009, there were 15.3 million self-employed individuals in the U.S., either incorporated or unincorporated, which equates to about one in every nine U.S. workers.

USA Today reported that as of August 2011 there were 14.5 million self-employed individuals in the U.S., which was down 800,000 from 2009 and down 2.1 million from the peak in 2006.

During the recession struggling self-employed individuals could no longer afford to keep their businesses operating and were forced to close their doors. Other potential entrepreneurs were not willing to sacrifice a steady pay check to go out on their own and open up a new business.

The economic downturn took hold in Canada in October 2008. Ninety percent of Canada’s population is concentrated within 100 miles of its border with the U.S. and the U.S. is Canada’s largest trading partner. A one-third drop in demand for Canadian exports was the largest contributing factor to Canada’s recession.

In 2009, manufacturing sales declined 17.4 percent, although most of the decline occurred during the first quarter of the year.

The automotive industry, which is concentrated in the province of Ontario, saw significant job loss and cutbacks. The tourism industry was negatively impacted by the strong Canadian dollar and the reduction in the number of visitors from the U.S. The entertainment industry, which includes casinos, felt the pinch as people limited their discretionary spending due to the economic uncertainty.

The United Kingdom entered the recession during the third quarter of 2008. London is one of the world’s financial centres with more than five hundred banking institutions, major insurance companies, foreign exchange trading and major law firms. Employment in the financial services sector was particularly hard hit by the recession, with job losses reaching 100,000, according to a Sky News report in September 2010.

Other industries such as manufacturing and construction also experienced significant job losses. As of March 2009, there were more than 750,000 enterprises in London and more than ninety percent of these enterprises were micro-business or the self-employed. These businesses provide jobs for nearly two million people, accounting for approximately forty percent of London’s business employment.

Prior to the global financial crisis, Australia’s economy had grown for 17 consecutive years, according to the CIA World Factbook. The country is known for its abundant and diverse natural resources and renewable energy sources. Fortunately for Australians, the economic crisis was not as severe as in other parts of the world. This was due in part to surging demand for iron ore and coal from China, the country’s largest trading partner, which kept the mining industry strong. In September 2008, Australia’s unemployment rate stood at 4.3 percent. At the peak of the financial crisis, in the summer of 2009, the unemployment rate rose to 5.8 percent, still well below the unemployment rates seen in the U.S., Canada and the United Kingdom during the same time period.

Australia has experienced significant natural disasters in recent years. Most recently, flooding in Eastern Australia began in late 2010 and continued into 2011. This flooding was followed by Cyclone Yasi which made landfall in Queensland on February 3, 2011. These natural disasters disrupted coal exports and, according to the Insurance Council of Australia, led to insurance claim payments in Queensland alone of nearly $1.9 Billion (AUS$).

Countries like Singapore and Hong Kong experienced a brief economic slowdown in late 2008 and into 2009 but the slowdowns were not significant. The unemployment rate in Singapore increased to 3.3 percent in September 2009 but then returned to 2.2 percent in March 2010. 8 According to the CIA World Factbook, Hong Kong’s unemployment rate was 5.2 percent in 2009 and 4.3 percent in 2010.

The impact of the global financial crisis varied throughout the world. The U.S. economy, along with Europe’s economies, continues to recover from the recession even as 2011 draws to a close.

How might the economy or the condition of a particular industry influence a disability claim assessment? It is common practice to request historical and current income tax returns as part of the disability claim assessment. The income tax returns are a useful source of information for identifying sources of income and amounts of income reported by the claimant. But moreover, understanding what economic or industry trends may be impacting the claimant’s business and income, either pre-disability or while on claim, is equally important. Keep in mind the income tax returns will not provide specific details about the claimant’s occupation or the person’s day-to-day activities while at work. Developing a thorough understanding of the claimant’s occupation is also an essential part of any disability claim assessment.

Considerations and Tools

When evaluating the income trends of a claimant, an analyst may need to evaluate whether the claimant’s income has been influenced by factors other than the claimant’s medical condition.

Considerations may include the economic condition in the region where the claimant operates. Do you, as the analyst, have sufficient knowledge of the economic conditions in the claimant’s city or region? If the claimant is located in your region, this is probably not an issue. But what if you are based on the East Coast and the claimant is a dentist practising in Phoenix? How familiar are you with the economy in Phoenix and how the economy fared during the last few years?

Many state websites provide a great deal of information on employment trends by city and by industry. For instance, the State of Michigan website contains information on current and historical unemployment rates, employment numbers by industry and a listing of occupations that are in high demand in the state. On the website you can search business entities and download annual filings from the state at no cost. Another source of useful information is the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor. The BLS is the federal agency charged with measuring labor market activity, working conditions and price changes in the economy. The BLS website (www.bls.gov) has considerable data available on both a national and regional basis. Other countries have similar data available. The Australian Bureau of Statistics’ website is www.abs.gov.au, the Statistics Canada website is www.statcan.gc.ca and the United Kingdom’s Office for National Statistics’ website is www.statistics.gov.uk.

Another way to analyze a claimant’s financial information is to perform a comparison of the claimant’s operating results to other companies in the same industry. For example, assume you are evaluating the financial records of a claimant who is a general dentist. The claimant’s annual net income fluctuated dramatically prior to the disability claim. Analysis revealed that the fluctuations in net income were the result of large swings in the amount of dental supplies purchased. As a percent of revenue, dental supplies ranged between 8 percent and 30 percent during the three years prior to claim. Industry data can show what the typical percent of dental supplies to sales is for other companies. This information can then be used as a benchmark to compare with the claimant’s financial data. Industry data is available through numerous online resources. Bizstats (www.bizstats.com) offers free business statistics and financial ratios for various industries on their website.

Other considerations during the assessment of the claim might include the impact of a significant local event, such as the Olympics, which could inflate income for a period of time or a natural disaster, such as a hurricane or earthquake, which could cause a decline in income for a period of time.

The goal of this research and analysis is to be able to identify anomalies in income that are attributable to economic or industry conditions during pre-disability periods and to identify factors other than the claimant’s medical condition which are impacting income while on claim.

Consideration should also be given to other factors which could influence the claimant. For example, what is the availability of employment in the insured’s city, either in his or her own occupation or in an alternate occupation? Could issues involving increased workplace stress, a lack of job security or a lack of work/life balance be influencing the claimant? Other factors, such as significant stock market or real estate losses, loss of personal savings or loss of a retirement plan – all of which can weigh heavily on a person – could potentially affect the claimant’s decision making process.

Taking the time to thoroughly understand both the claimant’s occupation and any economic or industry conditions effecting the claimant’s business or job will provide helpful information for the disability claim assessment.

By Suzanne Tarchala. Published in Swiss Re Global Life & Health Claims in December 2011.

The statements or comments contained within this article are based on the author’s own knowledge and experience and do not necessarily represent those of the firm, other partners, our clients, or other business partners.

1. Steven F. Hipple, “Self-employment in the United States,” Monthly Labor Review Sep. 2010

2. Laura Petrecca, “Fewer people choose to be self-employed,” USA Today 9 Sep. 2011

3. E. Boulay, “The evolution of the global financial crisis and cross border activity, 2007-2010,” (Statistics Canada, 16 Sep. 2010)

4. Gwen Harding and Russell Kowaluk, “Manufacturing: The Year 2009 in Review” Analysis in Brief, no. 87, June 2010, Statistics Canada catalogue no. 11-621-M, http://www.statcan.gc.ca/pub/11-621-m/11-621-m2010087-eng.htm, Ottawa

5. Adam Arnold, “100,000 UK Jobs Cut in Financial Sector” Sky News Online 14 Sep. 2010

6. “Supporting London’s Small and Medium Sized Enterprises (SMEs) and Entrepreneurs during the Recession” (The British Library Business & IP Centre, March 2009)

7. Australian Bureau of Statistics, Labour Force, catalog no. 6202.0

8. Labor Force Survey, Singapore Ministry of Manpower