Rethink The Future: The New Normal In Absence And Disability Management Alex Dumont, Assistant Vice President, Product Marketing

The New Normal Interest rate is the lowest in 200 years Healthcare costs 3 times what it did in 1999 - Kaiser /HRET survey The Great Recession wiped out 15 years of net worth from the middle class -Federal Reserves “Changes in Family Finances from 2007-2010” By 2025, there will be 4 generations in the workforce - US Census Bureau 38% increase in SSDI applications - SSDI data 1 in 5 employees are caregivers to a person over age 50 - Executive Office of The President Council of Economic Advisers 2

Key Drivers Of Future Trends Economy Demographics Healthcare Top heavy structures will change leadership, management and team dynamics. Healthcare costs will continue to outpace inflation, despite reform. Employees have less money to spend on benefits. Interest rates are lower – impacting saving vs. spending. Healthcare vs. ancillary benefits vs. savings. Benefits costs will change significantly. Compressed corporate budgets as consumer spending is muted. Relevance of disability insurance. Benefits needs for each generation differ.. 3

Surpassed pre- recessionary level Family Net Worth Average family: Back to 1995 level Employment: Back to 2005 level Home Prices: Back to 2002 level Stock Market: Back to 2007 level Economy: Surpassed pre- recessionary level The Great Recession wiped out 15 years of net worth from the middle class. 4 Source: Federal reserves “Changes in Family Finances from 2007-2010”

Family Net Worth 40-59.9 percentile 60-79.9 percentile $250 $200 $150 ($ 000’s) 40-59.9 percentile ($46K in annual income) 60-79.9 percentile ($72K in annual income) $250 $216 $200 $177 $184 $150 $151 $115 $108 $129 $100 $60 $66 $72 $78 $83 $92 $50 $66 $0 1992 $40.4k 1995 $43.5k Average earnings 1998 $44.6k 2001 $48.9k 2004 $49.8k 2007 $49.6k 2010 $45.8k 5 Source: Federal reserves “Changes in Family Finances from 2007-2010”

The Great Recession – Significant Contraction And Job Loss Past Recessions Duration (Months) Peak Unemployment GDP Decline Jobs Lost (1,000) 1949 11 7.9% -1.7% -2,344 1953 10 6.1% -2.6% -1,711 1958 8 7.5% -3.7% -2,215 1960-1961 7.1% -1.6% -1,256 1969-1970 -0.6% -831 1973-1975 16 9.0% -3.2% -2,171 1980 6 7.8% -2.2% -1,159 1981-1982 10.8% -2.7% -2,838 1990-1991 -1.4% -1,621 2001 6.3% -0.3% -2,202 2007-2009 18 10.1% -5.1% -8,750 Average -2.3% -2,463 The most severe recession experienced in 60 years, with more jobs lost than in previous four recessions combined. Source: Bureau of Labor Statistics - Reported unemployment; Aggregate contiguous periods of negative nonfarm payrolls. 6

Demographics: U.S. Population - 1980 85+ 80-84 75-80 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 26-29 20-24 15-19 10-14 5-9 0-4 Greatest Generation Silent Generation Baby Boomers 1 2 3 Men Women 4 5 7 Source: US Census Bureau

Demographics: U.S. Population - 2010 85+ 80-84 75-80 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 26-29 20-24 15-19 10-14 5-9 0-4 Baby Boomers Generation X Generation Y 1 2 3 Men Women 4 8 Source: US Census Bureau

Demographics: U.S. Population - 2025 85+ 80-84 75-80 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 Baby Boomers Generation X Generation Y 5-9 0-4 AO 1 2 3 Men Women 4 9 Source: US Census Bureau

Trend #1: Baby Boomers Will Stay At Work Longer Impacts Significantly higher healthcare costs. Higher disability risk. Better retention of intellectual capital – lower training costs and turnover. Higher salaries, cost structure and possibility of lower productivity – high impact on service industry. Top heavy – slower career progression for generation Y and less supply of talent when baby boomers ultimately retire. 10

Healthcare Cost For Families $15,073 $16,000 $13,375 $13,770 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- $12,679 $12,105 $11,481 $10,880 $15,073 $9,950 $9,069 $8,003 $7,056 $6,438 $5,840 Significant growth in healthcare costs with greater cost sharing. Source: The Kaiser Family Foundation and Health Research 11

How Long Will Savings Last In Retirement? Net Assets ($ 000’s) $300 $275 $250 $227 $200 $179 Retiree in 2001 (average net worth = $227k) Retiree in 2012, assets funded to age 73 (average net worth = $179k) Retiree in 2012, assets funded to age 77 (average net worth = $350k) $150 $100 $50 $- $(50) 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 Retirees today will only have assets to fund retirement until age 73 vs. retirees in 2001 with sufficient assets to fund retirement until age 77. The average baby boomer will have to work at least 4 years longer. 12 Assumption: Monthly expenses of $2k, 2% inflation, current interest rate, excludes Social Security

Impact On Healthcare Costs Age Individual Family 30-34 $7,711 $11,383 40-44 $9,276 $13,693 50-54 $14,237 $21,017 60-64 $22,704 $33,515 Baby boomers working longer will put additional strain on healthcare costs. Source: Rates filed with State of Oregon for small groups 13

Trend #1: Baby Boomers Will Stay At Work Longer Impacts Solutions/Implications Significantly higher healthcare costs. Higher disability risk. Better retention of intellectual capital – lower training costs and turnover. Higher salaries, cost structure and possibility of lower productivity – high impact on service industry. Top heavy – slower career progression for generation Y and less supply of talent when baby boomers ultimately retire. Return to work and stay at work initiatives become key programs that enable baby boomers to be productive and help reduce healthcare costs. Wellness programs are key in reducing healthcare costs.

Trend #2: The Sandwiched Generation Doing More With Less Impacts Doing more with less (salary increases have significantly lagged behind inflation). Fewer upward mobility/ promotional opportunities due to top heavy structures. Growth in number of employees with caring responsibilities. Time and flexibility becomes more valuable than before.

Finances Of Generations Family net worth ($ 000’s) Age 35-44 (average earnings = $47k) Age 45-54 (average earnings = $51k) $200 $165 $150 $95 $118 $100 $50 $42 $- 2001 2004 2007 2010 Generation X are more impacted by the Great Recession and cost increases. Source: Federal reserves “Changes in Family Finances from 2007-2010” 16

FMLA Utilization FMLA utilization rate 20.0% Other Maternity Own Family 15.0% 10.0% 7.9% 7.2% 8.6% 5.0% 10.6% 11.9% 3.2% 0.0% 4.9% 3.4% 2.2% Under 25 1.8% 25 - 34 35 - 44 45 - 54 Over 54 The Sandwiched Generation is more likely to utilize FMLA/ leave programs. Source: The Standard claims analytics research 17

Trend #2: The Sandwiched Generation Doing More With Less Impacts Solutions/Implications Doing more with less (salary increases have significantly lagged behind inflation). Fewer upward mobility/ promotional opportunities due to top heavy structures. Growth in number of employees with caring responsibilities. Time and flexibility becomes more valuable than before. FMLA and leave utilization will increase significantly (due to need and values). Flexibility will evolve to be a very important employee benefit. Concierge type services will be highly valued. Job rotations will be more prevalent.

Trend #3: Increased Disability Incidence Impacts Higher disability incidence due to the economy. Workplace stress has a direct impact on disability and healthcare costs. Significant increases in musculoskeletal claims. Decreases in interest rate will continue to increase disability costs.

Impact of Workplace Stress LTD Incidence High Growth Moderate Growth Stagnant Moderate > 10% Loss High Loss 2% to 10% -2% to 2% -7% to -2% < -7% Customers exhibiting moderate job growth (2 - 10%) have the lowest LTD incidence. Source: The Standard claims analytics research 20

Increase By Diagnosis % increase in awards (2005-2010) 50% Increase in awards between 2005-2010 47% 40% 30% 27% 26% 20% 18% 11% 20% 10% 10% 0% Cancer Heart Injuries Mental Musculo- skeletal Nervous System Respiratory Significant increase in Musculoskeletal claims in the past 5 years; currently makes up 32% of all SSDI claims. Source: SSDI data 21

Trend #3: Increased Disability Incidence Impacts Solutions/Implications Higher disability incidence due to the economy. Workplace stress has a direct impact on disability and healthcare costs. Significant increases in musculoskeletal claims. Decreases in interest rate will continue to increase disability costs. Investments in early intervention, return to work and stay at work will be key. Long term healthcare and Disability cost implications should be considered during workforce planning. Conversion of ASO to fully insured plans as disability costs will increase due to aging population and interest rate.

Trend #4: Unintended Consequences Impacts Cost shifting to disability voluntary plans increases healthcare and productivity cost. Enrollment levels are likely to be low; especially given values and economics facing generations X, Y and AO. Savings in total costs will be short term and temporary, with longer term and permanent higher healthcare costs.

Cost Shifting In Employee Benefits HC – Employee Portion HC – Employee Portion 20,000 4,377 4,377 15,000 4,129 10,000 10,944 11,600 11,600 5,000 2011 2012 2012 (Cost Shift) Employer paid LTD $300 Total employer cost $11,244 $11,900 $11,600 Increase 5.8% 3.2% $300 savings per employee Cost shifting of healthcare inflation by switching from employer paid LTD to voluntary LTD plans.

Healthcare Cost For Family # Of Employees The majority of healthcare costs result from a minority of the employees Costs 300 Employees 250 Employees 250 Employees $6,400 $1000 $500 100 Employees 80 Employees $18,000 $54,000 10 Employees 10 Employees $203,000 $440,000 10% of employees (100 employees from 1000 life company) cost 70% of healthcare. 0.5% of employees (5 employees in a 1000 life company) go out on disability. 25

Trend #4: Unintended Consequences Impacts Solutions/Implications Cost shifting to disability voluntary plans increases healthcare and productivity cost. Enrollment levels are likely to be low; especially given values and economics facing generations X, Y and AO. Savings in total costs will be short term and temporary, with longer term and permanent higher healthcare costs. Convert voluntary disability plans to employer paid plans. Pursue voluntary plans only if enrollment will high. Build active communication strategies about the need for Disability during benefits orientation or open enrollment.

Key trends due to economy, demographics and healthcare The New Normal Key trends due to economy, demographics and healthcare Trend #1: Baby boomers will stay at work longer Trend #2: Sandwiched generation will demand higher flexibility Trend #3: Increased disability incidence due to economy Trend #4: Unintended consequences of increased healthcare costs from cost shifting to voluntary disability plans Key Implications Return-to-work, stay-at-work and wellness programs become key to enabling baby boomers to be productive and control healthcare costs. Demand for FMLA usage and flexibility will continue to increase. Staffing levels will significantly impact disability/ healthcare costs. Disability insurance will become highly relevant n a world of increasing healthcare costs.

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