Loss of earnings insurance in the event of illness (APG): a deteriorating system


Loss of earnings due to illness, an insurance that is not (always) compulsory

Many companies choose to take out loss of earnings insurance in the event of illness. The latter makes it possible to pay a daily allowance which covers at least 80% of the salary of the employee on sick leave. The employer is therefore released from its obligation to pay the salary of the sick employee*. It should be noted that although this insurance is not compulsory in Switzerland, some collective agreements expressly provide for the employer to take out such insurance.

A deteriorating situation

In recent years, and more particularly with the health crisis, loss of earnings insurance premiums for illness have increased exponentially, guarantees have been diminishing and, paradoxically, the competition between companies regularly leads to the renewal of the existing insurer with less favourable conditions.

There are three main reasons for this situation: absenteeism in companies continues to rise (stress, changes in the professional environment, mental illness, etc.), FINMA has increased its monitoring of the profitability of each insurance sector and finally, insurers reject risks that are not part of their financial plans.

A fourth reason, not seen by the general public, prevents free competition in the Loss of earnings in the event of illness category.


Restricted competition 

Faced with this deteriorating situation, there is a strong temptation on the part of employers to put insurance companies in competition. However, the results of tenders often show that, despite higher premiums, the existing insurer remains the most competitive. This raises the question of whether the conditions for genuine competition are in place. We can only doubt it when we take an in-depth look at the system.

When a new insurer wishes to take over a contract from one of its competitors, it must continue to pay daily allowances for ongoing cases, in place of the former insurer. It is linked to “the vested benefits agreement for collective daily allowance insurance” which has been signed by the vast majority of insurers who are members of the Swiss Insurance Association.

The new insurer must therefore fund these cases in order to be able to take over the compensation, which automatically generates an entry loss. On the other hand, the former insurer cancels the provisions, which gives it an exit gain. It is therefore easier to understand that any challenger to the former insurer starts with a handicap since the reserves set up to compensate ongoing cases are not transferred to the new insurer. Under these conditions, what is the point of changing insurer?

In accident insurance (LAA) as in occupational pension insurance (LPP), the systems are different. For an accident, even if there is a change of insurer, it is the former one who indemnifies the claim until it is closed. For occupational pensions, a change of pension fund entails a transfer of the provisions established for the current case to the new fund. In both systems, the insurer is obliged to assume the risk subscribed until its term.

Well-protected data?

A final point that raises questions is data protection during exchanges between insurers. In the context of calls for tenders, each candidate assesses the risk on the basis of data provided by the insurer in place. At a time when cyber security is at the centre of the priorities of all companies and when the law drastically reinforces the protection of personal data, it is legitimate to ask, on the one hand, whether this exchange of information applies all the measures to guarantee data security and on the other hand if the very fact of exchanging financial data between insurers complies with regulations.

When will the APG be reformed?

How far will the rise in APG insurance premiums, which is already unsustainable for many companies, go? Can we maintain a system that calls into question the very principle of free competition?

Of course, there are alternatives such as the stop loss or the creation of a captive. But these alternatives are reserved for large companies only.

As a broker, we frequently offer these solutions. But it seems urgent and necessary to us today to open this debate with all the stakeholders.

*art. 324a and 324b of the Code of Obligations

An unfair premium calculation: proof by example

The existing insurer invoices its client company on the basis of the following data:

Average of CHF 100,000 in claims/year x 1.3 (corresponding to the commercial margin, administrative costs, etc.). The annual premium is 130,000 CHF.

It has set aside CHF 50,000 for ongoing cases.

The new insurer will have to add the part of the reserve necessary to continue the compensation of ongoing cases. It will therefore calculate, for a 3-year contract, the premium as follows:

CHF 300,000 in claims + CHF 50,000 in reserve for ongoing cases = CHF 350,000 x 1.3 (corresponding to margin, costs, etc.) = CHF 455,000 for 3 years

Or a total of CHF 152,000 annual premium
The conclusion is obvious: the new insurer is more expensive than the old one because it has to take the reserves into account. In addition, the existing insurer can also calculate the premium level on which its competitors will establish their offer, and can increase its premium while remaining competitive (in our example, it could increase the premium up to CHF 150,000, i.e. an increase of CHF 20,000).

The system prevents free competition and contributes to higher premiums
Yvan Roux - Swiss Risk & Care
Yvan Roux is the Director of the Corporate Business Unit at Swiss Risk & Care. He has more than 25 years of experience in insurance, pension and HR services at insurance companies and within our group. In such capacity, he is responsible for all services dedicated to Corporate clients.
This article was taken up by the newspaper Le Temps - October 2021. 
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