A note on privatised disability insurance in Chile
By José Piñera
Together with the privatisation of the old-age retirement system in 1980, we also fully privatised the traditional government-run disability and survivors' program.
This program was a source of systematic abuse, given the non-existence of incentives to control its fair use, adding to the overall deficit of the social security system.
After the reform, each pension management company (the AFP) has to provide this service to its affiliated workers by taking out, through open and transparent bidding, group life and disability coverage from private life insurance companies. This coverage is paid for by an additional worker contribution (this contingency was formerly covered by the payroll tax, and thus the payment by the worker when the reform was enacted did not entail a reduction in net salaries).
A key feature of this new system is that the occurrence of disability is not decided by a government employee, with no incentive to say "no" and maybe political incentives to say "yes" to benefits paid by the general taxpayer.
The law establishes the "disability commissions", set up by independent doctors appointed by the highly technical government regulatory body (the Superintendency of AFPs, www.safp.cl). A representative of the insurer sits in the commission as an observer. If the case is obvious, the observer will have nothing to object. In case of objection (for example in a "gray" case of mental health), the ruling can be appealed before a “central disability commission”.
There is also partial disability, with the possibility of reversal (giving an incentive to insurance companies to train and help the worker to regain his capabilities).
The survivors and disability premium, set in a competitive market, began at levels of 2 percent of salary. The enormous success in reducing disability has reduced the premium to around 0.9 percent of salary, the difference accruing to the worker as an increase in the net salary.