The Group Insurance Environment

1
Chapter 5

• The Group Insurance Environment

2
Characteristics of Traditional Group Insurance

• Group contract
• Policyholder receives master contract
• Covered employees receive certificates of
  insurance
• Eligibility of employees does not necessarily
  coincide with period of contract

3
Experience rating

• Actual experience affects rates
• Covered in detail in Chapter 17

4
Group underwriting

• Purposes
• To minimize adverse selection, which is the
  tendency of those most likely to have claims to
  also be the most likely to seek insurance
• To minimize administrative costs

5
Factors to consider

• Reason for existence of group group must be
  formed for some reason other than obtaining
  insurance
• Stability
• High turnover leads to high administrative costs
• Low turnover results in aging group
• Persistency group is profitability only if it
  stays on books for period of time
• Determination of benefits
• Employees should not be able to determine their
  own benefit levels
• High benefits encourage overutilization
• Low benefits lead to low participation if a plan
  is voluntary

6
Determination of eligibility

• Probationary periods often used
• Usually limited to full-time employees
• Premium payments
• Contributory plan employees pay some or all
• Noncontributory plan employer pays all
• Employees can elect out of contributory plan
• Insurability often required if person wants
  coverage under contributory plan after initial
  eligibility

7
Determination of eligibility (cont.)

• Administration
• Employer often required to carry out some
  functions
• Insurer concerned with ability and willingness of
  employer
• Prior experience
• Prior experience is often an indication of future
  experience
• Changes in new plan may combat poor prior
  experience

8
Size

• Large groups give good indication of future
  experience
• Small groups underwritten more strictly
• Composition
• Claims generally increase with age
• Women tend to have more medical and disability
  claims
• High income employees tend to have higher medical
  and dental claims
• Industry
• Claims may vary
• Stability and persistency may vary
• Geographic location
• Claims vary by region
• Administrative costs increase if employer has
  multiple locations

9
Voluntary Benefits

• Many employers make one or more available
• Reasons for popularity
• Ease of payroll deduction
• More liberal underwriting
• Portability
• Supplementing employer-provided benefits
• To meet differing needs of employees
• Increased availability of products

10
Market characteristics

• Many insurers offer
• Life insurance most popular product
• Ancillary medical products (dental, drug, vision,
  specified disease, hospital indemnity) also
  common
• Underwriting
• Guaranteed issues
• Simplified issue
• Modified guaranteed issue
• Cost usually about 10 percent less than in
  individual marketplace

11
Premium payments

• Usually payroll deduction
• Usually determined by benefit purchased

12
Portability

• Automatic for individual products. Group products
  usually also continue
• Premiums paid on direct-bill basis, possibly less
  frequently than monthly

13
State Regulation

• McCarran Act gives primary responsibility for
  insurance regulation to the states

14
Eligible groups

• States often impose minimum size restrictions for
  groups
• Types of groups
• Individual employer
• One employer owns policy
• Employees have coverage
• Negotiated trusteeship
• Results from collective bargaining
• Policy issued to trust
• Union members who meet specified criteria have
  coverage

15
Eligible groups (cont.)

• Trade associations
• Policy issued to trust or association
• Individual employers elect coverage for employees
• Labor union groups
• Union provides benefits to employees
• No employer contributions allowed

16
Eligible Groups (cont.)

• Multiple-employer welfare arrangements
• Formed for specific industry
• Trust provides benefits
• Employer joins trust
• Trust may be insured or uninsured
• Trust may be administered by an insurance company
  or a third party
• Uninsured MEWAs have caused problems because of
  inability to pay claims

17
Contractual provisions

• While some variations exist, there is uniformity
  among states
• Traditional focus on common provisions, but trend
  is to mandate benefits
• Because of ERISA, only insured plans are affected
• Benefit limitations not of much significance now

18
Contractual provisions (cont.)

• Tax treatment each state levies a premium tax on
  premiums written in state.
• Regulatory jurisdiction
• Of little concern if all employees and the
  employer are in same state
• Under doctrine of comity, it is generally
  accepted that state where contract is delivered
  has governing authority over contract
• An employer may have some choice in determining
  site of delivery

19
Age Discrimination in Employment Act

• Prohibits discrimination for workers age 40 or
  older
• Applies only to employers with 20 or more
  employees

20
Age Discrimination in Employment Act (cont.)

• Group benefits other than medical expense can be
  reduced for older employees
• Must be cost justified
• Can be done on benefit-by-benefit basis or
  benefit-package basis
• Effect on group term life insurance
• Benefits usually not reduced until age 65
• Benefit reductions most commonly done on basis of
  5-year brackets generally at age 65 a 35 percent
  reduction can be justified

21
Table 5.1
22
Age Discrimination in Employment Act (cont.)

• Effect on disability income benefits
• No reductions allowed for uninsured sick-pay
  plans
• Short-term benefits a 20 percent reduction at
  age 65 can usually be justified
• Long-term benefits
• Benefit level can be reduced.
• Benefit duration can be reduced but this is most
  common
• States may have laws that apply to persons not
  covered by the federal act

23
Pregnancy Discrimination Act

• Applies to employers with 15 or more employees
• Provisions
• Generally requires pregnancy to be treated like
  any other medical condition
• Pregnancy benefits can be excluded for
  dependents, but not employees even if unmarried
• Abortions can be excluded unless life of woman is
  endangered

24
ERISA

• Applies to retirement and welfare benefit plans
• Definition of welfare benefit plan
• Includes medical expense, disability, and death
  benefit plans
• Also includes plans such as vacation benefits,
  day-care centers, prepaid legal services, etc.

25
ERISA (cont.)

• Does not include government plans, church plans,
  or plans to comply with workers compensation or
  unemployment laws
• Certain other plans are exempt by regulation
• Overtime and holiday pay
• Compensation for time away from work if paid out
  of general assets of employer
• Plans under which employer pays nothing, is not
  the policyowner, and merely collects premiums on
  behalf of employees
• Covered in more detail in Chapter 26

26
Americans with Disabilities Act

• Applies to employment and numerous other
  activities that affect the disabled
• Title I applies to employers with 15 or more
  employers
• Disabled persons cannot be denied employment as
  long as job can be performed with or without
  reasonable accommodation
• Disabled persons must be accorded equal access to
  whatever health insurance the employer provides
  to other employees
• Certain coverage limitations and
  preexisting-conditions clauses are acceptable

27
Financial Services Modernization Act
(Gramm-Leach-Bliley)

• Restructures financial services industry to focus
  in this course is on privacy
• Privacy notice must be given to customers when a
  relationship begins and annually thereafter. It
  must provide clear and factual statements about
  an institutions policies and practices for
  collection and disclosure of financial
  information
• Broad sharing of information generally allowed
• States may legislate stricter provisions