Topic 4 Group Insurance Underwriting Principles
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What is Group Insurance?
- An arrangement for insuring a group of persons
- A single contract between the insurer and the policyholder
Who does Group Insurance benefit?
Individuals who have a specific relationship to the policyholder
Who can be the policyholder and who is able to be covered under each?
- -Employees of the employer
- -Dependents of the employee
- -Former employees
- Trust Fund
- -Collectively bargained multi employer plan (Taff-Hartley Plans)
- -Members of the union
- -Dependents of the members
- -Former members
What do the insureds receive instead of an individual contract in Group Insurance?
Certificates of insurance
What is often used in Group Insurance?
Which is usually less expensive, Group Insurance or Individual Insurance?
Group Insurance is usually less expensive than Individual Insurance on a per-unit of coverage basis
What are the benefits of Group Insurance?
- Lower administrative costs, therefore lower expense loading
- Commissions are less
- No individual underwriting
- Employer performs many of the administrative functions
- Holding expected loss constant, Group Insurance is less expensive than Individual Insurance because of the lower administrative costs
What are the two decisions an Underwriter can make?
- Insure or not
- -If yes, then how much to charge for premium?
In Underwriting terms, what should the premium pricing be based on?
- The level of risk being transferred to the insurer
- Proper terms that define this are Risk Based Pricing, Actuarial Based Pricing, Actuarial Equity, Actuarial Fairness (All mean the same thing)
Who determines the level of risk?
- Underwriter (backbone of insurance)
- -Is the charge enough to cover losses?
What is Individual Insurance?
- A single contract between the insurer and the insured
- -e.g. homeowner's insurance, auto insurance, etc.
What is Individual Underwriting?
- A unit of observation for underwriting purposes is the individual exposure unit
- Pricing based on individual characteristics
What is Group Underwriting?
- A unit of observation for underwriting purposes is the group as a whole, not any particular individual
- No individual evidence of insurability
- Pricing is based on the level of risk of the group
How do you measure the level of risk in a group?
- Look at broad characteristics of the group
- -e.g. Healthcare, Age Distribution, Gender Mix, Industry, Occupation, Geographic Location, Past Claims Experience, and Income
For healthcare, what is meant by rating bands and what is an example of this?
- They can change different premiums in the group by putting them in categories
- -Single rate
- -Married, no children
- -Married, with children
For Life Insurance, what is meant by blended rate?
- It is the charging the same rate for all employees per unit of coverage
- -$1,000 of Face Amount = unit of coverage
- *($X per every $1,000 of Face Amount)
- -$X is same for all employees
For Life Insurance, what is meant by age bands and what is an example of this?
- Putting group into categories based on age
- -Age 36-40 - $X1 per unit of coverage
- -Age 41-45 - $X2 per unit of coverage
- -$X2 > $X1
What makes you able to be insurable for Individual Insurance?
- Based on the fact that the individual has "passed" the underwriting standards of the insurer
- -Individual Underwriting is used
What makes you able to be insurable for Group Insurance?
- Membership in the group
- No Individual Underwriting is used
What is Adverse Selection?
Allowing people into your risk pool and not charging them enough
What is the purpose of Underwriting?
Controls Adverse Selection
What should the premium cover?
Expected loss + Admin. Costs + Risk Charge
What does the expected loss represent?
Level of Risk
When does Adverse Selection exist?
When only high risks buy or when they buy in higher proportion than low risks and they are not being charged "high-risk premiums"
What type of problem comes from Adverse Selection?
- Information problem
- -Insurer either does not have the correct information to classify the risk OR cannot use observable information
What is the best tool to guard against adverse selection?
- To acquire information about the risk and charge appropriate rates
- -High risk --> High premiums
- -Low risk --> Low premiums
In what type of insurance is the "best-tool" to control adverse selection gone?
- Group Insurance
- -No individual underwriting
- -Use "second best" solution
What are the 5 Group Insurance Underwriting Principles?
- Reasons for Existence of the Group
- Stability of the Group
- Persistency of the Group
- Determination of Benefits
- Determination of Eligibility
In Group Insurance, what are the reasons for existence of the group?
- Should exist for reasons other than obtaining "underwriting-free" insurance
- Purchase of insurance should be "incidental" to the group
- "True group", not a "fictitious group"
- Controls Adverse Selection
What are some acceptable groups for Group Insurance?
- Employer-Employee based group
- Taft-Hartley Plans (Unions)
- Student Groups
- Professional Groups
- Alumni Associations
- Veterans Groups
What does it mean to be a closed group?
- No new members (entrants)
- -Avg. level of mortality increases
- -Avg. level of morbidity increases
- -Therefore, avg. level of risk increases
- Unstable level of risk
What is ideal for the stability of the group in Group Insurance?
- Steady flow of persons through the group
- -New entrants
- -Avg. level of risk remains relatively constant or stable
How/Why does the stability of a group in Group Insurance control adverse selection?
- Suppose an employer has a relatively closed group
- Overtime, costs increase
- If plan is contributory, employer will increase contribution
- Low risks may drop out or purchase individual insurance
- Adverse selection and leads to death spiral
Why is it good for the group to be persistent?
- As underwriter, long-term relationships matter
- Desirable for the employer to remain with the insurer for a number of years
- Initial acquisition expenses are amortized overtime
- Insurer gains more information
- Controls adverse selection
When determining benefits, what is the general way to go?
- For there to be little choice as to the types and levels of benefits
- -Controls adverse selection
- -Minimizes admin. costs
When determining benefits, what does it mean to have a baseline?
- No choice
- Every employee receives the same benefits
When determining benefits, what is the catch with allowing variation with types and levels of benefits?
- It is based on something beyond individual control
- Ex. Salary/Position (no control)
- -Life Insurance varies (Face Amount = multiple of salary)
- -Disability Insurance
- -Retirement Plans
When determining benefits, what is the plan discrimination issue? (Use the life insurance example)
- Face Amount = $12,000 for all employees
- -Very non-discriminatory
- Face Amount = 200% of salary for all employees
- Face Amount = 100% of salary for all non-HCEs and 200% for HCEs
- -Very discriminatory
When determining benefits, what is the adverse selection problem?
- Key decision makers are highly compensated
- Make decisions regarding plan design
- May be high risk
What does it mean to be participating in a benefits plan?
- Person is insured
- Contributions are made by an employee and employer to 401(k) plan
What are the four eligibility conditions?
- Full-time, permanent, active employees
- Probationary or waiting period
- Actively-at-work Requirements
- Pre-existing Conditions A.K.A. "Pre-X"
What is a pre-existing condition?
- Condition that existed prior to being covered by Insurer B and that a claim has been filed for
- Insurer B imposes a pre-existing condition exclusion (PCE)
- PCEs create coverage gaps
- May result in a "job lock"
- -HIPAA limits the use of PCEs in health insurance
- *ACA did away with PCEs
What are the two permissible enrollment periods?
- Open enrollment
- New hires
What are the two financing decisions?
How do you measure the size of a group?
- Large groups usually have a minimum size of 500-2,000 and a jumbo group is considered 2,000 plus
- Small groups have less than 100 lives
- -Small group markets (1, 2-10, 11-50)
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