t6 p2 notes
Key Principles of Group Insurance Underwriting
Existence of the Group (First Principle)
The group should exist for reasons other than obtaining insurance (e.g., social or professional ties).
Purchase of insurance must be incidental to the group's existence to prevent adverse selection.
Stability of the Group (Second Principle)
Groups should ideally be closed to new entrants to maintain average risk levels.
Over time, mortality and morbidity rates will likely increase if no new, healthier members join.
Insurers manage these risks by creating policies that address group dynamics.
Benefit Determination (Fourth Principle)
There should be limited choice regarding the level of benefits for employees to control adverse selection.
Minimizing administrative costs is also a key goal for employers.
Standardization of Benefits:
A more standardized approach involves offering similar benefits to all employees, mitigating potential areas of risk and bias.
Variations may be allowed based on factors beyond individual control, such as salary or job position.
Determination of Eligibility (Fifth Principle)
Every benefit offered by a firm must have eligibility rules or standards that must be ratified before participation.
Participation Defined:
An individual participates in a health care plan if they are insured.
An individual participates in a 401(k) plan if contributions can be made by the employee and/or employer.
Eligibility Rules for Benefits Participation
Employment Status (First Eligibility Rule)
Benefits are usually limited to full-time, permanent employees to control adverse selection risk.
Reasoning: Part-time employees typically have higher turnover rates which can lead to increased administrative costs and instability in risk calculations.
Probationary or Waiting Period (Second Eligibility Rule)
This is a minimum period of time a newly hired employee must wait before becoming eligible to participate in benefits programs (commonly ranges from 30 to 90 days).
Shorter Waiting Periods:
Typically applied for health, life, and disability benefits.
Longer Waiting Periods:
Common for retirement plans and capital accumulation plans, as they favor longer service EEs and control administrative costs related to turnover.
Coverage Gaps:
Waiting periods can create coverage gaps for newly hired employees, which could lead to adverse selection if employees postpone necessary care.
Actively at Work Requirement (Third Eligibility Rule)
An Employee (EE) must be 'actively at work' to be eligible for benefits.
Example:
An employer has a one-month waiting period for healthcare coverage.
It is better to state that on the 31st day, an employee must be actively at work.
This requirement ensures that the employee is engaged and able to fulfill their job responsibilities, thereby reducing risk for the insurer.
Implication: Ensures that only EEs who are actually working are covered, thereby controlling insurer risk and costs.
Open Enrollment Periods (Fifth Eligibility Requirement)
There are typically two permissible enrollment periods:
Open Enrollment:
During this period, all employees can enroll without evidence of insurability (EOI).
Coverage is guaranteed for those who enroll.
New Hire Enrollment:
Specific to individual employees who are newly hired.
Challenges During Open Enrollment:
If an employee declines coverage during open enrollment and later wishes to enroll, they may be considered a “late entrant,” which can raise adverse selection concerns.
The insurer may require the employee to provide evidence of insurability before enrolling, thereby controlling adverse selection risks.
Importance of Stability in Group Underwriting
Steady Flow of Entrants:
Ideally, the group should have a stable influx of new entrants to maintain a consistent level of risk.
Stable groups are better for insurers as they can predict costs and risks accurately.
Adverse Selection Risk:
In a relatively closed group, adverse selection can increase over time, leading to a higher average level of risk.
Individuals with lower health risks may leave the group, causing costs to increase.
Long-term Relationships:
Insurers value long-term relationships with employers to manage acquisition costs effectively.
It is desirable for the employer to remain with the insurer for several years, allowing initial acquisition expenses to be amortized.
Pre-existing Conditions
Type of Individual Underwriting - Pre-existing Conditions
Pre-existing Condition (Pre-X) - refers to a health issue that existed prior to the employee being covered by the insurance policy.
Example:
Insurer A provides coverage for an individual with a pre-existing condition.
Insurer B offers coverage for the same prior condition.
Adverse Selection Concerns:
Insurer B may impose pre-existing condition exclusions (PCEs) as a measure to manage the risk of covering higher-risk individuals.
Insurer B might provide some type of limitation in coverage for that particular condition, impacting access to necessary care for the insured individual.
Problems with Pre-existing Condition Exclusions (PCEs)
Coverage Gaps and Job Lock:
PCEs can create coverage gaps leading to situations called “job lock,” where employees may feel unable to leave their job due to fear of losing health insurance coverage.
Regulatory Impacts:
HIPAA limits coverage restrictions related to PCEs.
The Affordable Care Act (ACA) eliminated PCEs for individual and small group markets.
Face Amount in Insurance
Face Amount (FA):
Examples:
FA= for all employees (non-discriminatory).
FA = of salary for all employees (non-discriminatory).
FA = of salary for non-highly compensated employees (NHCEs) and for highly compensated employees (HCEs) (discriminatory).
Adverse Selection Problems:
Decision makers in businesses may face challenges related to adverse selection when high-risk individuals are in key decision-making roles affecting coverage designs.