Group Insurance Underwriting Principles Study Notes

Group Insurance Underwriting Principles

First Principle: Care for Existing Group

  • Existence: The group should exist for reasons beyond just providing insurance.

    • The insurance component must be "incidental" to the group.

    • True groups are not fictitious but naturally occurring.

  • Adverse Selection: Control adverse selection by ensuring the group is accepted relatively easily without risky individuals dominating.

    • Examples of Acceptable Groups:

    • Alumni associations

    • Professional and trade associations

    • Student groups

    • Veterans groups

    • Affinity groups such as shared interests or characteristics.

Second Principle: Stability of the Group

  • Concept of Stability:

    • Ideally, the group should be closed, meaning no new entrants enter over time.

    • This stability leads to an increase in both average mortality and morbidity rates as the group ages.

  • Natural Aging Impact:

    • As the average age increases, the average level of risk also tends to increase.

  • How Stability Affects Risk:

    • New entrants are crucial to maintaining a stable average risk level.

    • An ideal situation includes a steady flow of members joining the group over time, ensuring the average level of risk remains constant.

  • Failure of Stability:

    • Without new entrants, higher-risk individuals may dominate, leading to increasing costs and adverse selection defined as a "Death Spiral."

    • Reference to Affordable Care Act (ACA) and grandfathered plans to illustrate closed plan examples.

Third Principle: Persistency of the Group

  • Long-Term Relationships:

    • Insurers value persistency, meaning groups ideally remain with the insurer for several years to recoup acquisition costs.

  • Reduced Administrative Costs:

    • Persisting groups allow insurers to gather more information, control adverse selection, and share the costs more effectively over time.

Fourth Principle: Determination of Benefits

  • Choice and Control:

    • There should be minimal choice available concerning the type or level of benefits provided.

    • Aiming to control adverse selection and lower administrative costs for employers, a "one size fits all" model is stated.

  • Benefit Variability:

    • While basic benefits might be uniform, variations can arise based on objective factors like salary or position.

    • Types of insurance include Life Insurance and Disability Insurance with a focus on making the plans equitable.

    • Example of Face Amount (FA):

    • FA = multiple of salary; e.g., 10FA = $10,000 for all employees.

    • DFA = 200% of salary for all employees.

    • OFA = 100% of salary for non-highly compensated employees (NHCEs) and 200% for highly compensated employees (HCEs).

Fifth Principle: Determination of Eligibility

  • Eligibility Rules:

    • Each benefit must outline eligibility rules that need affirmation from potential participants (Employees, EEs) before they can enroll.

  • Employment Status as the Initial Rule:

    • Benefits typically limited to full-time, permanent employees to mitigate adverse selection, as part-time or seasonal employees often show higher turnover rates, leading to increased administrative costs.

  • Probationary or Waiting Period:

    • Minimum period new hires must wait before eligibility could be set at various durations like 30 days, 60 days, or longer.

    • Waiting Periods:

    • Shorter periods encourage immediate coverage needs for health, life, and disability benefits.

    • Longer waiting periods could benefit capital accumulation plans while minimizing administrative costs associated with high turnover rates among new hires.

  • Balancing Gaps and Control:

    • Short waiting periods prevent coverage gaps but may increase risk, while longer periods may foster stability but create initial coverage voids.