Transcript Economics of Life and Health Insurance

Group Insurance
Richard MacMinn
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Saturday, July 18, 2015
Copyright MacMinn.org
Objectives
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Consider the circumstances that generated
employee benefit plans
Explain how group and individual
underwriting differ
Describe the advantages of group over
individual insurance
Review the coverage and the specification of
benefits for group life insurance
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Employee benefit plans
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Definition
Rationale
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Deferred income
Labor market
competition
U.S. benefit plans
International benefit
plans
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Multinational pooling
All forms of compensation
other than salary and
retirement
bonuses45.00%
may be
40.00%employee
considered
insurance
Deferring life
income
till
35.00%
benefits.30.00% Competition
retirement
allows the
in labor medical
markets
insurance
employee
toinclusion
avoid
25.00% may also motivate
the
unemployment
20.00%
taxes
on that
income
employee
benefits.
compensation
Since15.00%
1975of
benefits
have
until
then.retirement
10.00%
grown
fromBenefits
30% to over
41%
may
help
insavings
hiring,
5.00%
of the0.00%
payroll.
paid and
rest periods
increasing productivity,
1994
1995
1996
reducing
turnover;
each
maysick
vacations,
leave
increase profit.
misc
This does have implications for
international trade.
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Group insurance fundamentals
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The notion of group insurance Group insurance is a
Distinguishing characteristics contract through which a
group of persons are
These are provided insurance
Underwriting
1. Group rather
than with a single
coverage
Policy
individualcontract.
underwriting
The notion of a
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Cost
Flexibility
Experience rating
Costs and benefits
2.
3.
4.
5.
Use of agroup
master
is contract
changing.
Lower administrative
expense
Flexibility in contract
design
Use of experience rating
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Group underwriting
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Group underwriting replaces individual underwriting and the
former requires no proof of insurability; benefits are not subject
to limitations
Adverse selection must be controlled to ensure homogeneity of
risks in the group
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A group must display the following features to provide some
assurance that the adverse selection problem is controlled.
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Insurance incidental to the group
Flow of persons through the group
Automatic determination of benefits
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Cafeteria plans
Minimum participation in the group
Third party cost sharing
Efficient administrative organization
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Group policy
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The group policy, equivalently, contract is
held by the owner as group policyholder and
summary evidence of insurance is held by
participants
The contracts have the following
characteristics:
Theexperience
premiums are
based
the
The
rating
is a on
premium
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Lower cost
Flexibility
Experience rating
actuarial assessment
of the
adjustment
process based
ongroup;
the actuarial
healthy individuals
may be
able
to the
experience
of the group.
The
larger
buy insurance
group
the more cheaper.
weight is attached to its
Subsidization
employer
a larger
own
experiencebyinthe
a single
year.is The
critical factor
in have
the construction
of
employers
then
a vested interest
in
the group policy.
maintaining
favorable loss and expense
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records.
Benefits and costs of the group
mechanism
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Benefits
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Costs
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It is an effective mass distribution method that extends
coverage of life and health insurance
It provides coverage to otherwise uninsurable individuals
It is often subsidized by the employer
It receives favorable tax treatment
The coverage is temporary (also see COBRA)
Retiree group health insurance may only be provided as a
supplement to Medicare
The transition to individual life and health provides less
flexibility at generally greater cost
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Group life insurance
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Nature of coverage
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Minimum size
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Greater than 50
Individual eligibility
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Today some
states permit
groups with
ten or even
fewer.
Often only regular active full time employees
Probationary period This
The
probationary
may
be limited
may
be one to
to period
31 days
to limit
Eligibility period
six months
and is
adverse
selection.
– Coverage duration
designed to minimize
administrative
 Continues for the duration
of employment or longer
expenses.
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Group life insurance
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Benefits
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Benefit amounts determined:
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Conversion does not require proof of insurability
Waiver of premium benefits
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Most plans based on
compensation use a multiple
times earnings, e.g., two
times salary.
Minimum and maximum amounts
Conversion privilege
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Fixed amount
Amount of compensation
Position
Service
This disability provision allows continuous coverage as long as
disability is periodically proved
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Group life plans
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Yearly renewable term (YRT)
Supplemental lifeThe premia on these yearly renewable
group term policies are determined in
Credit life
the same was that we have calculated
previously. In some cases the employer
Accelerated death
benefit
pays
the entire premium while in others
the employee pays a level amount; in
either case the employer’s expense
increase with the age of the group. See
table 18-2 for the group calculation.
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Questions
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How have labor market, business conditions
and the federal tax treatment helped
employee benefit plans?
How can group underwriting diminish
adverse selection? What features do
insurers look for in a group to achieve this
benefit?
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