In this article we will analyze the reasons that motivate employers to get group health insurance for employees and we will look at the advantages and disadvantages from both points of view.
Group Health Insurance VS Individual Private Health Insurance
Probably the most meaningful distinguishing characteristic of group insurance is the substitution of group underwriting for individual underwriting. In group situations, no individual evidence of insurability is usually required, and assistance levels can be substantial, with few, if any, important limitations.
Group underwriting typically is not concerned with the health or other insurability aspects of any particular individual. Instead, it aims to acquire a group of individual lives or, what is already more important, an aggregation of such groups of lives that will provide a predictable rate of mortality or morbidity. If a sufficient number of groups of lives is obtained, and if these groups are reasonably homogeneous in character, then the mortality or morbidity rate will be predictable. The point is that the group becomes the unit of underwriting, and insurance principles may be applied to it just as in the case of the individual. To assure that the groups obtained will be reasonably homogeneous, the underwriting course of action in group insurance aims to control negative selection by individuals within a group.
In underwriting group insurance, then, certain important features should be present that either are inherent in the character of the group itself or may be applied in a positive way to avoid serious negative selection such as:
Insurance minor point to the Group: The insurance should be minor point to the group; that is, the members of the group should have come together for some purpose other than to acquire insurance. For example, the group insurance furnished to the employees of a given employer must not be the characterize that motivates the formation and existence of the group.
Flow of Persons by the Group: There should be a steady flow of persons by the group; that is, there must be an arrival of new young lives into the group and an out flow from the group of the older and impaired lives. With groups of actively working employees, it may be assumed that they are in average health.
Automatic Determination of Benefits: Group insurance underwriting commonly requires an automatic basis for calculating the amount of benefits on individual lives, which is beyond the control of the employer or employees. If the amount of benefits taken were completely optional, it would be possible to select against the insurer because those in poor health would tend to insure heavily and the healthy ones might tend to elect minimum coverage.
As the group mechanism has evolved, however, insurers have responded to demands from the marketplace, particularly large employers, for more flexibility in the selection of benefits. This flexibility typically is expressed in optional amounts of life and health insurance in excess of basic coverage provided by the employer and in more health care financing choices. Also, increasingly popular cafeteria plans allow participating employees to select among an range of benefits using a predetermined allowance of employer funds. Individuals select, unprotected to certain basic coverage’s being required, a combination of benefits that best meet his or her individual needs.
Minimum Participation by the Group: Another underwriting control is the requirement that significantly all eligible persons in a given group be covered by insurance. In plans in which the employee pays a portion of the premium (contributory), generally at the minimum 75 percent of the eligible employees must join the plan if coverage is to be effective. In the case of noncontributory plans, 100 percent participation is required. By covering a large proportion of a given group, the insurance company gains a safeguard against an undue proportion of substandard lives. In situations in which employees refuse the insurance for religious or other reasons that do not include any elements of selection, this rule is relaxed.
Third Party Sharing of Cost: A portion of the cost of a group plan ideally should be borne by the employer or some third party, such as a labor union or trade association. The noncontributory employer-pay-all plan is simple, and it gives the employer complete control over the plan. It provides for insurance of all eligible employees and consequently, eliminates any difficulties involved in connection with obtaining the consent of a sufficient number of employees to meet participation requirements. Also, there is no problem of distributing the cost among various employees, as in the contributory plan.
Contributory plans usually are less costly to the employer. Hence, with employee contributions, the employer is likely to position for more adequate protection for the employees. It can also be argued that, if the employee contributes toward his or her insurance, he or she will be more impressed with its value and will appreciate it more. however, the contributory plan has a number of disadvantages. Its operation is more complicated, and this at times, increases administrative cost considerably.
Each employee must consent to contribute toward his or her insurance, and as stated before, a minimum percentage of the eligible group must consent to go into the arrangement. New employees entering the business must be informed of their insurance privilege. If the plan is contributory, employees may not be entitled to the insurance until they have been with the company for a period of time. If they do not agree to be covered by the plan within a period of 31 days, they may be required to provide satisfactory evidence of insurability to become eligible. Some noncontributory plans also have these probationary periods.
Efficient Administrative Organization: A single administrative organization should be able and willing to act on behalf of the insured group. In the usual case, this is the employer. In the case of a contributory plan, there must be a reasonably simple method, such as payroll deduction, by which the master policy owner can collect premiums. An automatic method is desirable for both an administrative and underwriting perspective. A number of miscellaneous controls of underwriting significance are typically used in group insurance plans, but the preceding discussion permits an appreciation of the group underwriting underwriting theory. The discussion applies to groups with a large number of employees.
A majority of the groups, however, are not large. The group size is a meaningful factor in the underwriting course of action. In smaller plans, more restrictive underwriting practices relating to negative section are used. These may include less liberal contract provisions, simple health position questions, and in some situations, detailed individual underwriting of group members.
Group Policy: A second characteristic of group insurance is the use of a group policy (contract) held by the owner as group policyholder and booklet-certificates or other summary evidence of insurance held by plan participants. Certificates provide information on the plan provisions and the steps required to file claims. The use of certificates and a master contract consists of one of the supplies of economy under the group approach. The master contract is a detailed document setting forth the contractual relationship between the group contract owner and the insurance company. The insured persons under the contract, usually employees and their beneficiaries, are not truly parties to the contract, although they may enforce their rights as third party beneficiaries. The four party relationship between the employer, insurer, employee, and dependents in a group insurance plan can create a number of interesting and uncommon problems that are shared only to group insurance.
Lower Cost: A third characterize of group insurance is that it is usually lower-cost protection than that which is obtainable in individual insurance. The character of the group approach permits the use of mass dispensing and mass administration methods that provide economies of operation not obtainable in individual insurance. Also, because group insurance is not usually underwritten on an individual basis, the premiums are based upon an actuarial assessment of the group as a whole, so a given healthy individual can perhaps buy insurance at a lower cost. Employer subsidization of the cost is a basic factor in group insurance plan design. Probably the most meaningful savings in the cost of marketing group insurance lies in the fact that group commissions absorb a much smaller proportion of total premiums than commission for individual contracts.
The marketing system relieves the agent or broker of many duties, responsibilities, and expenses typically associated with selling or servicing of individual insurance. Because of the large premiums involved in many group insurance situations, the commission rates are considerably lower than for individual contracts and are usually graded downward as the premium increases. Some large group insurance buyer’s deal directly with insurance companies and commissions are deleted. In these situations, however, fees frequently are paid to the consultants involved. The character of the administrative procedures permits simplified accounting techniques. The mechanics of premium collection are less involved, and experience refund procedures much simplified because there id only one party with whom to deal with such as the group policy owner.
Of course, the issuance of a large number of individual contracts is avoided and, because of the character of group selection, the cost of medical examinations and inspection reports is reduced. Also, regulatory filings and other requirements are reduced. In the early days of group insurance, administration was simple. That is no longer true. already with group term life insurance, for which there is no cash value, the push for accelerated death benefits, assignment to viatical companies, and estate or business planning record keeping method that the administration of coverage may be as complicate as with an individual policy.
Flexibility: in contrast to individual contracts that must be taken as written, the larger employer usually has options in the design and preparation of the group insurance contract. Although the contracts follow a pattern and include certain standard provisions, there is considerably more flexibility here than in the case of individual contracts. The degree of flexibility permitted is, of course, a function of the size of the group involved. The group insurance program usually is an integral part of an employee assistance program and, in most situations, the contract can be molded to meet the objectives of the contract owner, as long as the request do not require complicated administrative procedures, open the way to possibly serious negative selection, or violate legal requirements.
Experience Rating: Another special characterize of group insurance is that premiums often are unprotected to experience rating. The experience of the individual group may have an important bearing on dividends or premium-rate adjustments. The larger and, hence, the more reliable the experience of the particular group, the greater is the weight attached to its own experience in any single year. The knowledge that premiums net of dividends or premium rate adjustments will be based on the employers own experience gives the employer a vested interest in maintaining a popular loss and expense record. For the largest employers, insurers may agree to complicated procedures to satisfy the employer’s objectives because most such situations are experience rated and mirror the increased cost.
Some insurers experience rate based on the class or kind of industry, or already based on the kind of contract. For small groups, most insurance companies’ use pooled rates under which a uniform rate is applied to all such groups, although it is becoming more shared to apply separate pooled rates for groups with considerably better or worse experience than that of the total class. The point at which a group is large enough to be eligible for experience rating varies from company to company, based on that insurer’s book of business and experience. The size and frequency of medical claims vary considerably across countries and among geographic regions within a country and must be considered in calculating a group insurance rate. The composition (age, sex, and income level) of a group will also affect the experience of the group and, similarly, will be an important underwriting consideration.
Advantages and Limitations of the Group Mechanism.
Advantages: The group insurance mechanism has proved to be a remarkably effective solution to the need for employee benefits for a number of reasons. The utilization of mass-dispensing techniques has extended protection to large numbers of person s with little or no life or health insurance. The increasing complexity of industrial service economies has brought large numbers of persons together, and the group mechanism has enabled insurance companies to reach great numbers of individuals within a comparatively short period and at low cost. Group insurance also has extended protection to a large number of uninsurable persons. Equally important has been the fact that the employer usually pays a large proportion of the cost. additionally, in most countries, including the United States, the deductibility of employer contributions and the popular tax treatment of the benefits to employees make it a tax effective means with which to provide benefits.
Another meaningful factor, and one of the more cogent motivations for the rapid development of group insurance, has been the continuing governmental role in the security benefits area. Within the United States, Old-Age. Survivors, Disability, and Health Insurance programs has expanded rapidly, but many observers believe that, had not group insurance provided substantial sums of life insurance, health insurance, and retirement protection, social insurance would have developed already more rapidly. As economies worldwide continue to reduce the size and scope of social insurance programs, we can expect the need for group based security to grow already more.
Disadvantages: From the viewpoint of the employee, group insurance has one great limitation- the permanent character of the coverage. Unless an employee converts his or her coverage to an individual policy which is usually ore expensive and provides less liberal coverage, the employee loses his or her insurance protection if the group plan is terminated and often also at retirement because employment is terminated. Group life and health protection is continued after retirement in a meaningful proportion of situations today in the United States, but often at reduced levels. Recently, with the introduction of a new U.S. accounting standard (FAS 106) requiring that the cost of such benefits be accrued and reflected in financial statements, an increasing number of employers have discontinued post retirement life and health benefits thoroughly. When such continued protection is not obtainable, the permanent character of the coverage is a serious limitation.
Retiree group health insurance often is provided as a supplement to Medicare. Another problem of possible significance involves individuals who may be lulled into complacency by having large amounts of group insurance during their working years. Many of these persons fail to recognize the need for, or are unwilling to confront the cost of, individual insurance. Perhaps of already greater significance is the fact that the flexibility of the group approach is limited to the design of the master policy and does not extend to the individual covered employees. Furthermore, group plans typically fail to provide the mechanism for any examination of the financial needs of the individual which is a service that is typically furnished by the agent or other advisor. Many agents, however, discuss group insurance coverage with individuals as a foundation for discussing the need for additional amounts of individual life and health insurance.