In this article we will explore the reasons that motivate employers to obtain group health insurance for employees and we will look at the advantages and disadvantages of both points of view.
Group Health Insurance VS Individual Private Health Insurance
Perhaps the most significant distinguishing characteristic of group insurance is the reimbursement of group insurance for individual coverage. In the case of a group, usually no individual evidence of coverage is required, and the returns can be substantial, with few, if any, important limitations.
Group underwriting usually does not relate to the health or other insurable aspects of a particular individual. Rather, it aims to derive a group of individual lives or, more importantly, a collection of those life groups that will produce a predictable rate of mortality or morbidity. If a sufficient number of living groups are obtained, and if these groups are sufficiently homogeneous in nature, the mortality or morbidity rate will be predictable.
The point is that the group becomes the unit of guarantee, and the principles of insurance can be applied to it as well as to the individual. To ensure that the resulting group will be sufficiently homogeneous, the underwriting process in group insurance aims to control adverse selection by individuals within a group.
Therefore, in group insurance coverage, there must be certain important characteristics that are inherent in the nature of the group itself or can be applied positively to avoid serious adverse choices such as:
Incidental Insurance for the Group: Insurance must be incidental for the group; that is, group members are supposed to come together for some purpose other than to obtain insurance. For example, group insurance provided to employees of a particular employer should not be a motivating feature of group formation and existence.
Flow of People through Groups: There should be a steady flow of people through the group; that is, there must be an inflow of new young life into the group and an outflow of older and disabled living groups. With this group of employees actively working, it can be assumed that their health is average.
Automatic Benefit Determination: Group insurance coverage usually requires an automatic basis for determining the amount of benefits over the life of an individual, which is beyond the control of the employer or employee. If the amount of benefit taken is completely optional, it may be possible to vote against the insurer as those in poor health will tend to insure heavily and the healthy may tend to opt for minimum coverage.
However, as the group mechanism has evolved, insurance companies have responded to demands from the market, especially large employers, for more flexibility in the selection of benefits. This flexibility is usually expressed in the amount of optional life and health insurance that exceeds the basic coverage provided by the employer and in more health care financing options.
Also, the increasingly popular cafeteria plans allow participating employees to choose between various benefits using predefined employer fund benefits. The individual chooses, depending on the particular basic coverage required, the combination of benefits that best suits his individual needs.
Minimum Participation by Group: Another underwriting control is the requirement that substantially all eligible persons in a given group are covered by insurance. In plans where employees pay a portion of the premium (contributive), generally at least 75 percent of eligible employees must join the plan if coverage is to be effective.
In the case of non-contributive plans, 100 percent participation is required. By covering a large number of certain groups, insurance companies gain protection against an undue proportion of living below the standard. In cases where employees refuse insurance for religious reasons or other reasons that do not involve an element of selection, this rule is relaxed.
Third Party Cost Sharing: A portion of the cost of a group plan should ideally be borne by the employer or a third party, such as a trade union or trade association. The all non-contributing employer pay plan is simple, and gives the employer complete control over the plan.
This provides insurance for all eligible employees and thus, eliminates the difficulties associated with obtaining the approval of a sufficient number of employees to meet the participation requirements. Also, there is no problem in distributing costs among various employees, as in a contribution plan.
Contribution plans are usually less expensive for the employer. Therefore, with employee contributions, employers are likely to arrange for more adequate protection for employees. It can also be said that, if the employee contributes to his insurance, he will be more impressed with its value and will appreciate it more.
On the other hand, the contribution plan has a number of drawbacks. Operations are more complicated, and this sometimes increases administrative costs significantly.
Each employee must agree to contribute to his or her insurance, and as previously stated, a minimum percentage of the eligible group must agree to enter the arrangement. New employees entering the business must be informed of their insurance entitlements. If the plan is contribution-based, employees may not be entitled to insurance until they have worked with the company for a certain period of time.
If they do not agree to be covered by the plan within the 31 day period, they may be required to provide satisfactory evidence of insurability in order to qualify. Some non-contributing plans also have this trial period.
Efficient Administrative Organization: A single administrative organization must be able and willing to act on behalf of the insured group. In the usual case, this is the employer. In the case of contribution plans, there should be a fairly simple method, such as payroll deductions, by which the master policyholder can collect the premiums. An automated method is desirable for both administrative and underwriting perspectives.
A number of miscellaneous controls of underwriting significance are commonly used in group insurance plans, but the previous discussion allows an appreciation of group underwriting theory. The discussion applies to groups with a large number of employees.
However, most groups are not large. Group size is an important factor in the underwriting process. In smaller plans, more stringent underwriting practices related to the adverse share are used. This may include less liberal contract terms, simple health status questions, and in some cases, detailed individual guarantees from group members.
Group Policy: The second characteristic of group insurance is the use of a group policy (contract) held by the owner as a group policy holder and a booklet certificate or other proof of insurance summary held by program participants. The certificate provides information about the terms of the plan and the steps required to file a claim. The use of certificates and master contracts is one of the economic resources under the group approach.
The master contract is a detailed document outlining the contractual relationship between the group contract owner and the insurance company. The persons insured under the contract, usually their employees and beneficiaries, are not actually parties to the contract, although they may enforce their rights as third party beneficiaries.
The four-party relationship between employer, insurance company, employee, and dependents in a group insurance plan can create a number of interesting and unusual problems that are common only to group insurance.
Lower Cost: A third feature of group insurance is that it usually costs less to cover than that available in individual insurance. The nature of the group approach allows the use of mass distribution and mass administration methods that allow economic operations that are not available in individual insurance.
Also, because group insurance is usually not covered individually, premiums are based on the actuarial valuation of the group as a whole, so healthy individuals may be able to purchase insurance at a lower cost. Cost subsidies by the employer are an important factor in the design of group insurance plans.
Perhaps the most significant savings in group insurance marketing costs lies in the fact that group commissions absorb a much smaller proportion of total premiums than commissions for individual contracts.
The marketing system frees agents or brokers from many of the duties, responsibilities, and costs typically associated with selling or servicing individual insurance. Due to the large premiums involved in many group insurance cases, commission rates are much lower than for individual contracts and are usually lowered down as premiums increase. Some large group insurance buyers deal directly with the insurance company and the commission is omitted.
In these cases, however, fees are often paid to the consultants involved. The nature of administrative procedures allows for simplified accounting techniques. The premium collection mechanism is less involved, and the refund procedure is simplified because there is only one party to deal with such as the group policy owner.
Of course, the issuance of a large number of individual contracts was avoided and, due to the nature of group selection, the costs of medical examinations and inspection reports were minimized. Also, regulatory filings and other requirements are minimized. In the early days of group insurance, administration was simple.
That’s no longer true. Even with group term life insurance, which has no cash value, the push for expedited death benefits, assignments to viatical companies, and estate or business planning records mean that the administration of coverage may be as complex as individual policies.
Flexibility: in contrast to individual contracts which must be taken as written, larger employers usually have a choice in the design and preparation of group insurance contracts. Although contracts follow a pattern and include certain standard terms, there is more flexibility here than in the case of individual contracts. The degree of flexibility allowed is, of course, a function of the size of the group involved.
Group insurance plans are usually an integral part of an employee benefit plan and, in most cases, contracts can be formed to meet the contract owner’s objectives, as long as the request does not require complicated administrative procedures, pave the way for potentially serious adverse selection, or violate legal requirements.
Experience Rating: Another special feature of group insurance is that premiums are often subject to experience ratings. The experience of individual groups may have an important influence on dividend or premium rate adjustments. The larger and, accordingly, the more reliable the experience of a particular group, the greater the weight attached to its own experience in one year.
Knowledge that premiums after deducting dividends or adjustments to premium rates will be based on the employer’s own experience gives the employer an interest in maintaining a favorable record of losses and expenses. For the largest employers, the insurance company may agree to complex procedures to meet the employer’s objectives because most cases are judged on experience and reflect increased costs.
Some insurance companies rate by class or type of industry, or even by type of contract. For small groups, most insurance companies use a combined rate where a uniform rate is applied to all of the group, although it is becoming more common to apply separate combined rates for groups with significantly better or worse experience than the total class.
The point at which a group is large enough to qualify for an experience assessment varies from company to company, based on the insurance company’s business book and experience. The size and frequency of medical claims vary widely between countries and between geographic areas within a country and should be considered in determining group insurance rates.
The composition (age, gender and income level) of a group will also affect the experience of that group and, likewise, will be an important underwriting consideration.
Advantages and Limitations of the Group Mechanism.
Advantages: Group insurance mechanisms have proven to be a very effective solution to employee benefit needs for a number of reasons. The use of mass distribution techniques has extended coverage to a large number of people with little or no life or health insurance.
The increasing complexity of the service industry economy has brought together large numbers of people, and group mechanisms have allowed insurance companies to reach large numbers of individuals in a relatively short period of time and at low cost.
Group insurance has also extended coverage to a large number of people who cannot be insured. Equally important is the fact that employers usually pay most of the costs. In addition, in most countries, including the United States, reduced employer contributions and favorable tax treatment of employee benefits make them a tax effective means of providing benefits.
Another important factor, and one of the stronger motivations for the rapid development of group insurance, is the continued role of government in the area of security benefits. In the United States, Old-Age.
The Survivors, Disability, and Health Insurance programs have grown rapidly, but many observers believe that, if group insurance did not provide a large number of life insurance, health insurance, and retirement protection, social insurance would grow even more rapidly. As economies around the world continue to reduce the size and coverage of social insurance programs, we can expect the demand for group-based security to increase.
Disadvantages: From an employee point of view, group insurance has one major limitation – the temporary nature of coverage. Unless an employee changes his or her coverage to an individual policy which is usually expensive and provides less coverage, the employee loses his or her insurance coverage if the group plan is terminated and often upon retirement as employment is terminated.
Group life and health protection resume after retirement in a significant proportion of cases today in the United States, but often at a reduced rate.
Recently, with the introduction of a new US accounting standard (FAS 106) requiring that the cost of such benefits be recognized and reflected in financial statements, more and more employers are phasing out post-retirement life and health benefits entirely. When such extended coverage is not available, the temporary nature of the coverage is a serious limitation.
Retiree group health insurance is often provided as a supplement to Medicare. Another potentially significant problem involves individuals who may be lulled into complacency by having large amounts of group insurance during their working years. Many of these people fail to recognize the need for, or are unwilling to face the costs of, individual insurance.
Perhaps even more important is the fact that the flexibility of the group approach is limited to the master policy design and does not extend to the individual covered employees. Furthermore, group plans usually fail to provide a mechanism for any individual financial needs analysis which is a service typically provided by agents or other advisors.
Many agents, however, discuss group insurance coverage with individuals as a basis for discussing the need for additional amounts of individual life and health insurance.
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