2010 Il Life & Health Insurance Exam Unit 5

Front 1

Characteristics of Group Insurance

Back 1

• Group insurance provides coverage to many
people under one policy
• Individuals must be first members of a group
before they become eligible to purchase the
insurance
• The group sponsor, or master policyowner,
holds the insurance policy

Front 2

Group members receive a certificate of
insurance that certifies

Back 2

– The coverage
– The benefits under the policy
– The name of the covered individual or individuals
– The name of the beneficiary if applicable

Front 3

Types of Eligible Groups

Back 3

-Generally almost any kind of natural group
formed for a purpose other than to obtain
insurance will be considered by an insurer
• Insurance groups most typically fall into one of
the following categories

Front 4

Single-Employer Groups

Back 4

• Employer is the policyowner
• Employer establishes the eligible class of
employees covered
– Classification will usually include all full-time
employees
– Can also specify further (i.e. full-time, salaried,
nonunion employees)
– By classifying in this manner, employer is able to
legally exclude certain groups of employees (i.e. part
time and union)

Front 5

Multiple Employer Group (METs)

Back 5

• Several employers form a trust fund to combine
their workers for life insurance eligibility
• Policy may be issued to the trustees of a trust
group if the fund has been established by
– Two or more employers in the same or related field
– One or more labor unions or associations (known as
a Taft-Hartley trust)
• Trustees are the policyholders
• Plan must not be for the benefit of the employer

Front 6

Members of labor organizations or an
association must have certain characteristics to
be called a group

Back 6

– Have a constitution and bylaws
– Be organized and maintained in good faith for
purposes other than obtaining insurance
– Have insurance for the purpose of covering members,
employees, or the employees of members for the
benefit of persons other than the association, its
officers, or its trustees

Front 7

Creditor and Debtor Groups

Back 7

• Written to provide payment of the insured’s debt
when he dies prematurely or is disabled as a
result of accident or sickness
• Creditor is the policyowner
• Debtor is the insured
• Benefits under the credit insurance are not
permitted to exceed the amount of the
indebtedness

Front 8

Premiums

Back 8

• Group insurance policies often able to provide
coverage at a lower premium than individual
policies can
• One reason is the administrative costs involved
– Less expensive to cover a group of 50 people versus
writing 50 separate policies
• Group premiums are based on the experience of
the group as a whole

Front 9

The underwriter focuses on the group as a
whole, rather than individual members

Back 9

– All eligible participants obtain coverage
– Group insurance involves experience rating, not the
health, habits, or characteristics of individual
members
• A method of establishing a premium for the group
based on the group’s previous claims experience
• The larger and more homogeneous the group, the
closer it comes to reflecting standard mortality and
morbidity rates

Front 10

Based on the group’s risk profile, which is
measured against the insurer’s selection
standards, the group is either accepted or
rejected

Back 10

– Most commonly done on two occasions
• When a group first is taken on by an insurer
• When a group member tries to enter the plan after
initially electing not to participate

Front 11

Reason for the group’s existence

Back 11

– Purchasing group insurance must be incidental to the
group’s formation, not the reason for it

Front 12

The stability of the group

Back 12

– Underwriters want to see a group of stable workers
without an excessive amount of turnover

Front 13

The persistency of the group

Back 13

– Groups that change insurers every year do not
represent a good risk

Front 14

The method of determining benefits

Back 14

– It must be by a schedule or method that prevents
individual selection or benefits

Front 15

How eligibility is determined

Back 15

– Underwriters like to see, for example
• Sickness related probationary period

Front 16

The source of premium payments from
individual participation

Back 16

– Contributory – paid jointly, employees share a portion
of the premium
• Contributory plans require 75% participation by
eligible members
– Noncontributory – employer pays 100% of premium
• Preferred type of risk as it helps spread the risk
and reduces adverse selection
• Almost all noncontributory plans require 100%
participation by eligible members

Front 17

Underwriting Considerations

Back 17

The prior claims experience of the group
• The size and composition of the group
• The industry or business with which the group is
associated
– Hazardous industries are typified by higher-thanstandard
mortality and morbidity rates

Front 18

Adverse Selection

Back 18

• The tendency for poor risks to seek and be
covered for insurance more often than average
risks
• Underwriting process occurs to protect insurers
from adverse selection

Front 19

Adverse Underwriting Decisions

Back 19

• A risk will be rejected when the insurer believes
the applicant cannot be profitable at a
reasonable premium or with reasonable
coverage modifications
– If rejected on basis of information on an investigative
report, applicant must be notified and given name and
address of reporting company
• In health insurance, when renewal is denied the
insured must be given written explanation or be
notified that explanation available upon request

Front 20

Probationary Period

Back 20

• The specified period after beginning a job that
an individual must wait before becoming eligible
for group coverage
• 90 day period common, but can be longer or
shorter
• Helps control costs for the employer

Front 21

Eligibility Period pt 1

Back 21

• If plan is noncontributory, all individuals become
covered immediately after the probationary
period
• If plan is contributory, the employees must first
fulfill the probationary period and then must
enroll within the eligibility period to avoid medical
underwriting
– Eligibility period typically is for 30 or 31 days after the
probationary period expires

Front 22

Eligibility Period pt. 2

Back 22

If plan is contributory (continued)
– If group member does not apply during this period,
the member is generally required to prove insurability
before being eligible for coverage
• Could involve some type of medical/physical exam
– If an individual does not enroll during the eligibility
period but wants to enroll later, the individual will
generally be required to prove insurability and will be
selected on an individual basis
• Could involve some type of medical/physical exam

Front 23

Statutory Requirements

Back 23

Nondiscriminatory classifications
– An eligible group must not discriminate in favor of
individuals in a manner that increases the opportunity
for adverse selection against the insurance company

Front 24

Optional Requirements

Back 24

• Employer control
– Employer should be in charge of enrollment, premium
payment, benefit selection, and all other areas of
administration that are not an insurance company
function
– Employer’s duty to see that plan administration is
conducted in a confidential, legal, and objective
manner that precludes the individual insured’s active
participation in the business end of the insurance
administration

Front 25

Group Size

Back 25

• Most insurers require a minimum number of
employees or plan participants before a group
health insurance plan may be written
• Requirement may vary depending on state laws
(see your state law supplement)

Front 26

Predetermined Coverage Amount

Back 26

• Underwriter should determine that individual
coverage is based on some plan other than
individual selection
• Coverage must be uniform for plan participants

Front 27

Enrollment Percentage

Back 27

• Underwriter should determine that individual
participation meets the insurer’s guidelines to
prevent adverse selection (i.e. noncontributory
100%, contributory 75%)

Front 28

Insurance Incidental to the Group

Back 28

Underwriter should determine that the group has
not been formed only for the purpose of
purchasing insurance
– If group was formed only for the purpose of obtaining
insurance, the chance of adverse selection would
increase dramatically

Front 29

Eligibility

Back 29

Underwriter should first determine that the
business is one that the insurer will cover
– In regards to occupations, the higher the risk or
instability of the occupation, the higher the premium
required
– May also take geographic location into account due to
death and illness rates differing in different parts of
the country

Front 30

Composition of Group

Back 30

• Underwriter should determine that the group is
of such nature that there is a reasonably steady
flow of new members into the group
• Must also be concerned about currently disabled
employees or their dependents

Front 31

Composition of Group

Back 31

• A new insurer may establish a preexisting
condition provision in the group contract that
excludes coverage for any condition that exists
before the effective date of coverage
– This provision normally will exclude these conditions
for a period of 6 or 12 months after the effective date
of coverage
• Will generally also be a requirement that only
employees currently working at least 25 hours
per week are eligible for coverage

Front 32

Group Contract and
Certificate of Coverage pt. 1

Back 32

• Basic principle of group insurance is that it
provides insurance coverage for a number of
people under a single master contract or master
policy

Front 33

Group Contract and
Certificate of Coverage pt. 2

Back 33

• Group insurance typically provided by an
employer for its employees as a benefit
– In these cases, employer is the applicant and contract
holder
– As group members, employees are not parties to the
contract
– Each eligible employee fills out an enrollment card
and is given a certificate of insurance
– Certificate summarizes the coverage terms and
explains employees’ rights under the contract
– List of individual employees covered under the
contract is maintained by the insurer

Front 34

Funding of Group Insurance pt. 1

Back 34

• Several mechanisms for funding group
insurance have been developed
• Alternative funding allows employers to absorb
some of the risk and save premium dollars while
increasing cash flow
– A shared funding arrangement allows employer to
self-fund health care expenses up to a certain limit
• Employer selects a deductible
• Pays covered expenses for any individual incurring
claims up to that maximum
• At that point, insurer assumes the risk

Front 35

Funding of Group Insurance pt. 2

Back 35

• Alternative funding (continued)
– Under a retrospective premium arrangement
• Insurer agrees to collect a provisional premium
but, based on the actual incurred losses, may at
the end of the year
– Collect additional premium, or
–Make a premium refund

Front 36

Funding of Group Insurance pt. 3

Back 36

• Alternative funding (continued)
– A minimum premium plan occurs when the employer
agrees to fund expected claims and the insurer funds
excess claims
• Employer and insurer agree to a trigger beyond
which the insurer is liable
• A large employer may elect to fully self-fund or
may self-fund a plan contract for administrative
services only (ASO)