Gi Ch. 23 Underwriting Small Groups

Front 1

THE SMALL GROUP MARKET
Typical Small Group Plans

Back 1

Medical
 Many small employers cannot afford HI
 High ee contributions and cost-sharing
 Key employees only, sometimes.

Life Insurance
 Small face amounts; packaged

Disability
 STD is rare; LTD more common.

Front 2

Why Antiselection Is High in Small Groups

Back 2

 Er has first-hand knowledge of the ees’ health
 Cost pressures  Er only buys insurance when it’s needed
 Guaranteed Issue regulations
HIPAA Requirements for Insurers of Small Groups:
 Guaranteed issue; Guaranteed renewal
 Cannot reject any employee because of his health
 Must offer all plans
 Required pregnancy coverage
 Portability
State Laws
 States limit premium variation by demographics

Front 3

Distribution Sources – Sales and Marketing to Small Groups

Back 3

 Noncaptive agents, except for larger groups
 Internet sales becoming common (UW still manual)

Commissions
 Level, or first-year higher
 Vary by group size
 Should encourage “field underwriting”

The Small Group Competitive Environment
Winners: National carriers; BCBS’s; HMOs
Losers: Mid-size and Small carriers

Summary: Recommendations and Difficulties for Insurers in the Small Group Market
A small group insurance carrier needs to understand:
 The competition
 Market volatility; changing regulations
 Plan designs that maximize cost control
 Regulations
 HIPAA
 Differing state laws
 Compliance-related expenses

Front 4

UNDERWRITING FACTORS

Back 4

Evaluate: 1) The individual ees; 2) The employer entity as a whole.

 (A) ge and (S) ex
 States limit allowable rating spread  causes demographic risk to insurer
 Young ees subsidize old; males subsidize females
 (H) ealth of ees
 Critical in small group underwriting.
 Ees underwritten individually by: “Short-form”, “long-form”, or medical exam
 UW information includes: APS; drug info; blood tests.
Note: APS = Attending Physician’s Statement

Considerations in health status underwriting for small groups:
 Admin. expensive; must weigh costs vs. possible savings in claims
 Amount of risk transferred to providers:
 Capitated providers  less UW required, but:
 Consider provider’s risk tolerance.

 (F) amily Size
 2, 3, or 4-tier structure
 Family rates computed exactly, or using assumed age/sex distributions
 Cheaper/easier, but riskier.
 (I) ndustry
 Cannot reject a group based on industry
 Premium adjustment limited by law
 (L) ocation — compensate for:
 Claim cost variation
 Provider contract variations
 Marketing expenses

 (E) Environment; Smoking


 (O) ffsets vs. Workers Comp or Medicare

 (A) ntiselection controls
 Minimum Participation req.
 Min Contribution req.
 Consumer-driven defined-contribution plans have lower claim costs.

 Pre-existing condition limitations
Difficulties:
 Portability laws prevent its use
 Laws vary for new entrants vs. late entrants.

 Eligibility Rules
 Waiting period of 1-3 months
 Full-time, actively-at-work requirement
 Dependents < 19 only
 Optional benefits electable only at issue.

 (F) eatures of the product
 Plan richness; managed care savings
 Cannot vary rates based on assumed antiselection

 (F) inancial Viability and Carrier Persistence
 Will not recoup acquisition cost if company fails or switches.

 (Z) siZe of group
Larger  safer and cheaper, b/c:
 Risk is spread over more ees
 Admin costs lower
 Antiselection lower
Note: Verify group’s size to see if HIPAA applies


 (P) Prior Experience / Past claims
 Why is group seeking coverage now?

Difficulties:
 Small groups’ past claims are not credible

 (O) verstaffed companies / Companies with high turnover
 Higher admin cost/difficulty
 Higher antiselection

 (T) ype of Group (Single-er or MET)

Front 5

HOW THE UNDERWRITING FACTORS ARE USED

Back 5

 Insurers must keep a rate manual, which:
 Lists loading factors for Age, Sex, Family composition, Industry, Location, Features of the product, and Group size. (A, S, F, I, L, F, and Z)
 Complies with state laws (may have more than one rate manual)
 Is certified by an actuary

 Premium charged =
 New business premium  usually low, for competitivity
times
 Manual age, sex, industry, etc. factors
times
 Adjustments for health, prior claim cost, duration

Front 6

RENEWAL RATING STRUCTURES – DURATIONAL AND TIERED RATING
Claim costs increase steeply after the first year, because:

Back 6

 Underwriting wears off
 Pre-existing exclusions expire
 Calendar-year deductible was applied in first year

Front 7

Durational Rating

Back 7

 Charging a group more every year regardless of claims
 Forbidden in most states.

Front 8

Tiered Rating (also called Band Rating or Formula-Based Rating)

Back 8

 Create several loss ratio bands; each gets its own rate increase
 States limit the allowable rate increase.

Front 9

Difficulties with Tiered Rating

Back 9

 Small group experience is not credible
 May overcharge a healthy group (uncompetitive) or undercharge a sick one

Front 10

Solutions

Back 10

 Pool large claims
 Examine causes of the claims (expensive)
 Use risk predictor software.

Front 11

STATE RISK-POOLING PROGRAMS

Back 11

 Reinsurance Programs
 Risk-Adjustment Programs

Goals:
 Limit risk from Guaranteed Issue and pricing restrictions
 Limit catastrophic claim risk
 Spread risk among insurers




Done.