Group Ins. - Underwriting Large Group

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Introduction

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Underwriting comes before pricing. Underwriting means evaluating an employer group or individual to see how risky it is as a policyholder, then assigning that group or individual to one of the insurer’s “risk classes”. Pricing means taking the risk classes and deciding that Class A should be charged $x per month, Class B should be charged $y per month, and Class C should be charged $z per month.

For individual insurance, the same exact insurance plan is sold to many policyholders. If you set up a collection of risk classes for this plan, such as “15-30 year old male smoker”, “15-30 year old female nonsmoker”, “30-45 year old male nonsmoker”, etc., then, for this plan, each class will have many different policyholders who fall into it.

However, insurance products for large employer groups are often tailor-made for the group. Each large employer has a specific type of flex plan that it wants (e.g. a triple-option choice of HMO, PPO, and indemnity plan) and a different type of funding method that it wants (e.g. full insurance, stop-loss insurance, or Administrative Services Only). Even if the insurance company has already developed “standard” flex plans and ASO policies, the large employer usually requests customizations to these prefabricated plans. The result is that large employer groups can rarely be lumped together and then priced, as is done for individuals. Rather, the underwriting and pricing for a large group are done in one step.

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Characteristics of the Group to consider during underwriting and pricing:

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See “General–Rating Factors” for a consolidation of this list with similar lists. This same list (“ASHFILE OAF FEZ POT”) comes up dozens of times in the syllabus.


 (A) ge and (S) ex
 The two most important risk characteristics of a group. The best indicators of future morbidity.
 (H) ealth
 Health status of individuals is rarely considered in large groups, except on large life insurance policies.
 (F) amily Size
 (I) ndustry
 Important UW factor for Disability Insurance.
 (L) ocation
 Important for HI because health costs vary greatly between rural and urban areas.

 (E) Environment; Smoking



 (O) ffsets
 Workers over 65 have Medicare coverage; this lowers insurer’s cost.
 Disabled workers may be covered by Social Security or Workers Comp.

 (A) ntiselection controls
 Minimum participation requirement (the more employees participate, the more stable the cross-section of risks to the insurer)

 (F) eatures of the product
See “Designing The Plan”, below



 (F) inancial Viability and Carrier Persistence
 Is the employer at risk of insolvency?
 Does the group have a history of switching carriers every year?
This is vital to the carrier, since the acquisition of a large group can be extremely expensive and the costs will not be recouped for a couple of years.

 (E) ase of administration
 The more homogeneous the group, the better.
 Groups with multiple worksites, a mix of union and nonunion members, or customized plans, have higher administrative costs.
 Best if the employer can provide accurate enrollment and termination data to the insurer.

 (Z) siZe of group
 Larger the size, the better economy of scale. But if the large group is very complex to administer, that can eat up the savings.

 (P) Prior Experience
See “Evaluating The Experience”, below


 (O) verstaffed companies / Companies with high Turnover
 Companies with seasonal staff levels have increased admin costs and cause difficulties with portability regulations.
 Also, the anticipation of layoffs causes a sudden flurry of disability claims and last-minute utilization.

 (T) ype of Group
 Single-employer groups are the most common and easiest to underwrite.
 Other types of groups (Multiple-Employer Trusts, Association groups, and Purchasing Alliances) pose special risks.

See “Special Risks (Special Types Of Groups)”, below.

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Designing a Large Group Insurance Plan
The insurer should design a plan that:

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 Prevents antiselection
 Controls costs

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The following safeguards help control antiselection and plan costs:

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Life Insurance
Disability Insurance
Health Insurance
Dental and Vision Plans

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Life Insurance

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Main risks:  Volatile experience;
 Elected amounts subject to antiselection.
Recommendations:
 Require high ee participation %
 Require EOI (evidence of insurability) for individuals who elect high amounts
 Mandatory reductions in face value for older employees
 Open enrollment period (lets ees change election only once a year)

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Disability Insurance

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Main risks:  Volatile, long-period claims
 Claims are subjective and ees can falsify them.
Recommendations:
 Include an elimination period
 Don’t reimburse 100% of salary (that encourages false claims)
 Use offsets (e.g. if ee is also covered by Workers Comp or Soc Sec, do not pay)
 Encourage limited-duty return to work, rehabilitation, etc.
 Don’t insure overstaffed or high-turnover groups; too many disability claims.

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Health Insurance

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Recommendations for Traditional HI
 Include deductibles and coinsurance. Limit covered services.


Recommendations for Managed Care HI
 Give ees financial incentives to:
 Use preventive care
 Use in-network doctors (lower cost to MCO)
 Prevent unnecessary specialty care, by requiring pre-authorizations.

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Dental and Vision Plans

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Main risk:  Very vulnerable to antiselection, since the services are elective.
Recommendations:
 Have minimum participation requirements.
 Encourage preventive care by providing 100% coverage; require out-of-pocket cost for major treatments.
 Package the dental/vision plan with the health plan (e.g. make it mandatory to sign up for the dental plan)

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Considerations in Using a Group’s Past Claims to Project Future Claim Costs:

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 Are the past claims statistically credible? (i.e. will future experience look the same as the past?)
 Is the data accurate and complete?
 How must I adjust the data (which occurred while the group had a different plan and carrier) to be on the same scale as our proposed plan?

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Credibility Issues

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 The smaller the group, the less credible the experience.
 The low-frequency, high-severity coverages (Life Insurance and Long-Term Disability insurance) have the lowest credibility, since they are so volatile. Health insurance has the highest credibility.

Ways to Cope with Volatile, Non-credible Data:
 Ignore the group’s experience, and just use manual rating
 Look at several years of data
 Pool large claims

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Data Accuracy Issues

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Look at the prior insurer’s public financial statements.
 Have its IBNR reserves turned out to be accurate, given the actual runout?
 Have its premiums been consistent with the exposure demographics?
 Were its claim patterns for real, or were they just due to administrative difficulty?

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Data Adjustments

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Data from the previous experience must be adjusted for:
 Trend
 Business cycles
 One-time anomalies (must remove from the experience)
 Increased antiselection, e.g. if the employer group used to have a single health plan but is looking to you to provide a choice of three concurrent health plans.

 Managed Care Plan Differences between your HMO and the previous one:
 Location of your network doctors
 Size of your network
 Expected in-network usage % (for a PPO or POS plan)
 Provider contract differences (type of contract; level of discount)
 Difficult to quantify because the prior carrier probably had secret, proprietary contracts with its doctors.
 However, the employer’s RFP (see below) usually provides past utilization and cost statistics for the employees, which can give clues as to the types of provider contracts the previous carrier used.
 Which services will fall under which of your providers’ contracts
E.g. if both you and the old carrier had one hospital reimbursed at a 20% discount, and one hospital reimbursed at a 10% discount, but in your plan the employees will use the cheaper hospital more often (due to a utilization management program, perhaps), then you can expect a drop in plan costs.
 Degree of utilization management present in your HMO (preauthorizations, case management, etc.)

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Contents of a Typical Employer’s RFP

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 Reports of its own past claim experience (utilization; cost)

 Questionnaires for the insurer:
 Its previous utilization figures by location (especially the employer’s offices’ locations)
 Its ability to manage health care costs
E.g. employer may ask what the HMO’s negotiated fee for a particular medical procedure is in such-and-such city.
 Its financial performance


 Specifications for the desired plan (often highly customized)
 Carve-out options desired
(e.g. the employer may already have a vendor in mind for certain health benefits, and just wants the insurer to cover everything else)
 Funding method desired (e.g. full insurance, stop-loss insurance, or Administrative Services Only)

 Risk-sharing desires and performance guarantees (for ASO contracts)
In an ASO contract, the employer retains all the claim cost risk, and the insurer merely handles the enrollment, claims processing, and plan design. So the insurer may not have incentive to exercise tight claims control and keep medical costs low.

Having the insurer share in claim costs (through a pre-agreed formula) gives it the desired incentive. For example, the arrangement may be “target corridor is $100 to $120 per member per month; insurer pays employer 10% of the excess claim cost above $120; employer pays insurer 10% of the surplus, should claims be lower than $100.”

Performance guarantees also ensure that the ASO vendor will provide quality service.

Performance guarantees can be based on:
 claim speed / accuracy
 employee satisfaction
 quality of care (based on ee surveys, HEDIS reports)

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A Good Response to an RFP

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The insurer must take all that has been learned about the group, plan design, and prior experience, and present a package that is financially sound and yet attractive to the employer.

The insurer’s offer should include:
 Price
 Underwriting controls it will impose
 The assumptions it used in claims projecting:
 Level of employer contributions
 Demographics
 Ee participation %
 Statement of Right to Cancel the offer (e.g. if the above claims assumptions do not hold)
 Performance Guarantees (to make the bid appealing to the employer)
 Breakdown of expense charges (e.g. claims processing cost; marketing cost; mailing costs)
 Alternate plans (if employer has asked for suggestions)

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Difficulties in Responding to an RFP

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A large group often has special characteristics unique to that group:
 Unique type of population
 Highly customized type of plan desired
 Special funding method desired

These characteristics won’t be part of the insurer’s standard rate manual; thus judgment is needed from the underwriter.

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Evaluate the Year’s Experience

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 Did enrollment rise or fall?
 Was the minimum participation requirement met?
 How much antiselection was there?
 Any catastrophic claims? (Read: are the claims we’ve seen typical?)
 What is the IBNR reserve?
 What is the claim runout pattern?

 This analysis should be split by age, sex, location, etc.

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Difficulties

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 In order to give the employer advance notice of next year’s premium rate, the insurer needs to quote it before the year of claims is complete.
As a result:
 Claims not mature yet
 IBNR reserve not confident
 Can’t tell whether large claims are “typical” or not

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Develop Renewal Recommendations

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 Tell employer the new premium rates.
 If they’re unattractive, then:
 Offer a funding method alternative (e.g. retrospective premium agreement)
 Propose plan design changes, e.g.
 increased ee cost-sharing
 tighter utilization review program
 reduced retiree health plan costs (e.g. by shifting retirees into Medicare)
 Or any of the other antiselection and cost controls from “(F)eatures of the product”, above.
This would make a good exam question.

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Proactively Develop Revisions

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 Anticipate possible changes in the group’s composition (e.g. union/nonunion employees; population changes). Develop cost estimates and plan changes in case these changes occur.

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Do Renewal Monitoring

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 Track emerging experience throughout the year (not just at year-end).
Reasons why:
 For financial reporting
 For internal control
 For cash flow planning (e.g. can predict the end-of-year risk-sharing settlement or retrospective premium settlement, and budget for it)
 To quickly identify trends and take corrective action
 To keep employer informed, so that an end-of-year rate increase is not a shock

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Most insured groups are single-employer groups. But the following groups of people can also get a group insurance contract:

SPECIAL RISKS (SPECIAL TYPES OF GROUPS)

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 Association Programs
A group made up of members of a professional organization

Risks to Underwriter:
 Low participation of individuals (sometimes only 5%)  high antiselection

 MET’s (Multiple Employer Trusts)
Several employers in the same industry jointly insuring their employees under one contract.

Risks to Underwriter:
 MEWAs (self-insuring MET’s) have a history of insolvency.

 Taft-Hartley Plans
Insurance provided by a labor union to its members (who work for all different employers).
The Taft-Hartley Act prevents employers from paying a union directly for the purchase of employee benefits. Instead, the contributions are paid to a trust fund.
Risks to Underwriter:
 Underwriter must make sure the total income from all employers is sufficient to pay for the administration and cost of benefits of all the employees.


 Purchasing Alliances
Several employers in possibly different industries join together to buy insurance under a common RFP.

 The main reasons for joining together are to get better bargaining power and to get lower prices by offering the insurer better economies of scale.
 The employers all use the same plan design, to foster teamwork and to make the insuring more attractive to the bidder. Member employers are forbidden to offer their ees any plan not purchased through the Alliance.

Risks to Underwriter:
 Alliance has strong negotiating power
 Alliance may demand that each member group get charged the same premium. This undermines the underwriter’s ability to adjust for different risks.
 The participating firms may make up a high percentage of the insurer’s clientele.

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Plan Design for These Special Types of Groups

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The insurer should require (similar to “Designing The Plan”, above)
 High or 100% er contribution
 Evidence of Insurability for large amounts of Life Insurance
 High ee participation requirements
 Preexisting condition exclusions

Done