Group Ins. - Underwriting Small Groups

Front 1

Typical Small Group Plans

Back 1

Most small employers cannot afford the costs of full employee benefit programs. Medical insurance is considered more important than life or disability.
Medical
 Many small employers cannot afford medical plans for their employees.
 Those that do require high ee contributions and high cost-sharing (deductibles).
 Often, only key employees are covered.

Life Insurance
 Usually small face amounts, packaged with the medical plan.

Disability
 STD is rare for small groups, unless required by state law. LTD more common.

Front 2

Why Antiselection Is High in Small Groups

Back 2

 Small employers have first-hand knowledge of the health status of their ees (so they can choose the right time to buy insurance)
 Cost pressures force small employers to only buy insurance when they really need it.
 Laws require insurers to accept all groups, and prevent them from adjusting premiums to match the riskiness of the insureds.

HIPAA Requirements for Insurers of Small Groups:
 Must offer guaranteed issue and guaranteed renewal.
 Cannot reject any individual employee because of his health
 Must offer all plans to the group
 Required pregnancy coverage (pregnancy cannot be excluded as a pre-existing condition)
 Portability: Employees switching from another carrier do not need to satisfy a new pre-existing condition waiting period.
State Laws
 State laws limit the differences in premiums that can be charged to groups with similar demographics.

Front 3

Distribution Sources – Sales and Marketing to Small Groups

Back 3

 Small group insurance is distributed mainly through noncaptive agents and brokers.
 Carriers marketing to larger small groups may use captive agents or group representatives
 Internet sales becoming common
 But underwriting still needs to be done manually

Front 4

Commissions-INFO

Back 4

 Are level, sometimes with higher first-year rate
 Vary by group size
 Should encourage “field underwriting”
It’s important for the agent to market to groups that he/she feels will be good clients, because once a group decides to buy insurance, HIPAA forbids the insurer from rejecting it or adequately adjusting premiums to reflect its risk.
But, agents must still comply with fair marketing laws.

Front 5

The Competitive Environment
WINNER, LOSER

Back 5

Winners in the small group market
 National carriers and regional BCBS’s (due to market share and ability to negotiate lower costs with providers)
 Local HMO’s (increasingly common in the small group market)

Losers
 Mid-size and Small carriers (cannot compete economically; exiting the small group market)

Front 6

Summary: Recommendations and Difficulties for Insurers in the Small Group Market

Back 6

A small group insurance carrier needs to understand:
 The competition
 The market volatility (partially due to changing regulations)
 Plan designs that maximize cost control
 Regulations
 HIPAA
 State laws (which vary greatly from state to state) on rating, UW, and plan design
 The expenses associated with compliance

Front 7

UNDERWRITING FACTORS

Back 7

Small group underwriting takes place on two levels:
1. Characteristics of the individuals (severely limited by state laws and HIPAA)
2. Characteristics of the employer entity as a whole.

Again, the underwriting factors are ASHFILE OAF FEZ POT, with “ASHFILE” being the characteristics of the individuals, “OAF” being miscellaneous factors, and “FEZ POT” representing characteristics of the business entity.

Front 8

 (A) ge and (S) ex

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 States limit the allowable spread between the oldest and youngest ages, and between females and males.
E.g. the premium loading factor for a 65-year-old can’t be more than 2 times that of a 20-year old. The loading factor for a female can’t be more than 2 times that of a male.
 This causes young ees to subsidize older ees (who actually cost around 6 times as much as young people), and males to subsidize females.
 The insurer is at risk if more old people or more females enter the group than expected.

Front 9

 (H) ealth

Back 9

 The health of the employees is critical in small group underwriting.
No employee can be rejected, and laws may require the insurer to charge all groups a similar premium. But knowing the health statuses of the insureds helps the insurer choose that premium.
 Ees are often underwritten individually.
 Underwriting approaches include: Short-form questionnaire; long-form questionnaire; or full medical examination.
 Sources of medical information include: Physician statements; drug usage info; blood tests.

Considerations in health status underwriting for small groups:
 It is administratively expensive; insurer must weigh the costs of doing it vs. the possible savings in claims and increase in profit.
 HMOs should consider the amount of risk transferred to providers.
 E.g. capitation puts the doctors at full financial risk, and the insurer just pays a fixed amount per member per month. Thus, an HMO with capitation contracts can use less underwriting.
 But, the HMO cannot throw too much risk at the doctors or its network relations will suffer. So some underwriting is still important.

Front 10

 (F) amily Size

Back 10

 Insurers offer two-tier, three-tier, or four-tier products
(e.g. a two-tier product includes an ee-only option and an ee+family option)
 Rates for family tiers can be computed:
(a) exactly (by finding out each dependent’s age and sex individually), or
(b) approximately (by assuming age/sex distributions for the dependents). Cheaper/easier, but introduces pricing risk.

Front 11

 (I) ndustry

Back 11

 HIPAA forbids insurers to reject a group based on industry
 Further, state laws restrict the level to which an insurer can adjust premiums.

Front 12

 (L) ocation

Back 12

Location rating factors compensate for:
 Claim cost variation by area
 Provider contracts/discounts in the area
 Marketing expenses for the area

Front 13

 (E) Environment; Smoking

Back 13

 Similar to Industry.
E.g. employees of a motorcycle company are more likely to ride motorcycles and get into an accident. Again, laws restrict industry rating.
 “Smoking” must be treated the same as health status
The rationale is that it’s so closely linked with morbidity that insurers should not be able to treat smoking separately from overall health.

Front 14

 (O) ffsets

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 The underwriter may require the employer to provide Worker’s Compensation, since WC lowers the medical costs the insurer itself must pay.
 Similarly, employees eligible for Medicare may be required to enroll in it, so that the insurer can be the secondary carrier.

Front 15

 (A) ntiselection controls

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 Minimum Participation requirements (e.g. at least 50% of ees must participate)
 Employer Contribution requirement
 The more the employer pays of the total cost, the greater the employee participation, and the less antiselection.
 Consumer-driven defined-contribution plans have lower claim costs.
Each employee has a personal medical fund to which the er contributes; it carries over from year to year. Encourages employee prudence in spending

 Pre-existing condition limitations
Difficulties:
 HIPAA’s portability rule prevents the insurer from using this on employees who already had medical insurance.
 Laws vary between new entrants vs. late entrants.

 Eligibility Rules
Strict eligibility rules help prevent antiselection. For example:
 Waiting period of 1-3 months after hire, before coverage begins
 Only full-time, actively-at-work ees covered
 Dependents must be under age 19
 Optional benefits (e.g. optional drug coverage) electable only at issue; not later.

Front 16

 (F) eatures of the product

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 Insurers are allowed to vary rates to reflect:
 Plan richness
 Managed care cost savings available in a plan.
 But they are not allowed to vary rates based on assumed antiselective choices the employees might make.
For example, when an insurer offers an HMO plan and an Indemnity plan, typically the healthy members choose the HMO and the sicker members choose the indemnity plan. But the insurer is not allowed to charge the indemnity plan higher premiums just because of this assumption. Only after actual experience is recorded can the indemnity premium be adjusted.

Front 17

 (F) inancial Viability and Carrier Persistence

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 Important because many small companies fail. The insurer may not recoup its acquisition cost.
 The underwriter may consider number of years in operation, if unable to audit the company’s financials.

Front 18

 (E) ase of administration – Not discussed.

Back 18

BLANK

Front 19

 (Z) siZe of group

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The larger the small group, the safer and cheaper, because:
 Risk is spread over more ees
 Admin costs per ee are lower
 Antiselection is lower (it’s less likely the employer bought insurance because of one sick employee)
 Note: HIPAA only applies to groups of <= 50 ees. So the underwriter should verify the group’s size!

Front 20

 (P) Prior Experience

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Try to find out:
 Why the group is seeking coverage now, or why the group is changing carriers now;
 What its claim costs were under the last policy.
Difficulties:
 Small groups’ past claims are not statistically credible
 A better approach would be to examine the causes of prior claims; but this is not financially feasible.

Front 21

 (O) verstaffed companies / Companies with high turnover

Back 21

Bad, because of
 Higher administrative cost/difficulty
 Higher antiselection

Front 22

 (T) ype of Group

Back 22

 Single employer, or multiple-employer trust (MET)

Front 23

HOW THE UNDERWRITING FACTORS ARE USED

Back 23

 Insurers must keep a rate manual. The manual must:
 List the insurer’s premium loading factors for Age, Sex, Family composition, Industry, Location, Features of the product, and Group size.
(A, S, F, I, L, F, and Z from the list above)
 Comply with state laws. (e.g. not exceed the maximum spread between highest and lowest ages; not have more than a 20% adjustment for Industry)
 Be certified by a company actuary every year

Insurers often have a different rate manual for each state, since state laws differ.

 The premium charged to a new group is:
 The standard new business premium
times
 The age, sex, industry, etc. factors from the rate manual,
times
 Adjustments for employee Health status, Prior claims experience, Duration (see below), and other factors not listed in the rate manual

Note: The “standard new business premium” is usually set low, for maximum competitivity.

Front 24

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

Back 24

 The strict underwriting wears off
 Pre-existing condition exclusions expire
 A full calendar-year deductible may have been applied to the first partial year of issue

Front 25

Two rating methods have been suggested for dealing with this inevitable inflation:

Back 25

Durational Rating
 means charging a group more and more automatically every year, without regard to its actual claims.
 Forbidden in most states.


Tiered Rating (also called Band Rating or Formula-Based Rating)
 means creating several loss ratio bands (e.g. “0-70%”, “70%-100%”, “100%-130%” and “130% or more”); and assigning the group a particular rate action for next year depending on which band it fell into this year.
 States limit the percentage by which a group’s premium can go up from one year to the next.
For example, “No group’s premium can increase by more than 20%”; or “No group’s premium can be more than 167% of the New Business Premium at any time.”

Front 26

Difficulties with Tiered Rating

Back 26

 Small group experience has little statistical credibility.
 Thus pure tiered rating often results in:
(a) Giving unnecessarily large rate increases to an (actually) healthy group, or
(b) Giving too small an increase to an (actually) very unhealthy group.
(a) results in uncompetitivity; the group may switch carriers.
(b) results in financial risk and loss of profit.

Front 27

Solutions

Back 27

 Pool large claims
That is, if one group had a large claim, raise all the groups’ premiums a little, rather than assigning a huge rate increase to just that particular group.

 Examine causes of the claims. Determine which claims will reoccur and which won’t.
 Use risk predictor software.
The computer predicts future claim costs based on diagnosis codes and drug usage information.

Front 28

STATE RISK-POOLING PROGRAMS

Back 28

Guaranteed issue requirements and pricing restrictions put insurers at financial risk.

So some states have created:
 Reinsurance Programs
 Risk-Adjustment Programs

These programs allow insurers to:
 Limit catastrophic claim liability
 Share their small-group financial risk with other insurance companies.



Done.