Chapter 4 Group Products Flashcards
Group products: definition (2)
- Group business is defined as any collection of individuals who combine to make a single proposal for uniform insurance cover.
- Usually the collected individuals will be employees in the same company and the employer will pay for premiums in part or wholly.
Give some broad characteristics of group products (5)
- Group versions are most commonly for PMI, and CI cover, but are not very common for LTCI
- Group contracts are single contracts
- this is different to individual cover contracts in that they cover a number of individuals under a single policy document
- Group products are short term, regularly reviewable products, and the business usually covers 1-2 years
- The premiums for group products depends on the number and characteristics of individuals
Give examples of different instances in which group contracts can arise (7)
- An employer takes out group cover for its employees
- employer pays the whole premium on behalf of employees
- cost is shared between employer and employee
- employer facilitates with payroll but employer pays all costs
- employer sets up a a scheme for employees
- Where group is not employment based but linked to club membership or credit cards
- Group products may also be set up by affinity groups
- group of people who share a common interest, background or goal and are linked together by being members of the same organisation.
What are they key wasy in which group products differ compared to individual contracts? (6)
Differences between group products compared to individual contracts due to
- the purpose of the product
- the underwriting and acceptance procedure
- the pricing methodology
- manner of distribution
- tax
- term
Differences between group products and individual contracts: purpose
Discuss the purpose of (offering) group health insurance contracs (9)
- they may be a legal requirement in some territories
- attract staff/retaining members: by sending positive message
- to prospective employees at recruitment stage or
- to existing employees at starve if pro1motion.
- it can act for both parties to
- promote health and
- ensure a speedy return to work following an op.
- group covers may have tax advantages over individual insurances in some territories
- may help to smooth the early retirement process
Differences between group products and individual contracts: Purpose, Flexible benefits
Give an overview of flexible benefits offered by employers on a group basis (2)
Describe the flexible benefits which may be offered under this structure (3)
Intro
- Employers may provide ‘flexible benefit schemes’ to their employees
- Employees have choice of selection from a range of alternative provisions that the employer is prepared to make, some which will require staff contribution.
- eg: benefit schemes, flex schemes, cafeteria benefits.
Benefits
- There will be a list of core benefits employeers have provided
- On top of core benefits, the individual can then purchase additional types of benefit from further options available.
- Each benefit brings its own tax considerations either in premiums contributes or on the benefits when paid.
Differences between group products and individual contracts: Purpose, Flexible benefits
Give advantages (1) and disadvantages (2) of offering flexible benefit schemes
Intro
- Employers may provide ‘flexible benefit schemes’ to their employees
- Employees have choice of selection from a range of alternative provisions that the employer is prepared to make, some which will require staff contribution.
- eg: benefit schemes, flex schemes, cafeteria benefits.
Benefits
- There will be a list of core benefits employeers have provided
- On top of core benefits, the individual can then purchase additional types of benefit from further options available.
- Each benefit brings its own tax considerations either in premiums contributes or on the benefits when paid.
Advantages/disadvantages flexible benefit schemes
- Advantage:
- give greater flexibility to match benefits to needs.
- Disadvantage:
- present insurers with problems of anti-selection
- increased administration.
Differences to individual contracts: underwriting and acceptance
Give an overview of the key factors that introduce anti-selection problems within a group context (4)
Anit-selection problem in group context
- Group arrangement is usually open enrolment to all employees/group members ie
- membership of the group implies guaranteed acceptance at least for basic level of cover…
- ….standard premium rates apply for all members selecting a particular level of cover or benefit option
- This introduces anti-selection
Differences to individual contracts: underwriting and acceptance
How might anti-selection risk be reduced/managed in the context of group insurance contracts? (6)
Measures to reduce this anti-selection risk in a group context
- Requiring minimum take up rates, if scheme is voluntary
- Strict controls on
- eligibility
- compulsory membership: ensuring/forcing employees to join scheme within 3 months of starting employment
- Underwriting may be used carefully for optional benefits (ie benefits taken in addition to core/free cover benefits; remember, the point of free cover benefits is that they are not subject to underwritng)
- Use of waiting periods and exclusions for pre-existing conditions
Differences to individual contracts: underwriting and acceptance, use of average assumptions
In addition to using underwriting to manage anti-selection, what other important role does underwriting play in relation to assumptions used for pricing (individual or group business)? (2)
What kind of view/approach does an underwriter take specifically in the context of group business? (3)
What are the important ‘caveats’ to the underwriting approach mentioned above? (2)
Use of underwriting
- The insurer underwrites to ensure that, on average, the risk represented by the lives accepted for cover matches that expected when the premium rates were calcualted/produced.
- In a group context, due to averaging/cross-subsidies, some lives in poor health may be accepted because they balance very good health within the group.
Underwriter takes a global (think “average”) view to asses expected experience of the group
- Experience of group determines premiums to charge if size sufficient to be credible
- Poor health lives in group will be balanced by good health lives within the group
- Hence, pricing/underwriting can be more relaxed
Important to note the key caveats to this ‘relaxed’ underwriting approach
- if risk pool has changed significantly, may need to reassess this view
- very important to specially consider PMI/CI claims in payment or about to be paid as these can be costly
Differences to individual contracts: underwriting and acceptance, free cover
What do we mean by free cover? (4)
Under key condition is important in order to be able to provide free cover limits on grou products? (1)
What kind of conditions might be needed for free cover to be offered for CI group business (2) and for members of a group insurance product to qualify for this ‘free cover’ (1)?
Free cover intro/definition
- “Free cover” refers to the amount of cover/level of benefits granted to group members without being underwritten on an individual basis.
- Benefits given at the ‘free cover’ level will be at standard rates…it STILL NEEDS TO BE PAID FOR (it is NOT free, literally)
- If additional benefits are sought by a member of the group,
- these can be obtained at an extra costs
- with potential underwriting being required
Important condition for free cover
- Free cover limits applies to groups large enough that no invidual life is significant in context of the overall group
Conditions to offer free cover and qualificaion criteria for members
- May be granted to CI schemes with more than a specified minimum number of members, provided that membership is compulsory, and benefits are maintained at a level specified by a formula.
- To qualify for free cover member may be required to satisfy an “actively at work” qualification.
Differences to individual contracts: underwriting and acceptance, aim of free cover
Briefly discuss the aims of free cover (8)
- Reduce the cost of underwriting to the insurer.
- Avoid inconvenience by asking clients too many people to be medically examined.
- Promotes inclusion of members
- Most companies have a free cover formula to enable most lives in most schemes to be accepted without underwriting
- The formula should be set taking into account all info available.
- Promoting greater inclusion of members helps for reasons of
- statistical credibility
- reduced anti-selection
- better being able to price the risks/predict exposure
- taking choice out of members’ hands
Group PMI: benefits
Discuss the benefits which may be provided on a group PMI contract (3)
- Benefits and exclusions are similar between group and individual products.
- Pre-existing conditions are more likely to be covered under group business compared to individual business, because we can expect a lower degree of anti-selection to be encountered in a group context
- Greater scope for customsing benefits for a larger group
How can Group PMI benefits be customised? (6)
- There is more scope to customise group PMI benefits compared to individual PMI benefits
- They can be customised by:
- choosing specific levels of
- excess or
- limits
- choose certain benefits not available on standard individual PMI products eg
- dental cover or
- prescription fees
- exclude certain benefits it may not require eg psychiatric treatment
- choosing specific levels of
Group PMI: challenges with declining risk profiles in group plans
Briefly outline what we mean by a ‘good risk profil’ in a group insurance context (2)
What might cause a good risk profile to go bad? (2)
Outline the importance of a good risk profile in the context of group PMI business, and what impact emerges when risk profile deteriorates (4)
Good risk profile
- A “good risk profile” in a group insurance context is possible where, for example, young healthy individuals subsidise older unhealthy individuals. ie we have a suitable demographic mixture of risks which offset each other.
A good risk profile may become a bad risk profile
- where industry undergoes contraction and fewer younger people are joining the industry.
- this effect is worsened if scheme is closed to new business
Importance of a good risk profile
- Group PMI where membership is restricted (eg to particular employer or industry) will be able to provide benefits adequately only if risk profile is good.
- If group risk profile becomes poor, then premiums may be inadequate.
- There’s a further risk that if premium rates are increased to remedy this situation, then healthier lives may withdraw and self insure, which exacerbates the problem if only bad risks remain.
- This can make premiums unaffordable
