Group Chap 29: Group Insurance Underwriting Flashcards
Introduction
Goal of large group underwriting is to help insurer achieve its strategic goals in the large case market
1. The Market
a. Often broken down into three segments
- Pooled groups (51-200 employees)
- Experience-rated groups (200-1000 employees)
- Large groups (1000 or more employees)
b. Can include single-employer plans, associations, labor unions, multiple-employer trusts, coalitions, and government plans
c. Designs are flexible and customizable
d. Emphasis of this chapter is on groups over 200 employees
2. Some Basic Principles
a. Underwriting large groups involves financial projections, based on aggregate data and historical trends, and it may also involve risk selection for certain products
b. There is inherent risk protection, as employee risk pool consists largely of healthy individuals
c. Key risk factors include demographics, industry, financial outlook, work force stability, work suite location(s), carrier persistency, and levels of participation
d. Prior loss ratio or utilization data are often considered in pricing
e. Due to larger claim sizes and lower claims frequency, life and disability require larger case sizes than medical and dental for experience rating
f. Prior experience is a major factor to predict future costs, especially in health
g. Employer and carrier share goals of wanting low claims cost, high provider quality, and satisfied
employees
3. Sales Interaction
a. Sales representative should be involved in determining best rate to be offered and qualify the prospect to gather information
4. Underwriting Cycle
a. 1960s-1990s – “underwriting cycle” – strong cycle of gains and losses, often 3 years of gains followed by 3 years of losses
- Attributed to timing lag of claims experience, lag between premium quotes and actual implementation and over-reliance on recent financial information
- Cycle moderated significantly in the 90s
b. Care must be taken not to create an underwriting cycle by increasing premiums too much in poor financial times and decreasing too much when experience better than expected
5. Provider Reimbursement
a. New technology introduces new ways providers can interact with patients
- Telemedicine – phone, email or video conference
- COVID-19 pandemic fast tracked federal, state, provide and patient implementation and use of telemedicine
b. Value based payment initiatives also affect provider delivery and reimbursement – pay for value, not volume
6. ACA Program Design Considerations
a. Plans offered by Applicable Large Employers (ALEs) must meet certain criteria:
- Offer certain classes of benefits to qualify as Minimal Essential Coverage (MEC) – eliminates skinny plans that covered only limited benefits. Must be offered to at least 95% of full time employees
- Benefit plan must meet minimum value (MV) to cover 60% of total allowed costs of expected benefits
- Employers must offer affordable coverage – can’t exceed 9.5% of employee’s income for single only coverage, 9.5% goes up with indexed increases
b. ER faces penalties if EE doesn’t receive minimum essential coverage that meets MV and affordability requirements
c. ACA imposes maximum waiting periods before benefits must be offered to new EEs. Underwriter should consider the risk shorter waiting periods creates, especially for jobs that could be sought merely for health benefits
d. Employers must consider whether it’s more beneficial to offer affordable coverage to all employees via complex subsidies varying by income range or to simply pay penalties for certain employees
e. Cadillac Tax: ACA penalties for those enrolled in rich benefit plans
- Repealed in Dec 2019 (also repealed health insurer tax and tax on medical devices)
7. Public Exchanges
a. Public exchanges were designed primarily for individuals and small employers
b. However, employees may leave their employer coverage to seek out coverage on the individual market public exchange
c. Underwriter should consider the changing demographics of groups due to the public exchange alternatives now available
d. Individual Coverage Health Reimbursement Arrangements (ICHRAs) – beginning in 2020, large ERs
can fund accounts with pre-tax funds for employees to obtain individual market coverage
▪ Substantial penalties for ERs who don’t provide affordable coverage, if at least one EE obtains tax credits on a public exchange
▪ In the past, these types of accounts were called QSEHRAs
8. Private Exchanges
a. Private exchanges have insurers offer similar benefits and allow choice between plans and insurers for employees
b. Often established by large employee benefit consulting firms or health insurance brokerages
c. Creates antiselection risk that the underwriter must consider
New Business Underwriting
Characteristics of the group
- Age and gender
- Location or area
- Type of Industry
- Financial Stability
- Ease of administration
- Level of employer satisfaction and participation
- Persistency
- Other consideration
- Plan Design
1. Age and gender
▪ Age is single best indicator of future mortality and morbidity
▪ Gender mix also impacts life and claim costs
▪ Average family size and number of retirees covered can help predict claim costs
2. Location or area
▪ There are significant regional and local differences in health practices and prices
▪ Due to level of competition from providers and cost shifting from other programs
* Urban areas may have more Medicaid cost shifting
* Rural provider with a monopoly on patients may charge more
3. Type of Industry
▪ Some industries expose employees to health hazards or high stress levels
▪ Industry can be related to age, gender, and lifestyles which can effect claims cost
▪ Some industries with unstable employment levels, low wages, or high turnover can pose substandard risk and administrative challenges
4. Financial stability
▪ Does group have history of making timely payments?
▪ Is there risk of insolvency?
▪ Downturns lead to reductions in staff
▪ Anticipation of layoffs can produce a spike in disability claims and use of medical and dental services
▪ May include caveats in quote that reserve the right to re-price if employment changes by 10% or more
5. Ease of administration
▪ Larger groups offer opportunity for higher productivity and economies of scale, but can be more complex
▪ It is the jumbo groups with highly customized services that place the greatest emphasis on administrative functions and cost
▪ Retirees require special admin cost consideration
* Coordination of benefits with Medicare complicates claim adjudication
* More claims per person and more customer service calls
6. Level of employer subsidization and Level of employee participation
▪ In the past insurers usually required employer pay a minimum portion of premium to keep cost attractive for healthier employees. 75% participation requirement was common
▪ ACA requires guarantee issue for major medical, even for large groups. Thus many insurers have added participation and contribution levels to their rating formulas
▪ Adequate plan participation has become more difficult to assess in an environment of multiple options and dual-income families
7. Persistency
▪ Installation and setup of a very large new group can be extremely expensive and competitive pricing pressures do not allow room to recoup costs
▪ Therefore, underwriters should review client’s track record of persistency with prior carriers
8. Other considerations
▪ Larger employers often opt for self-funded ASO contacts to obtain financial benefits
▪ Underwriting of large groups places little emphasis on health status of individuals
▪ HIPAA prohibits use of evidence of insurability for late entrants and requires insurers to issue a certificate of prior coverage to employees who terminate employment
▪ ACA promotes access and consumer choice with:
* Prohibitions on preexisting condition exclusions
* Restricting lifetime maximums
* Prohibiting annual maximums on essential benefits
* Require coverage to dependents to age 26
* Health insurance exchange that is guaranteed issue and without preexisting condition exclusions
▪ Interest in self-funding has grown among small employers (due to small group rating requirements under ACA)
▪ Level funding products designed for better cash flow planning and limiting self funding risks – appeal to small and mid sized employers with healthy risk mix, younger age enrollees in states with restrictive age rating, and states where small group definition is 100 employees rather than 50
9. Plan Design
▪ Trend has been to offer employees a broad menu of choices with employer making a fixed dollar contribution towards cost
▪ For disability, key elements are length of elimination period, % of compensation replaced, offsets, and maximum duration of benefits
▪ HMO plan have rich benefits for preventive care, but may require pre-approval and increased cost sharing for specialty care
▪ PPO or POS pay lower benefits for non-network care, and EE may be balance billed by provider
▪ ACA
* Requires most medical plans pay 100% for in-network preventative benefits
* No annual or lifetime max on essential benefits
▪ Underwriter must try to anticipate impact of employee choice on claims cost
Evaluating the Experience
- Group Life
- Disability Income
- Medical Plan
- Medicare Part D
- Wellness Programs
- Dental and Vision Plans
1. Access to group-specific experience data is a unique feature of underwriting large groups
- The larger the group, the more critical this information becomes
2. Questions the underwriter is looking to answer:
- Can I identify meaningful past results and trends
- How can I apply this information to projected costs for the proposed plans and eligible groups?
3. Goal in evaluating prior experience data is to know the risk and the existing carrier
- Need current information that considers changes, business trends, and many other factors
4. Should perform internal check to determine if prior experience information is accurate and reliable
5. Group life
- Experience tends to be volatile due to low frequency of loss and wide variations in amounts of coverage
- Pooling of large claims is common
6. Disability income
- Disability (especially LTD) may also have low claim frequencies, but large liabilities
- Identify patterns relating to business cycles or industry risks
7. Medical plans
- For large groups, one year of medical claim experience is adequate to project future costs
- Provider discount is difference between amount provider would charge a non-network member and the amount it charges a network member
- Adjust for discounts, cost containment programs, and claim controls
- Underwriter must build a model that compare offerings in terms of:
▪ Service area
▪ Size of network
▪ Ease of access
* Use software tools to understand the degree of access employees will have to in- network providers
▪ Projected enrollment
▪ In-network usage
▪ Provider payment/reimbursement contracts
▪ Utilization management
* Underwriter must quantify impact of UM programs on cost
- Method of projecting claim costs under a new plan using different plan experience depends on provider arrangements
▪ Look at each component of prior experience data to identify the pieces that give credible information, and identify which care components under new plan should be adjusted to consider prior experience - Evaluating and projecting claim costs requires dealing with multiple choice scenarios
▪ If an employer offers HMO, PPO, and Indemnity options, all have different benefit levels of utilization, discounts, and trend that must be considered
8. Medicare Part D
- Medicare Modernization Act created new prescription drug benefit for Medicare enrollees, which changes how many ERs treat retirees’ benefits
- ACA made Part D plan option attractive to ERs who offer retiree coverage. Reasons:
▪ Part D design became richer through 2020
▪ Govt. secured a 50% discount on brand name drugs on Part D formulary
* Feb 2018 – pharmaceutical industry increased this discount to 70%
▪ ERs discouraged from offering retires commercial drug plans due to income tax implications – Retiree Drug Subsidy (RDS) no longer exempt from federal income tax
9. Wellness Programs
- Examples: on site health screenings, self-assessment computer modules, rebates for fitness club membership, smoking cessation programs, on site flu shot, financial incentive for exercise, and educational programs
- It is hard to measure impact of wellness and disease management programs on claim experience
10. Dental and Vision Plans
- Carry large antiselection risk since insureds have discretion over nature and timing of services
- Plans respond by increasing cost sharing for major services and introducing frequency limits, exclusions, and participation requirements
- New dental groups require special underwriting due to a likely increase in first year claims
Developing the Proposal
- Basic Considerations
- Funding Alternatives
1. Basic considerations
a. Large group requests for proposals (RFPs) are often very lengthy
b. Goal is to get information to make a highly customized plan
c. Must also consider plan design, funding arrangements, and enrollment patterns unique to a group
d. A well-designed risk sharing arrangement should include a fair formula and reasonable caveats for changes in demographics, gain/loss sharing and pooling
e. Must also develop charges for administrative and other expenses, which are also likely to be case-specific
f. Very large groups have less perceived need for insurance protection
▪ Therefore, quality and price of administrative services become more important, leading to development of performance guarantees in which if certain customer service metrics are not met, premium owed decreases
g. Most performance guarantees deal with speed or accuracy of claims processing and customer service teams
h. Factors used to determine if guarantees will improve service results:
▪ Degree to which services are centralized
▪ Whether client has dedicated service teams
▪ Timeliness and management of tracking reports
▪ Accountability for results
▪ Customer service
▪ Ability to influence behavior of third parties
2. Funding alternatives
a. Must settle on funding method that will be offered
b. Consider if the employer offers multiple choices among plans and vendors and employer’s contribution strategy
▪ Consumer driven health plans may lead to a highly fragmented risk pool
c. Alternatives include:
▪ Fully-insured funding
▪ Self-funded arrangements
* Employer may purchase reinsurance in this arrangement
▪ Combination approach
Renewal Underwriting
- Evaluating the case
- Developing renewal recommendations
- Revision underwriting
- Renewal Monitoring
1. Evaluating the case
a. Review items such as changes in enrollment, evidence of antiselection, catastrophic claims, and effectiveness of cost control measures and admin
b. Additional information is now available
c. Timing is an issue
▪ You may not have mature data for the first plan year by the time you need to begin evaluating the case
2. Developing renewal recommendations
a. Present new premium rates for the existing program
b. May propose alternate funding methods or plan design changes
c. The renewal process is similar to the proposal process, but with more information
3. Revision underwriting
a. Needs and benefits of groups are constantly changing
b. Develop cost estimates for changes in composition of group
▪ May be required due to acquisitions or downsizing
4. Renewal monitoring
a. Underwriter must track emerging claims experience to identify emerging trends
b. Should review claims by diagnosis, type of provider, type of service, geographic area, business unit, demographic category, and more
c. Also need to project incurred but unreported liabilities
d. Done both for internal control and to meet financial reporting requirements
e. Corrective actions can often be taken if issues are identified quickly
f. Underwriter should watch for a pattern that risks putting the insurer below the ACA minimum loss ratio (MLR) for large groups of 85%
Special Risks
1. Association Programs
a. Two types of associations
▪ Association of individuals such as members of a medical society or bar association
* Poses greater risk of antiselection, as participation rarely exceeds 5%
▪ Multiple-employer trusts (METs) are issued to the trustees of a fund established by two or more employers in the same industry
* Characteristics of successful METs:
- Sponsoring association is a strong entity with a high percentage of eligible firms participating
- Associations provide many other services to their members - Large pool of eligible members
- Relatively small average employer size
- Underwriting of METs includes age rating and limited plan designs
- Many METs are self-insured
b. ACA insurance exchanges may eliminate need for many association plans to offer health insurance
2. Taft-Hartley Groups
a. State laws differ widely with respect to eligibility rules, types of coverage permitted, size requirements, and employee contributions
b. Successful programs have required that coverage be noncontributory and 100% of eligible employees are covered
3. Purchasing alliances
a. Formed when two or more non-affiliated large groups come together
▪ Done primarily to enhance purchasing power and reduce cost
b. Typically purchase fully insured plans
c. Recent form has involved very large employers purchasing managed care plans directly from providers
d. Ground rules for participating in coalitions include:
▪ Common plan designs
▪ Restrictions on offering plans not sponsored by the coalition
▪ Limited number of plans in one area
▪ Favored status for the best local plan
e. In addition to cost savings, increased size may allow buyers ability to monitor and influence quality of care
Underwriting Group Disability Income
- Disability claims are a subjective and volatile risk sensitive to claimants’ motivations
- Groups are classified by occupation and industry
- Overinsurance must be avoided
- Overinsurance creates moral hazard by influencing the insured’s motivation to file a claim or return to work
- Liberal definitions of disability should be restricted to white collar groups in select situations
- Firms with a history of employment fluctuation are higher risk
- Non-contributory plans (i.e. where employer pays the full premium) are desirable to minimize individual selection and get a better spread of risk
- An ER that actively supports disabled EEs in returning to work will experience lower claim costs
- Surplus earned by LTD insurers when experience is good may be needed to carry insurer through down cycles
Underwriting Group Life
- Fully insured experience rating is usually based on several years’ experience
- Group life coverage may be sometimes continued into retirement
- Consider financial stability of group, impact of layoffs on retiree liability, and aging of population
- New benefit features have been added to differentiate
- Risks from terminal illness benefit and universal life needs to be managed
