Module 5: Group Insurance Plans Flashcards
What is Basic Risk Theory?
- Risk can be defined as the exposure to an unacceptable level of financial loss
- Employers must determine how much risk is acceptable and insure the rest
What is Risk Sharing (Insurance Concept #1)
- Groups or classes of employees share the risk through insurance
- Risk can be “pooled”
- Larger the pool the more the risk is spread out (lowering the cost of all)
What is Insurable Loss (5 Characteristics) (Insurance Concept #2)
- True insurable loss has certain characteristics:
1. Will involve a large financial loss (significant ie. an umbrella is not insurable because premium will be higher than cost of replacement)
2. Unpredictable (timing ie. the loss must occur by chance and not intentionally caused by the insured)
3. Likely to be experienced by one or more of members of a large group
4. Unlikely to occur simultaneously to the majority of members of the group
5. Occur randomly (beyond control of any individual who is insured)
6. Not catastrophic to the insurer-otherwise, the insurer be responsibly promise to pay benefits for the loss
What are Premiums? (Insurance Concept #3)
- Premiums are the charges that the plan sponsor must pay to the insurer to obtain the insurance coverage for its employees
- Premiums = Insurance Coverage
- Premiums are the basis for the “pool”
- Claims are repaid from the premium pool
Define Group Insurance
- designed to insure classes or groups of individuals rather than specific persons
- group insurance, a plan sponsor (usually the employer) enters into a contract (called a master policy) with an insurer to pay claims for the benefits provided to employees covered under the sponsor’s benefit plan
- In return, the employer pays the insurer premiums for providing its services
- Individual plan, however, only insures that person based on their state of health, occupation, lifestyle and family history at the time of application
- Much of this information is determined from a medical questionnaire and often a medical examination
- Employees covered under group plans are only identified in the master policy as members of a class of employees who work for the employer, and not by name
Differences Between Individual and Group insurance
- Individual
o Underwriting: strict (medium test acquired)
o Coverage: flexible
o Stable as long as premium paid (insurance coy, cant cancel it)
o Premium fixed
o Contract is personal (name of individual written on it)
o Expert assistance
o No tax payment if premium paid after dollar income
o Benefit amount: determined by the individual
o Contract document usable for other purposes as security
o Policy may have benefits such as premium holiday for sometime - Group Insurance
o Loose (prin. Of actively at work)
o Fixed (negative by ‘yer)
o Unstable if there is job loss (through there may be a conversion clause)
o Premium is reviewed annually
o Contract is global (involving a grp of people)
o Ltd expert assistance as HR may not be conversant with the nitty gritty of insurance
o Tax payment required if the ‘yer paid premium for the plan
o Determined by the ‘yer and it is usually a multiple of “yee annual salary (x2 or more
What is Underwriting?
- The process of identifying, classifying, and pricing the risks in the plan coverage
What are do Underwriter’s decide and what are their objectives
- For Groups to an underwrite decides:
o Whether to ‘accept’ the risk associated with a particular employee group (selection/identification)
o The amount of premium needs to be charged (classification & pricing/rating) - An underwriter’s objectives are:
o To ensure the characteristics of any smaller group to be insured are compatible with the overall group
o To ensure the financial health of the plan – both for the insurer and for the employer
How is Underwriting seen? What forms?
- Underwriting can take the form of initial underwriting, issue underwriting, or renewal underwriting
o Group insurance is typically underwritten one-year renewable
Underwriting Group Insurance
a) Define Master Group Insurance Policy? What does it involve?
- A master group insurance policy involves a plan sponsor (employer) entering a contract with an insurer to pay claims to employees for benefits covered
- Employers pay the insurer premiums for providing the service
- Policies usually contain certain principles or characteristics designed to minimize ‘adverse’ selection
What are the 7 Principles of Group Insurance?
- Fixed schedule of benefits *
- Actively at work
- Mandatory employer contribution (at least 50%)
- Open group (in-flow and out-flow of new members)
- Minimum enrolment no. of plan members (min 5) before insurer can accept
- Evidence of good health required for life and LTD insurance *
- Group must not be formed for the sole purpose of acquiring insurance
What are the different types of groups? (4)
- Single employer group insurance plans: Provides group insurance benefits to employees of a single employer
- Multi-Employer Groups (Industry-Wide ie. unions): Eligibility & coverage based on union membership not employment
- Association Group Plans: Members of professional associations or business associations. Group benefit coverage that might otherwise be unavailable and/or better rates than individual arrangement
- Credit Group Plans: Provides life and disability insurance coverage for those who owe money to a creditor (ie bank, credit union)
What are the different Factors Influencing the funding Decision?
- Size and nature of the organization
- Predictability of the covered event occurring
- Type of risk
- Financial planning or budgetary restraints
- Tax effectiveness
- Unions
- Degree of employee contribution
- Need for insurer claims support, adjudication, administration
a) What is a Risk Management?
b) What are Different Risk Management Techniques/Methods?
a) - Risk management is the process of identifying, assessing (measuring), and dealing with exposures to risk (a risk is an unacceptable level of loss)
b) * - mentioned in class
1. *Risk Avoidance: eliminates the risk entirely
- Not driving a car
2. *Risk Reduction or Control results in a plan sponsor assuming a risk that it deems affordable
- Employer might be comfortable self-insuring a dental plan but not prepared to self-insure accidental death benefits which unlike dental, have infrequent claims with potentials large dollar amount claims
- Adhere to safety rules
3. *Risk Acceptance or Retention
- Make personal savings
4. *Risk Transfer deals with claims for risks that cannot be adequately controlled, cannot be avoided and should not be retained
- Typically done by transferring the risks to an insurer through an insurance policy
- Insure all-high risks
5. Sharing
- Insure some-low risks
Funding Group Insurance Benefits:
- The more larger the claim is, the smaller the frequency (higher the risk).
- Life insurance, long-term disability & AD&D falls under it.
- The smaller the claim, the larger the frequency (lower the risk).
- Dental, healthcare & short-term disability falls under it.
- Life Insurance, Long term Disability, AD&D - fully insured
- Dental, Health Care, short term disability: self insure some or all
