In this article, we’ll explore why employers should purchase group health insurance for employees and look at the pros and cons from both perspectives.
Group Health Insurance Vs Private Individual Health Insurance
Perhaps the most important distinguishing feature of group insurance is the substitution of individual insurance for group underwriting. In group cases, individual evidence of insurability is generally not required and benefit levels can be substantial, with few or no limitations.
Collective underwriting generally does not deal with health or other aspects of insurance for a particular individual. Instead, aim for a collection of individual lives, or more importantly, an aggregate of those groups of lives that will result in a predictable rate of death or disease. If a sufficient number of soul groups are obtained, and if these groups are reasonably homogeneous in nature, mortality or morbidity will be expected. The point is that the group becomes the underwriting unit and the principles of insurance can be applied to it as to an individual. In order to ensure that the groups obtained are reasonably homogeneous, the group insurance underwriting process aims to control the negative selection of individuals within the group.
When taking out group insurance, certain important characteristics must be either inherent in the very nature of the group or positively applicable to avoid dangerous adverse selection, such as:
Group incidental insurance: The insurance must be incidental to the group; That is, the members of the group must come together for a purpose other than obtaining insurance. For example, the group insurance offered to the employees of a particular employer should not be the characteristic that favors the formation and existence of the group.
Flow of People Through the Group: There should be a continuous flow of people through the group; That is, there must be an influx of new young lives into the group and an exodus from the group of the elderly and disabled. With actively working groups of employees, it can be assumed that they are in good health.
Automatic Benefit Determination – Underwriting group insurance generally requires an automatic basis for determining the amount of benefits throughout an individual’s lifetime, which is beyond the control of the employer or employees. If the amount of benefits to be obtained were completely voluntary, it would be possible to choose against the insurance company because people in poor health tend to be more underinsured and people in good health might be inclined to choose the lower limit cover.
However, with the development of the group mechanism, insurers have responded to market demands, particularly from large employers, for greater flexibility in the choice of benefits. This flexibility typically translates into optional life and health insurance amounts that exceed basic employer-provided coverage and more health care financing options. Additionally, increasingly popular cafeteria plans allow participating employees to choose from a variety of benefits using a predetermined allocation of employer funds. Subject to some basic coverage, people choose a benefit package that best suits their individual needs.
Minimum Group Participation – Another underwriting control is the requirement that all eligible persons in a given group be covered by insurance. In plans where the employee pays part of the premium (contribution), generally at least 75% of eligible employees must join the plan for coverage to be effective. For non-contributory schemes, 100% participation is required. By covering a large percentage of a particular group, the insurance company obtains insurance against an unnecessary percentage of declining lives. In cases where employees refuse insurance for religious reasons or for other reasons that do not include any element of choice, this rule is relaxed.
Share the cost with a third party: The employer or a third party, such as a union or union, must bear part of the cost of the group plan. A non-contributing employer plan is a simple full payment plan and gives the employer full control of the plan. It provides coverage to all eligible employees and thus eliminates any difficulty in obtaining approval for a sufficient number of employees to meet participation requirements. There is also no problem in distributing the cost among the different employees as in the contribution plan.
Contribution plans are generally less expensive for the business owner. Therefore, with employee contributions, the employer is likely to arrange more adequate protection for the employees. It can also be said that if the employee contributes to his insurance, he will be more impressed by its value and will appreciate it more. On the other hand, the contributory scheme has a number of disadvantages. Its operation is more complicated, which sometimes significantly increases the administrative cost.
Each employee must agree to contribute to your insurance and, as noted above, a minimum percentage of the eligible group must agree to participate in the settlement. New employees entering the company should be informed of their insurance privilege. If the scheme is contributory, employees may not be eligible for insurance until they have been with the company for a certain period of time. If they do not agree to be covered by the plan within the 31 day period, they may be required to provide satisfactory evidence of insurability to be eligible. Some non-contributory schemes also provide for these trial periods.
Effective Management Organization: A single management organization must be able and willing to act on behalf of the insured group. In most common case, this is the employer. In the case of a contributory plan, there must be a reasonably simple method, such as payroll deduction, by which the primary document holder can collect the premiums. It is recommended to use an automated method for management and underwriting. A number of different important controls are typically used to underwrite group insurance plans, but the above discussion helps to appreciate group underwriting theory. The discussion about applies to apply groups with a large number of employees.
However, most groups are not large. Group size is an important factor in the subscription process. In smaller plans, more restrictive underwriting practices related to the opposite division are used. These may include less liberal contractual terms, simple health questions and, in some cases, detailed individual underwriting of group members.
Group Policy: The second feature of group insurance is the use of a group policy (contract) held by the owner as the holder of the group policy and a booklet or other summary proof of the insurance certificates of the plan participants. The certificates provide information on the provisions of the plan and the steps required to file a claim. The use of certificates and master nodes is one of the sources of savings within the framework of Group Policy. The framework contract is a detailed document that defines the contractual relationship between the group contract holder and the insurance company. The persons insured under the contract, normally the workers and their dependents, are not actually parties to the contract, although they can assert their rights as third-party beneficiaries. The four-part relationship between employer, insurer, employee, and dependents in a group insurance plan can create a number of exciting and unusual issues that are common only to group insurance.
Lower cost: The third advantage of group insurance is that it is generally less expensive protection than that offered by individual insurance. The nature of the group approach allows the use of mass distribution and group administration methods that offer operating efficiencies not available in individual insurance. In addition, since group insurance is generally not taken out individually, the premiums are based on the actuarial valuation of the whole group, so that a person in good health can be insured at a lower cost. Employer support for costs is a critical factor in the design of a group benefits plan. Perhaps the greatest savings in the cost of insuring a marketing group is that group commissions absorb a much smaller percentage of the total premium than the commission on individual policies.
An agent or broker marketing system relieves many of the tasks, responsibilities and expenses normally associated with selling or servicing individual insurance. Due to the large premiums involved in many group insurance cases, commission rates are much lower than individual contract rates, and generally lower as premiums increase. Some large purchasers of group insurance deal directly with insurers and commissions are waived. However, in these cases, fees are often paid to the consultants involved. The nature of the administrative procedures allows for simplified accounting techniques. Premium collection mechanisms are less complicated and the experience of collection procedures is greatly simplified as there is only one party identity to deal with as the group policyholder.
Of Course, the issuance of a large number of individual contracts is avoided and, due to the nature of mass selection, the cost of medical examinations and inspection reports is minimized. Additionally, regulatory filings and other requirements are reduced. In the early days of group insurance, management was simple. It’s not true. Even with group life insurance, which has no cash value, the push for accelerated death benefits, law firm assignments, and estate planning or corporate record keeping means management coverage can be as complex as with an individual policy.
Flexibility – Unlike individual contracts which must be written, a larger employer usually has options in designing and preparing a group insurance contract. Although contracts follow a template and include some standard terms, there is much more flexibility here than in individual contracts. The degree of flexibility allowed is, of course, a function of the size of the group in question. A group insurance program is usually an integral part of a benefits program, and in most cases a contract can be designed to meet the objectives of the contract holder, as long as the request does not involve complex administrative procedures, paves the way for potentially serious adverse selection, or otherwise violates legal requirements.
Experience Qualification: Another particularity of group insurance is that premiums are often subject to an experience qualification. The experience of an individual group can have a significant impact on adjustments to the price of dividends or bonuses. The greater the experience of a particular group, and therefore the more reliable it is, the greater the weight associated with its own experience in a given year. Whether premiums are net of dividends or premium rate adjustments will depend on the employer’s own experience, giving the employer a vested interest in maintaining a favorable record of losses and expenses. For large employers, insurance companies may agree to complex procedures to meet employer goals, as most of these cases are graded based on experience and reflect increased costs.
The experience rate of some insurance companies depends on the category or type of industry, or even on the type of contract. For small groups, most insurers use group rates whereby a flat rate is applied to all such groups, although it is becoming more common to apply separate group rates to groups with experience. significantly better or worse than those in the general category. The point at which a group is large enough to qualify for an experience bonus varies from company to company, depending on the volume of business and the experience of the insurance company. The volume and frequency of medical claims vary greatly between countries and between geographic regions within the same country, and should be taken into account when determining the group insurance rate. The composition of the group (age, gender and income level) will also affect the experience of the group and will also be an important consideration for underwriting.
Advantages and limitations of the group mechanism.
Benefits: The group insurance mechanism has proven to be a remarkably effective solution to the need for benefits for several reasons. The use of mass distribution technologies has extended coverage to large numbers of people who have little or no health or life insurance. The increasing complexity of the industrial services economy has brought together a large number of people, and the pooling mechanism has enabled insurance companies to reach a large number of people in a relatively short time and at a lower cost. Group insurance has also extended the protection of a large number of uninsured people. Equally important was the fact that the business owner usually pays much of the cost. Additionally, in most countries, including the United States, the deduction of employer contributions and the preferential tax treatment of employee benefits make it a tax-efficient method of providing benefits.
Another important factor, and one of the most compelling drivers of the rapid development of group insurance, is the continued role of government in security provision. In the United States, aging. Survivor, disability and health insurance programs have grown rapidly, but many observers believe that if group insurance had not provided large sums of life insurance, health insurance and retirement protection , social security would have developed further. As economies around the world continue to reduce the size and scope of social insurance programs, we can expect the demand for collective security to increase even more.
Disadvantages: From the employee’s point of view, group insurance has one major limitation: the temporary nature of the coverage. Unless the employee converts their coverage to an individual policy which is often expensive and offers less liberal coverage, the employee loses insurance protection if the group plan terminates and often also upon retirement due to end of employment. Group life and health protection after retirement largely continues in the United States today, but often at low levels. Recently, with the introduction of a new US accounting standard (FAS 106) that requires the cost of these benefits to be accrued and reflected in the financial statements, an increasing number of employers have stopped working full-time after retirement and health benefits. When this continuous protection is not available, the temporary nature of the cover is a serious limitation.
Group health insurance is often provided to retirees in addition to health insurance. Another potentially significant issue is people who can become complacent by purchasing large amounts of group insurance during their working years. Many of these people do not realize the need or do not want to bear the cost of individual insurance. Perhaps most important is the fact that the flexibility of a group approach is limited to the design of the main policy and does not extend to the individual employees covered. Also, group plans generally do not provide a mechanism for analyzing an individual’s financial needs and this is a service that is usually provided by the agent or another advisor. However, many agents discuss group insurance coverage with individuals to discuss the need for additional amounts for life insurance and individual health insurance.