Life and Health Insurance Underwriting

Chapter 11
Group Insurance Underwriting Activities 

After studying this chapter, you should be able to..

• State the purpose of the request for proposal (RFP) and identify the information it provides and the documents it include (menyebutkan maksud atau tujuan dari permintaan proposal dan mengidentifikasi informasi yang idberikan dan dokumen yang disertakan)
• Describe the information the group underwriter receives in an agent's statement and in certain ERISA documents (menjelaskan informasi yang diterima oleh underwriter dalam pernyataan agen dan dokumen ERISA)
• State the purpose of the proposal for insurance and the master application and describe the information provided by each document (menyebutkan tujuan daro proposal asuransi dan master application serta menjelaskan informasi yang diberikan oleh tiap2 dokumen)
• Calculate a group's annual premium, given a certain premium rate, benefit unit, and number of employees (menghitung premium tahunan group)
• Distinguish among annual  rating, experience rating, and blended rating and describe how each is used in the  calculation of group premium rates (membedakan antara annyal rating, experience rate dan blended rating serta menjelaskan bagaiman tiap tiap metode digunakan untuk perhitungan group premium rating)
• Calculate the amount of a given  group's contractual claim liability for a specified period) (menghitung jumlah dari contractual claim liability pada periode tertentu
• Describe the methods for rating small group (menjelaskan metode rating untuk kelompok kecil)
• Describe a group insurer's post-issue underwriting activities, including the underwriting of late enrollees and renewal underwriting. (menjelaskan aktivitas-aktivitas underwriting group insurer's post-issue, termasuk underwriting dari pendaftar yang terlambat dan perpanjangan)

Group life and health insurance underwriters gather information, assess risk, and decide whether and on what terms to approve coverage just as do individual life and health insurance underwriters. (group life and health insurance underwriter mengumpulkan informasi menilai risiko dan memutuskan apa dan kondisi yang mana untuk menyetujui coverage seperti yang dilakukan individual life anf health insurance)

However, some major differences exist between underwriting group and individual products. (namun ada beberapa perbedaan yang besar antara underwriting group dan individual product)

In this chapter, we describe the typical activities of group life and health insurance underwriters. (di chapter ini, dijelaskan aktivitas khusus dari group life and health insurance underwriters)

We first discuss the sources of the information group underwriters need to underwrite a group insurance plan and the procedures group underwriters follow to assess a request for group insurance coverage. (pertama akan didiskusikan sumber informasi yang dibutuhkan oleh group underwriters untuk mengunderwriter rencana group insurance dan procedur yang diikuti group underwriter untuk menilai permintaan atas group insurance coverage)

We also describe the various rating methods used in underwriting group insurance and the functions group underwriters perform after the group policy has been issued (chapter ini juga menjelaskan berbagai metode rating yang digunakan dalam underwriting group insurance dan yang dilakukan fungsi group underwriter setelah group policy diterbitkan)

Information Sources

Underwriters use various information sources to assess a proposed group's risk.  (underwriter menggunakan banyak sumber informasi untuk menilai risiko dari proposed group)

In this section, we describe the primary sources of information used in underwriting group life and health insurance, including:

• the request for proposal
• the agent's statement
• ERISA required documents

Request for Proposal

Producers who specialize in group insurance spend a great deal of time searching for new group prospects. (producer yang mengkhususkan dalam asuransi group insurance menghabiskan banyak waktu untuk mencari group prospect baru)

When a producer or group representative identifies a prospect, she gathers information about the group and the coverage the group prospect wants, (ketika producer atau group representative mengidentifikasi sebuah prospect, dia mengumpulkan informasi tentang kelompok dan coverage yang diinginkan oleh group prospoct)

Using that information, the producer or group representative completes a request for proposal (RFP), which is a document that provides detailed information about the requested coverage and solicits a bid from the insurer for providing that coverage. (dengan menggunakan informasi tersebut, producer atau group representatice melengkapi RFP yaitu dokumen yang memberikan detail informati mengenai coverage yang di minta dan mengumpulkan penawaran dari insurer untuk pemberikan coverage)

Often the producer submit the RFP to a number of insurers so the group prospect can shop around for the best price.(sering producer mengirim RFP kepada insurer agar group prospect bisa mendapatkan harga terbaik)

Sometimes, very large employers submit RFP's directly to insurers without first contacting a producer or group representative. (terkadang pengusaha besar mengirim RFP secara direct kepada insurer tanpa pertama kali menghubungi producer atau group representative)

RFP usually includes the following information:

• Name and address of the group
• Characteristics of the group, such as size and industry
• Proposed effective date of coverage
• Types of coverage requested 
• Classes of employees to be covered. We define an employee class as a group of employees categorized  by position, earnings, or rank for purposes of determining eligibility for coverage and benefit levels.
• Amount of the policyholder's contribution to paying the cost of the coverage
• The group's previous insurance history, if any, including premium amounts paid, claim experience, and duration of coverage.
• The group's current benefits, if different from those being applied for, 

Proposal Attachment

Along with the RFP, a producer or group representative usually submits a number of other documents to the insurer, including a benefit transmittal and an employee census. (bersamaan dengan proposal, producer atau group representative biasanya menyerahkan sejumlah dokumen kepada insurer, termasuk benefit transmittal dan sensus pekerja)

A benefit transmittal is an attachment that provides details about the insurance benefits being requested, the effective date of coverage, how premium billing and claims will be administered, and other information about the requested plan. (benefit transmittal adalah sebuah lampiran yang memberikan detail insurance benefit yang diminta, tanggal efektif penutupan, bagaimana penagihan premi dan claim akan diadministrasi dan informasi lain tentang rencana yang diminta)

The producer or group representative also attached a census that lists demographic information about the group prospect as a unit and about individual members within the group. (producer atau group representative juga melampirkan cencus yaitu dafat informasi demographic tentang group prospect sebagai suatu unit dan tentang individual member di dalam group)

An employee census usually includes the following information: (employee cencus biasanya terdiri dari informasi berikut)

• The total number of individuals in the group (total jumlah individu dalam group)
• Types and amount of coverage requested (jenis dan jumlah coverage yang diminta)
• The total number of group members to be insured by each type of coverage (total jumlah group member yang diasuransikan oleh setiap jenis coverage)
• Each group member's date of birth, sex, salary, job title , and date of hire (tanggal sewa)
• Whether each group member has dependents for whom coverage is requested

If the plan is to be a contributory plan, the census also shows which group members will participate in the plan and how much coverage they will receive.

A contributory plan is a group insurance plan for which group insureds must pay some or all of the premiums for their coverage.

Typically, some group members who are eligible for coverage will choose not to be insured if they are required to pay premiums.

By contrast, a noncontributory plan is a group insurance plan for which the insured group members are not required to pay any part of the premium for for the coverage, the premiums are paid entirely by the policyholder and all eligible group members are automatically provided with coverage.

Agent's Statement

The producer or group representative may include an agent's statement with an RFP. The statement includes the producer's observations and recommendation about the requested coverage and about the group prospect. 

The underwriter consider these comments and evaluates them according to the insurer's experience with business submitted by that particular producer,

If the producer has consistently submitters sound business to the insurer, the underwriter generally looks favorably on the producer's recommendation.

Conversely, the underwriter usually does not give as much creditability to a producer who has continually submitted inappropriate or unsound business or requested inappropriate coverage.

Underwriters tend to place a great deal of confidence in a producer who specializes in group insurance products, particularly if the producer has extensive experience selling the kind of product being underwritten.

Underwriters  proceed cautiously when evaluating business submitted by unfamiliar producers or by producers who have limited experience marketing group products.

ERISA Documents

In the US, the Employee Retirement Income Security Act (ERISA) imposes a number of reporting requirements on welfare benefit plans, including employer-sponsored group life and health insurance plans.

Group underwriters sometimes use the information contained in documents filed under ERISA to assess the risk represented by a group prospect.

Typically, underwriters evaluate such documents only in cases in which a group is currently self-insured and is requesting coverage under a fully insured group plan.

A self-insured group plan is a plan for which the group sponsor rather than an insurance company is financially responsible for the claims incurred by group insureds.

In contrast, a fully insured group insurance plan is a plan for which an insurance company is financially responsible for the incurred claims.

Plans also may be partially insured and partially self-insured.

When a group prospect has been insured by another carrier, underwriters typically use information contained in the previous carrier's insurance contract and in reports provided by the previous carrier regarding the group's claim experience.

The following two ERISA documents provide especially helpful information to underwriters who are evaluating a group prospect that currently is self-insured:

• The summary plan description defines details of the coverage provided by the plan, the plan's eligibility requirements, and the group policyholder's claim administration procedures.
• The summary of material modification outlines any benefit changes that occurred within 60 days after the end of the plan's fiscal year. Underwriters use such information to identify unusual changes that need to be investigated further.

As we noted in chapter 10, the group policyholder sometimes is a trustee of a trust fund. 

The trustee is appointed by and operates under the terms of a written document known as a trust agreement.

In such cases,  ERISA requires the trustee to file the trust agreement with the Federal Department of Labor.

Underwriters sometimes examine such a trust agreement, which provides the following types of information:

• The insurer's potential liability in a situation in which the insurance benefits are required to match the benefits specified in the trust agreement
• The trustee's authority to contract for insurance
• How benefits are paid when group insureds submit claims

The Proposal for Insurance

After evaluating the information contained in the RFP and accompanying documents, the group underwriter must decide whether the group prospect is an acceptable risk.

If the risk is acceptable, the underwriter develops a proposal for insurance for the producer to present to the group prospect. 

A proposal for insurance typically includes the following information:

• The name of the group prospect, the eligible classes of group members and dependents, and the number of eligible group members and dependents.
• A benefit schedule, which is a table or schedule that specifies the amount of coverage provided for each class of group insureds. We describe benefit schedules in more detail in chapter 12. Any differences in the coverage the group requested and the coverage offered by the insurer are noted.
• A list of premium rates and the premium amounts required for each type of coverage. We describe rating methods later in this chapter. Except in the case of a small group, the proposal also includes an illustration of net cost that explains the premium rates, which may be guaranteed for one or two years.
• Underwriting principles and assumptions for the proposed coverage
• Details of plan administration, including the responsibilities of the policyholder and the insurer.

The Master Application

When a group has approved an insurer's proposal for insurance, the prospect submits to the insurer a master application for final underwriting.

The master application contains the specific provisions of the requested plan of insurance and is signed by an authorized officer of the proposed policyholder.

The producer or group representative helps the group prospect complete the master application, which provides detailed information about the proposed plan.

Typically, the master application provides the group underwriter with the following information about the group prospect and the proposed plan of insurance:

• Identification of the individuals who are eligible for coverage under the plan, including the total number of eligible group members and dependents, if applicable
• Definition of the probationary period and the date on which group insureds are eligible for coverage
• A schedule of benefits, by employee class if applicable
• The percentage of the premium that group policyholder will pay for each type of coverage requested
• The type of plan administration

The master application also provides the name of the correspondent, who is the person in the policyholder's organization who will serve as the liaison with the insurer. In employer-employee group, the correspondent often is a member of the employer's human resources department.

The master application also list the conditions under which the croup coverage will become effective. 

In most cases, the following conditions must be met for group coverage to become effective:

• The group policyholder must pay the initial premium
• The insurer must approve the application
• At least 75 percent of the eligible group member must apply for the coverage if the plan is a contributory plan.

Along with the master application, the group prospect submits an enrollment card completed by each eligible employee.

An enrollment card, sometimes called a group enrollment card, an enrollment application, or an employee application, provides the following information about each employee:

• Name and address
• Date of birth
• Sex
• Government identification number 
• Name of beneficiary and relationship to the group insured
• Type of optional coverage selected, if applicable
• Information about dependents if the employee elects dependent coverage

The employee must sign the enrollment card, indicating that he understands the coverage offered and agreeing to have his portion of the premium payments deducted form his salary if the plan is contributory.

An employee who chooses not to participate in a contributory group plan signs a statement to that effect. 

When the group underwriter receives the completed and signed master application and enrollment cards, she verifies that all information is complete and is consistent with the coverage that the group prospect agreed to in the proposal for insurance.

The underwriter has the opportunity to investigate any discrepancies or omissions.

The underwriter approves the coverage only after fully evaluating the case.

The insurer then issues the group policyholder a master group insurance contract and certificates of insurance.

Rating Methods

Group insurance premium rates are established on a case-by-case basis and typically are recalculated every policy year.

The goal in rate setting is to establish rates for each that are 

1. adequate to cover the insurer's costs of doing business and paying claims
2. equitable so that each insured group's rate fairly reflect the group's risk, and
3. competitive enough to attract group prospects

The premium rate is the amount an insurer charges for a specific amount of insurance coverage.

The specific amount of coverage specified in a premium rate is referred to as a benefit unit.

The benefit unit specified in a life insurance premium rate typically is $ 1.000.

For example, suppose an underwriter determines that the charge for a certain group is $ 0.17 per month 1.000 of coverage.

The underwriter uses the premium rates to calculate the group's annual premium, which is the amount that the group policyholder will be charges annually for the total amount of coverage requested.

For example, suppose the Gregson Company wants to provide each of its 1.000 employees with $10.000 of term life insurance coverage.

The underwriter determines that the premium rate for such coverage is $ 0.20 per month per $ 1.000 of coverage.

To calculate the annual premium amount for the coverage, the underwriter first computes the annual premium for each employee

• $ 0.20 [premium rate per employee per month per $ 1.000 of coverage]
• x 10 [number of benefit units per employee ($ 10.000 : $ 1.000)]
• x 12 [number of months]
• $ 24 [Annual premium per employee]

The annual premium for the coverage is then calculated by multiplying the annual premium per employee by the number of covered of employees

• $ 24 [annual premium per employee]
• x 1.000 [number of covered employees]
• $ 24.000 [Annual premium amount for the coverage]

The benefit unit for short-term disability income coverage typically is $ 10 of weekly benefit, and the benefit unit for long-term disability income coverage typically is $ 100 of monthly income.

The benefit unit for medical expense and dental coverage is not expressed as a dollar amount, but rather is expressed in terms of coverage for each insured person and that person's coverage dependents.

Because most group medical expense and dental plants provide the same coverage for each group insured, US insurers typically establish one monthly premium rate for each of the following employee classes:

• Class 1 : Employee only
• Class 2 : Employee and spouse
• Class 3 : Employee and dependent children
• Class 4 : Employee, spouse, and dependent children

Group insurers typically use three rating methods:

1. Manual rating
2. Experience rating, and
3. Blended rating 

Manual Rating

Manual rating is a method of establishing group insurance premium rates under which the insurer establishes rates for very broad classifications of group insureds.

The insurer establishes manual rates for a group insurance product using its own experience with that product and information collected by various governmental and trade associations, including the Society of Actuaries and the American Academy of Actuaries.

Typically, group underwriters use manual rating to establish the initial premium to charge a group prospect that has no recorded or reliable claim experience.

Although manual rating is used most often to establish initial rates for small groups, it also is used for larger groups that have insufficient or unreliable claim experience.

A group's claim experience may be unreliable, for example, if the group has undergone a significant change such as a large downsizing.

Group insurance premium rates typically are guaranteed for only one or two years.

At the end of the guaranteed policy term, the insurer calculates a renewal premium rate.

Insurers sometimes use manual rating to calculate renewal premium rates for groups that are very small or do not have credible experience.

For most groups, the insurer uses experience rating 

Experience Rating

Experience rating is a method of establishing group insurance premium rates using a group's own claim experience.

Underwriters typically use experience rating to calculate :

1. renewal premium rates for currently insured groups that have credible experience and
2. initial premium rates for large groups that have been previously insured and have a credible claim history

An important assumption underlying experience rating is that a group's claim experience tends to remain relatively constant from year to year.

As we describe in chapter 12, one of an underwriter's goals in assessing a group prospect is to ensure that the group's claim experience will be relatively stable over time.'

When using experience rating to establish a premium rate, the underwriter usually examines the group prospect's claim experience as follows:

• For medical expense and short-term disability income coverage, the underwriter examines the group's claim figures for the past three years, if available
• For group life insurance and long-term disability income coverage, the underwriter examines the group's claim figures for the past five years, if available.

If a group has had unusual claim fluctuations, the underwriter may examine the group's claim experience for a longer period.

For example, suppose that an employer-employee group with five years of favorable claim experience had significant increase in the number and amount of medical expense claims during the past two years.

The underwriter can examine the five-year trend of claims to determine the cause of the recent unfavorable experience.

If the underwriter discovers sufficient reason for the downturn and is convinced that the poor experience is likely to end, the underwriter may approve the application.

For instance, assume that in the previous example the underwriter discovers the business had moved into a new office building two years ago.

The building contained airborne contaminants that caused serious illness in the building's occupants, resulting in increased medical expense claim for the group.

After the company moved out of the building, the group's claim activity returned to its normal level.

Being able to attribute the unusual increase to specific, controllable circumstances allows the underwriter to approve coverage for the group.

When assessing a group's claim experience, the underwriter's objective is to calculate the group's contractual claim liability, which is the amount of money necessary to pay the claims actually incurred by the group during a specified period, typically one year.

Note that the contractual claim liability includes those claims incurred during the year and is not simply a calculations of claims paid during the year.

Claims incurred during a previous policy year but paid during the year are not yet been paid or even reported.

Although the underwriter can determine the amount of reported claims, she must estimate the amount of claims that have been incurred but not reported.

To account for incurred but unreported claims, the underwriter usually adds an amount that is estimated from the group's experience in previous periods of from the insurer's overall experience with the type of coverage for which the group's claim experience is being assessed.

The underwriter uses the following formula to calculate a group's contractual claim liability 

•    Total claims paid during the period
• -  Claims paid during the period but incurred earlier
• + Claims incurred and reported during the period but not yet paid
• + Estimated amount of claims incurred during the period but not yet reporter
• = Group's contractual claim liability

For example, suppose that after evaluating a group's claim experience during the previous policy year, an underwriter makes the following findings:

1. Total claims paid during the period = $ 264.000
2. Claims paid during the period but incurred earlier = $ 53.000
3. Claims incurred and reported the period but not yet paid = $ 74.000
4. Estimated amount of claims incurred during the period but not reporter = $ 17.000

The group's contractual claim liability for the previous policy year is $ 302.000 calculated as $ 264.000 - $ 53.000 + $ 74.000 + $ 17.000

Evaluating the group's claim experience also enables the underwriter to calculate the group's expected claim experience, which is the dollar amount of claims the insurer estimated the group will submit during the upcoming policy year.

In addition to the group's claim experience, the following factors affect the calculation of a group's expected claim experience:

• A change in the number of group insureds
• Changes in the group insured's average age or sex
• Changes in the covered expenses, deductible amounts, coinsurance, benefit schedules and benefit maximum
• A significant change in the employee mis (for example, shifting from mostly white-collar to mostly blue-collar employees)
• A reassignment of employees to new job duties that pose considerable additional hazards
• Changes in the group's industry or business segment
• Economic conditions affecting the financial strength of the group policyholder.

Experience rating helps an insurer charge equitable premiums to each insured group.

The amount of premium an insurer charges is established according to actuarial calculations the intent of which is to ensure, as much as possible, that the premium a group pays are adequate to cover its claims, administrative, expenses, and other business cost.

Thus, each group pays the costs if its own coverage.

Blended Rating

Some group are too large for an insurer to rely (mengandalkan) totally on manual rating, and some groups do not have enough claim experience information for the insurer to rely on experience rating.

In such cases, insurers sometimes use blended rating, which is a premium rating method that uses a combination of manual rating and experience rating.

In blended rating, the underwriter assigns a credibility factor to the group's experience.

A credibility factor is a percentage that represents the amount of weight given to a group's actual claim experience for premium rate calculation purposes.

For example, an underwriter who assigns a 25 percent credibility factor to a group's claim experience assumes that 25% of the group's expected claim experience will be based on the group's experience.

The remaining 75% of the group's expected claim experience will be based on the insurer's manual rating of the group.

An underwriter determines the blended rate by 

1. multiplying the premium calculated using experience rating by the credibility factor assigned to the rating
2. multiplying the premium calculated using the manual rating by the remaining percentage of the group's expected future claims, and
3. adding the two resulting number.

For instance, suppose an underwriter arrives at the following information for  a group:

• Premium calculated by experience rating = $ 275
• Credibility factor for experience rating = 25%
• Premium calculate by manual rating = $ 325

The underwriter calculates the premium using blended rating as follows:

• (275 x25%) + (325 x75%) =
• $ 68.75 + $ 243.75 = $ 312.5

In general, the more of claim experience that an insurer can evaluate for a group, the larger the credibility factor the insurer assigns to the group.

Likewise, the larger the group, the larger the credibility factor the insurer assigns.

Generally, in comparison to small groups, large groups tend to:

• More closely follow actuarial predictions regarding mortality and morbidity
• Have fewer and smaller fluctuations in claims
• Generate less administrative expense as a percentage of the total premium amount the group pays