Probably the most significant distinct characteristic of group insurance is the replacement of group underwriting for individual underwriting. In group cases, no individual proof of insurability is usually required, and benefit levels can be substantial, with few, if any, important limitations.
Group underwriting normally is not concerned annuities with the health or other insurability facets of any particular individual. Instead, it aims to acquire a group of individual lives or, what is even more important, an aggregation of such groups of lives that will yield a predictable rate of mortality or morbidity. If a sufficient number of groups of lives is obtained, and if these groups are reasonably homogeneous in nature, then the mortality or morbidity rate will be predictable. The point is that the group becomes the unit of underwriting, and insurance principles may be applied to it just as in the case of the individual. To reassure that the groups obtained will be reasonably homogeneous, the underwriting process in group insurance aims to regulate adverse selection by individuals within a group.
Insurance Incidental to the Group: The insurance should be incidental to the group; that is, the members of the group should have come together for some purpose other than to obtain insurance. For example, the group insurance appointed to the employees of a given employer ought not to be the feature that motivates the formation and existence of the group.
Flow of Persons through the Group: There should be a comfortable flow of persons through the group; that is, there needs to be an say of new young lives into the group and an out flow from the group of the older and reduced lives. With groups of try really hard to working employees, it may be assumed that they are in average health.
Automatic Determination of Benefits: Group insurance underwriting commonly requires an automatic basis for determining the amount of benefits on individual lives, which is beyond the control of the employer or employees. If the amount of benefits taken were completely optional, it would be possible to select contrary to the insurance organisation because those in poor health would tend to insure heavily and the healthy ones might tend to elect minimum coverage.
As the group mechanism has evolved, however, insurers have responded to demands from the marketplace, particularly large employers, for more flexibility in picking a benefits. This flexibility typically is expressed in optional amounts of life and health insurance in excess of basic coverage offered by the employer and in more health care financing choices. Also, increasingly popular cafeteria plans allow engaging employees to select among an array of benefits using a established allocated of employer funds. Individuals select, susceptible to certain basic coverage’s being required, a combination of benefits that best meet his or her individual needs.
Minimum Involvement by the Group: Another underwriting control is the requirement that significantly all eligible persons in a given group be covered by insurance. In plans in which the employee pays some of the premium (contributory), generally at least 75 percent of the eligible employees must join the plan if coverage is to be effective. In the case of noncontributory plans, completely involvement is required. By covering a large proportion of a given group, the insurance company gains a safeguard against an unnecessary proportion of second-rate lives. In cases in which employees not allow the insurance for spiritual or other reasons that do not involve any components of selection, this rule is relaxed.
Alternative party Sharing of Cost: Some of the cost of a group plan ideally should be borne by the employer or some alternative party, such as a labor union or trade association. The noncontributory employer-pay-all plan is straightforward, and it provides the employer full control over the plan. It provides for insurance of all eligible employees and thus, eliminates any difficulties involved in connection with obtaining the consent of a sufficient number of employees to meet involvement requirements. Also, there is no problem of distributing the cost among various employees, as with the contributory plan.
Contributory plans usually are more cost-effective to the employer. Hence, with employee contributions, the employer is likely to arrange for more adequate protection for the employees. It can also be suggested that, if the employee contributes toward his or her insurance, he or she is often more impressed with its value and will regards more. On the other hand, the contributory plan has a number of disadvantages. Its operation is harder, and this at times, increases admin cost considerably.
Each employee must consent to contribute toward his or her insurance, and as stated before, a minimum percentage of the eligible group must consent to enter the arrangement. New employees entering the business must be informed of their insurance benefit. If the plan is contributory, employees may not be eligible to the insurance until they’ve been with the company for a period of time. If they don’t agree to be covered by the plan within a period of 31 days, they may be required to provide satisfactory proof of insurability to become eligible. Some noncontributory plans also have these probationary periods.
Efficient Admin Organization: A single admin organization should be able and happy to act on behalf of the insured group. In the usual case, this is the employer. In the case of a contributory plan, there needs to be a reasonably simple method, such as payroll deduction, by which the master policy owner can collect premiums. An automatic method is desirable for both an admin and underwriting perspective. A number of miscellaneous controls of underwriting significance are typically used in group insurance policy, but the former discussion permits an appreciation of the group underwriting underwriting theory. The discussion applies to groups with a large number of employees.
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