Group Technique | Employee Benefit Plans

In many types of insurance programs, such as group life insurance and group health insurance, the group technique enables these coverages to be written as employee benefit plans. Unlike individual insurance, group insurance is based on a view of the group as a unit, rather than on the individual. Usually, individual insurance eligibility requirements are not required for group insurance written under an employee benefit plan. The concepts that make the group technique work are all designed to prevent "adverse selection"—that is, to reduce the possibility that less-healthy individuals may join a group or be a larger percentage of a group than anticipated because of the availability of insurance or other benefits.

Characteristics of the group technique of providing employee benefits include some or all of the following:

1.  Only certain groups eligible. While most groups qualify, this requirement is intended to make sure that the obtaining of insurance is incidental to the group seeking coverage. Thus, a group should not be formed solely for the purpose of obtaining insurance.

2.  Steady flow of lives through the group. The theory behind this concept is that younger individuals should come into the group while older individuals leave the group, thus maintaining a fairly constant mortality or morbidity ratio in the group. If the group does not maintain this "flow through the group" and the average age of the group increases substantially, costs could increase dramatically.

3.  Minimum number of persons in a group. A minimum number of persons, typically 10, must be in a group to be eligible for group benefits. However, this requirement has been liberalized to the point where two or three individuals in a group may obtain coverage. This minimum number provision is designed to prevent less-healthy lives from being a major part of the group and to spread the expenses of the benefits plan over a larger number of individuals.

4.  A minimum portion of the group must participate. Typically in group life and health insurance plans if the plan is noncontributory (i.e., solely paid for by the employer), 100 percent of eligible employees must be covered. If the plan is contributory (both employer and employee share the cost), 75 percent of the employees must participate. The rationale for this provision is also to reduce adverse selection and spread the expense of administration.

5.  Eligibility requirements. Frequently, eligibility requirements are imposed under group plans for the purpose, once again, of preventing adverse selection. A waiting or eligibility period may be used for certain benefits. Also, if employees do not join when eligible and want to enroll at a later date, some form of medical information may be required.

6.  Maximum limits for any one person. In certain cases, maximum limits on the amount of life or health benefits may be imposed to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual.

7.  Automatic determination of benefits. To prevent unhealthy lives in a group from obtaining an extremely large amount of a particular benefit or benefits, coverage is determined for all individuals in the group on an automatic basis. This basis may be determined by an employee's salary, service, or position, may be a flat amount for all employees, or may be a combination of these factors.

8.  A central and efficient administrative agency. To keep expenses to a minimum and to handle the mechanics of the benefit plan, a central and efficient administrative agency is necessary for the successful operation of an employee benefit plan. An employer is an almost ideal unit because it maintains the payroll and other employee information needed in meeting appropriate tax and record-keeping requirements.

Over the years many of the requirements just described have been liberalized as providers of employee benefits have gained experience in handling group employee benefits, and because of the competitive environment. Nevertheless, the basic group selection technique is important in understanding why employee benefits can work on a group basis and how any problems that exist might be corrected.