What type of group or group-type insurance programs are expressly excluded from ERISA coverage?

For purposes of ERISA coverage, the term “employee welfare benefit plan” does not include a group or group-type employee pay-all insurance program offered by an insurer to employees or members of an employee organization, under which:  

1.    No contributions are made by the employer or employee organization;  

2.    Participation in the program is completely voluntary for employees or members;  

3.    The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs, and to remit them to the insurer; and  

4.    The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.  

A U.S. District Court in Florida ruled that a disability plan originally maintained by an employer remains subject to the provisions of ERISA even after it becomes an employee pay-all welfare benefit arrangement.  

Such employers who pay all of an insurance program may, unintentionally, find themselves subject to ERISA where the employer or employee organization that has offered the program inadvertently endorses it (e.g., advising employees that the program offers a “valuable” extension of existing insurance coverage, or the marketing pamphlets for the program contain the employer or employee organization’s logos). 

Factors Affecting Claims | Group Insurance Rate Making

Factors Affecting Claims

As previously mentioned, equity requires that rates reflect those factors that result in different claims experience for different groups. Although there are variations among insurance companies, the following factors are used by most insurance companies to determine rates for life, disability income, medical expense, and dental insurance: the sex, age, geographic location, occupation, and income of group members; the size of the group; and the length of time that rates will be used.

Sex. The sex of insured persons is taken into account for determining rates for life, disability income, medical expense, and dental insurance.

Age. Age is also used as a rating factor for life, disability income, and medical expense insurance. Dental insurance rates usually do not take age into consideration.

Geographic Location. At one time, geographic location was a rating factor for medical expense and dental insurance only. However, an increasing number of insurance companies are using geographic variations for determining life and disability income insurance rates. For these latter types of insurance, rates may not be determined separately for a wide variety of locations. Rather, the insurance company may have only two or three rate schedules, with each schedule applying to several different geographic locations on the basis of past claims experience.

Occupation. Occupation is virtually always reflected in both group term life and accidental death and dismemberment insurance rates. It may also be reflected in disability income, medical expense, and dental insurance rates, but the number of groups for which it is of concern is relatively small. Consequently, some companies ignore it as a rating factor but may not write such coverages when certain occupations are involved.

Income. At one time, the income level of group members was commonly used as a factor in establishing disability income, medical expense, and dental insurance rates. Currently, income level is still a factor in determining dental insurance premiums, but it is more likely to be an underwriting consideration in disability income and medical expense insurance.

Size. The size of a group also affects rates because the proportion of the premium needed for expenses decreases as the size of a group increases. All manual premium rates are based on an assumption that the size of a group falls within a certain range. If the size of a group varies from this range, an appropriate rate adjustment is made to reflect this differential. In addition, many insurers reserve the right to rerate a group during the period of the contract if the group changes in size by a certain percentage. This is particularly important in an era of downsizing and mergers.

Time. A final factor considered in the calculation of rates is the length of time for which the rates will be used. This is a concern primarily for coverages that involve medical and dental claims, which over time will be expected to increase in severity because of inflation. In inflationary times, monthly rates that are guaranteed for three months can be lower than those guaranteed for one year.

Frequency of Premium Payment Period
Because group insurance premiums are usually paid monthly, this is the period for which rates are generally determined. When premiums can be paid less frequently (such as annually), they are usually slightly lower than the sum of the monthly premiums for the same period of coverage.

Calculation of Manual Rates
Manual rating involves the calculation of the manual premium rates (also called tabular rates) that are quoted in an insurance company's rate book. These manual rates are applied to a specific group insurance case to determine a final premium rate (sometimes called an average premium rate) that then will be multiplied by the number of benefit units to obtain a premium for the group.

There are three different manual rating methods. However, if identical assumptions are used, each method should result in approximately the same premium for any given group. The first method determines separate manual premium rates for groups with certain characteristics that an insurance company feels will affect claims experience. A second approach establishes a single standard manual rate that is adjusted in the premium-calculation process to compensate for any characteristics that deviate from those of the standard group. A third method merely combines the first two approaches and considers some factors in determining the manual premium rate and other factors in determining the final premium rate.

The first step in the calculation of manual premium rates is the determination of the net premium rate, which is the amount necessary to support the cost of expected claims. For any given classification, the net premium rate is calculated by multiplying the probability (frequency) of a claim's occurring by the expected amount (severity) of the claim. For example, if the probability that an employee aged 50 will die in the next month is .0005, then the monthly net premium for each $1,000 of coverage is .0005 × $1,000, or $.50. Because premiums are collected before claims are paid, the insurance company adjusts this figure downward for anticipated interest earnings on these funds.

In general, insurance companies that write a large volume of any given type of group insurance rely on their own experience in determining the frequency and severity of future claims. Insurance companies that do not have enough past data for reliable future projections can turn to many sources for useful statistics. Probably the major source is the Society of Actuaries, which regularly collects and publishes aggregate data on the group insurance business that is written by a number of large group insurance companies. Other sources of information are industry trade organizations and various agencies of the federal government.

The second and final step in the calculation of manual premium rates is the adjustment of the net premium rates for expenses, a risk charge, and a contribution to surplus. Expenses include commissions, premium taxes, claims settlement costs, and other costs associated with the acquisition and servicing of group insurance business. The risk charge represents a contribution to the insurance company's contingency reserve as a cushion against unanticipated and catastrophic amounts of claims. The contribution to surplus or net worth represents the profit margin of the insurance company. While mutual companies are legally nonprofit, they, like stock insurance companies, require a contribution to net worth that is a source of financing for future growth.

From the standpoint of equity, the adjustment of the net premium rate is complex. Some factors, such as premium taxes and commissions, vary with the premium charge; however, the premium tax rate is not affected by the size of a group, whereas the commission rate decreases as the size of a group increases. To a large degree, the expenses of settling claims vary with the number, and not the size, of claims. It costs just as much administratively to pay a $10,000 claim under a group life insurance plan as it does to pay a $100,000 claim. Certain other costs tend to be fixed regardless of the size of a group. For simplicity, some insurance companies adjust, or load, their net premium rates by a constant percentage. However, other insurance companies consider the different patterns of expenses by using a percentage plus a constant charge. For example, if the net premium rate is $.60, this might be increased by 20 percent plus $.10 to arrive at a manual premium rate of $.82 (that is, $.60 × 1.2 + $.10). Because neither approach adequately accounts for the difference in expenses as a result of a group's size, another adjustment based on the size of the group will be made in the calculation of the final premium rate.

REASONS FOR USE OF MANAGED CARE

There are many reasons why employees elect coverage under a managed care plan. First, it may be the only plan the employer provides, although most employers allow a choice of benefit plans. In those situations, the following factors have been identified as reasons why a managed care plan, in general, or a particular managed care plan might be selected:

The reputation of the managed care plan. To some extent, this is a function of the managed care plan's experience. In areas where managed care plans have been established for many years, a larger percentage of employees participate. Employees are also concerned with perceived quality of care and are less likely to choose a plan known for frequent coverage denials and difficulty in obtaining referrals to specialists.

The extent to which employees have established relationships with physicians. Employees are reluctant to elect a managed care option if it requires that they give up a physician with whom they are satisfied. In some cases, of course, this physician also may participate in the managed care plan. In general, new employees are more likely to elect a managed care option if they are new residents of the area or are just entering the labor force.

Costs. Managed care plans are obviously more attractive to employers when they offer a less expensive alternative to coverage under insurance company plans. As a rule, managed care plans are less expensive, and any employee share of the premium is lower. Even when the premium cost is comparable, there is often broader coverage and no deductibles or percentage participation. If employees view a managed care alternative as being less expensive in the long run, their participation is greater.

In the early days of the growth of managed care, employers were concerned primarily with cost savings when they adopted managed care plans. In a more mature managed care marketplace, employers are concerned with the same factors when they change plans as are employees: reputation, availability of providers, and cost. Throughout most of the late 1990s, the economy was booming, labor markets were tight, and employers faced relatively modest premium increases from year to year. As a result, employers were much more likely than in the past to modify managed care plans or to adopt new plans that were less restrictive, and therefore somewhat more expensive, in their management of care. With greater premium increases as the new millennium begins, some benefit consultants feel that this trend may reverse itself, particularly if there is an economic downturn.

Group Medical Expense Benefits, Managed Care Plans - Accreditation

As managed care matures and becomes more widespread, there is an increasing focus by government, employers, and consumers on quality. This has led many employers, particularly large employers, to require that managed care organizations for their employees meet some type of accreditation standards. Accreditation does more than just provide consumers with information about health plans. The process, which may cost a managed care organization several thousand dollars, compares it with what are considered benchmark standards of quality care. The organization knows where it stands in relation to its competitors and also what must be done to become accredited or to achieve a higher level of accreditation.

The leading organization for accrediting appears to be the National Committee for Quality Assurance (NCQA), an independent, not-for-profit organization that has been accrediting HMOs and POS plans since 1991 and plans to start accrediting PPOs. (It also accredits managed behavioral health care organizations, credentials-verification organizations, and physician organizations.) Unlike some accrediting organizations, NCQA makes detailed information available to the general public. The NCQA accredits managed care organizations by evaluating the following five areas of performance (the percentage weighting of each area in the overall accreditation decision is also indicated):

1. Access and service. Do health plan members have access to the care and service they need? For example, are physicians in the health plan free to discuss all treatment options available? Do patients report problems getting needed care? How well does the health plan follow up on grievances? (40 percent)

2. Qualified providers. Does the health plan assess each physician's qualifications and what health plan members say about their providers? For example, does the health plan regularly check the licenses and training of physicians? How do health plan members rate their personal physician or nurse? (20 percent)

3. Staying healthy. Does the health plan help people maintain good health and avoid illness? Does it give its physicians guidelines about how to provide appropriate preventive health services? Are members receiving tests and screenings as appropriate? (15 percent)

4. Living with illness. How well does the health plan care for people with chronic conditions? Does the plan have programs in place to assist patients in managing chronic conditions such as asthma? Do diabetics, who are at risk for blindness, receive eye exams as needed? (15 percent)

5. Getting better. How well does the health plan care for people when they become sick? How does the health plan evaluate new medical procedures, drugs, and devices to ensure that patients have access to safe and effective care? (10 percent)

From this information, the NCQA gives health plans one of the following accreditation outcomes:

Excellent

Commendable

Accredited

Provisional

Denied

The NCQA has also developed a set of performance measures that are designed to enable purchasers and consumers to have necessary information to reliably compare the performance of managed care plans. These measures are commonly referred to as the Health Plan Employer Data and Information Set, or HEDIS. The current version (which tends to change almost annually) has more than 50 measures that fall into the following categories:

Effectiveness of care

Access/availability of care

Satisfaction with the experience of care

Health plan stability

Use of services

Cost of care

Informed health care choices

Health plan descriptive information

Examples of a few of the measures that HEDIS reports, which then can be compared with suggested norms, are the following:

Percentage of adolescents receiving immunizations

Percentage of patients receiving beta-blocker treatment following a heart attack

Percentage of patients receiving appropriate treatment for asthma

Percentage of women receiving counseling at the onset of menopause

There are also other bodies that accredit various types of health care organizations, including managed care plans, and make their data available to consumers. The Joint Commission on Accreditation of Healthcare Organizations (JCAHO) has accredited hospitals for many years. It also accredits health care networks (including PPOs), home care organizations, long-term care facilities, behavioral health care organizations, ambulatory care organizations, and clinical laboratories.

Another major accrediting organization is the American Health Care Commission/URAC, commonly referred to just as URAC. URAC focuses on accrediting specific aspects of managed care, such as utilization review. Managed care organizations, such as HMOs and PPOs, can have their own utilization review activities accredited if prescribed standards are met. In addition, URAC accredits the activities of organizations that specialize solely in utilization review and that sell their services to managed care plans that do not have their own utilization review staffs. URAC also accredits organizations with respect to the following: case management standards, health call center standards, health network standards, health plan standards and network credentialing standards.

Group Medical Expense Benefits, Managed Care Plans - Quality of Care

A difficult question to answer is whether persons covered by managed care plans receive the same quality of care as persons covered under traditional medical expense plans. If the sole objective of a managed care plan is to offer coverage at the lowest possible cost, there may be a decline in the quality of care. However, some type of quality assurance program is one aspect of any managed care plan. If properly administered, this type of program can weed out providers who give substandard and unnecessary care. In this regard, managed care plans may be more progressive than the medical field as a whole.

The results of numerous surveys and studies on the quality of medical care plans have been mixed. Some studies show that persons in managed care plans are less likely than persons in traditional medical expense plans to receive treatment for a serious medical condition from specialists, and they are also likely to have fewer diagnostic tests. There are those who argue that family physicians can treat a wide variety of illnesses and avoid unnecessary diagnostic tests and referrals to specialists. On the other hand, an opposing argument contends that the decline in the use of specialists and frequency of diagnostic tests is also a clear indication that there is a decline in the level of medical care. Other studies show that persons in managed care plans are much more likely than the rest of the population to receive preventive care and early diagnosis and treatment of potentially serious conditions such as high blood pressure and diabetes. In addition, managed care plans are viewed as having been successful in coordinating care when it is necessary for a person to see several different types of specialists. There is no doubt that there are some small provider networks with a limited choice of specialists, but most networks are relatively large or allow persons to select treatment outside the network. There are also many managed care plans that do refer patients to highly regarded physicians and hospitals or have these providers as part of their networks.

In evaluating the quality of medical care, it is also interesting to look at surveys of participants in the various types of medical expense plans. Most persons in traditional medical expense plans are convinced they receive better care because of their unlimited ability to choose providers of medical care as needed. While surveys of participants in managed care plans usually show a high degree of satisfaction with the medical care received, there are some concerns that have resulted in recent plan changes and legislative actions and interest.

Two recent developments relate to the quality of care provided by managed care organizations—an increased interest in accreditation and a consumer backlash against some aspects of managed care. This backlash has led to the introduction or passage of laws in many states aimed at solving consumer and provider concerns about access to care, quality of care, and choice.

GROUP UNIVERSAL LIFE INSURANCE : Types of Group Universal Products & Underwriting

Types of Group Universal Products
Two approaches have been used in designing group universal life insurance products. Under the first approach, there is a single group insurance plan. An employee who wants only term insurance can pay a premium equal to the mortality and expense charges so that there is no accumulation of cash values. Naturally, an employee who wants to accumulate cash values must pay a larger premium.

Under the second approach, there are actually two group insurance plans—a term insurance plan and a universal life insurance plan. An employee who wants only term insurance contributes to the term insurance plan, and an employee who wants only universal life insurance contributes to the universal life insurance plan. With this approach, an employee purchasing universal life insurance must make premium payments that are sufficient to generate a cash-value accumulation. Initially, the employee may be required to make minimum premium payments, such as two or three times the cost of the term insurance. If an employee who has only the term insurance coverage later wants to switch to universal life insurance coverage, his or her group term insurance certificate is canceled, and the employee is issued a new certificate under the universal life insurance plan. An employee can also withdraw his or her cash accumulation under the universal life insurance plan and switch to the term insurance plan or can even have coverage under both plans. Typically, an employee is eligible to purchase a maximum aggregate amount of coverage under the two plans. For example, if this amount is three times annual salary, the employee can purchase term insurance equal to two times salary and universal life insurance that has a term insurance amount equal to one times salary.

Underwriting
Insurance companies that write group universal life insurance have underwriting standards concerning group size, the amounts of coverage available, and insurability.

Currently, most group universal life insurance products are limited primarily to employers who have at least 100 or 200 employees. However, a few insurers write coverage for even smaller groups. Some insurance companies also have an employee percentage-participation requirement, such as 20 percent or 25 percent, that must be satisfied before a group can be installed. Other insurance companies feel their marketing approach is designed so that adequate participation will result and, therefore, have no participation requirements.

Employees can generally elect amounts of pure insurance equal to varying multiples of their salaries, which typically start at one-half or one and range as high as three or five. There may be a minimum amount of coverage that must be purchased, such as $10,000. The maximum multiple an insurance company will offer is influenced by factors such as the size of the group, the amount of insurance provided under the employer's basic employer-pay-all group term insurance plan, and the percentage participation in the plan. In general, the rules regarding the amounts of coverage are the same as those that have been traditionally applied to supplemental group term life insurance plans. The initial premium, which is a function of an employee's age and death benefit, is frequently designed to accumulate a cash value at age 65 equal to approximately 20 percent of the total death benefit.

Other approaches for determining the death benefit may be used, depending on insurance company practices and employer desires. Under some plans, employees may elect specific amounts of insurance, such as $25,000, $50,000, or $100,000. Again, an employee's age and the death benefit selected determine the premium. Some plans allow an employee to select the premium he or she wants to pay. The amount of the premium and the employee's age then automatically determine the amount of the death benefit.

The extent to which evidence of insurability is required of individual employees is also similar to that found under most supplemental group term life insurance plans. When an employee is initially eligible, coverage is usually issued on a guaranteed basis up to specified limits, which again are influenced by the size of the group, the amount of coverage provided under the employer's basic group term insurance plan and the degree of participation in the plan. If an employee chooses a larger death benefit, simplified underwriting is used up to a second amount, after which regular underwriting is used. Guaranteed issue is often unavailable for small groups; underwriting on the basis of a simplified questionnaire is used up to a specific amount of death benefit, after which regular underwriting is used.

With some exceptions, future increases in the amount of pure insurance are subject to evidence of insurability. These exceptions include additional amounts resulting from salary increases, as long as the total amount of coverage remains within the guaranteed issue limit. A few insurance companies also allow additional purchases without evidence of insurability when certain events occur, such as marriage or the birth of a child.

GROUP UNIVERSAL LIFE INSURANCE : General Nature

GROUP UNIVERSAL LIFE INSURANCE
Beginning in the mid-1980s, many large writers of group insurance started to sell group universal life insurance, a trend that was greeted with much interest by insurers, employers, and even employees. This interest seems to stem primarily from the following five factors:

1. The success of universal life insurance in the individual marketplace.

2. Tax legislation that made employer-provided term life insurance in excess of $50,000 taxable after retirement.

3. The clarification of the tax treatment of universal life insurance. For the first few years after the introduction of universal life insurance, there was concern that the Internal Revenue Service (IRS) would not grant it the same favorable tax treatment that was granted to traditional cash-value life insurance policies. There was speculation that the interest paid on the cash value might become subject to taxation and also that the death benefit would be considered taxable income for the beneficiary. For the most part these fears were laid to rest by tax legislation, as long as a universal life insurance policy meets certain prescribed guidelines. Therefore, the cash value of a universal life insurance policy accumulates tax free, and death benefits are free of income taxation.

4. The desire of employers to contain employee benefit costs. Little needs to be said about the attempts of employers to minimize the costs of their employee benefit plans. Group universal life insurance plans can make life insurance available to employees with little cost to the employer.

5. Less favorable tax treatment for formerly popular products for prefunding postretirement life insurance, such as retired-lives reserves.

Group universal life insurance products are being marketed primarily as supplemental life insurance plans, either to replace existing supplemental group term life insurance plans or as additional supplemental plans. Some insurers are promoting them as a way of providing the basic life insurance plan of an employee. Marketing efforts tout group universal life insurance as having the following advantages to the employer:

- No direct costs other than those associated with payroll deductions and possibly enrollment, because the entire premium cost is borne by the employee. In this sense, group universal life insurance plans are much like the payroll-deduction-funded plans

- No Employee Retirement Income Security Act (ERISA) filing and reporting requirement as long as the master contract is issued to a trust and as long as there are no employer contributions for the cost of coverage. The current products are marketed through multiple-employer trusts, with the trust being the policyholder.

- The ability of employees to continue coverage into retirement, alleviating pressure for the employer to provide postretirement life insurance benefits.

The following advantages are being claimed for employees:

- The availability of a popular life insurance product at group rates

- The opportunity to continue insurance coverage after retirement, possibly without any postretirement contributions

- Flexibility in designing coverage to best meet the needs of the individual employee

The current plans being marketed are still evolving, and differences do exist among the plans being offered by competing insurance companies. Because of the flexibility given to policyholders, the administrative aspects of a group universal plan are formidable, and most insurers originally designed their plans only for employers with a large number of employees, usually at least 1,000. However, some insurers that write the product now make it available for as few as 50 employees or less.

Skeptics, including employees of some insurance companies offering group universal life coverage, wonder if the administrative problems can be handled so that coverage can be offered at a cost significantly lower than what is found in the individual marketplace. In raising this question, skeptics point out the administrative problems and costs that have arisen when universal life insurance has been included in payroll-deduction individual insurance plans. In addition, the highly competitive market for individual universal life insurance has resulted in rates with extremely low margins for contributions to surplus. These drawbacks, coupled with the lack of employer contributions, make savings to employees through the group insurance approach less likely than for many other types of insurance. Other critics point out that the popularity of universal life insurance in the individual marketplace decreased as interest rates have dropped over the last few years. Nevertheless, plans that are installed are usually well received by employees, and participation generally meets or exceeds expectations.

In 1998, universal life insurance accounted for about 6.5 percent of group life insurance certificates in force, up from 2 percent in 1995.[1]

General Nature
Group universal life insurance is a flexible-premium policy that, unlike traditional cash-value life insurance, divides the term insurance protection and the cash-value accumulation into separate and distinct components. The employee is required to pay a specified initial premium, from which a charge is subtracted for one month's mortality. This mortality charge in effect is used to purchase the required amount of term insurance (often referred to as pure insurance or the amount at risk) at a cost based on the insured's current age. Under some policies, an additional deduction is made for expenses. The balance of the initial premium becomes the initial cash value of the policy, which, when credited with interest, becomes the cash value at the end of the period. The process continues in succeeding periods. New premiums are added to the cash value, charges are made for expenses and mortality, and interest is credited to the remaining cash value. Employees receive periodic disclosure statements showing all charges made for the period, as well as any interest earnings.

Group universal life insurance offers an employee considerable flexibility to meet several life-cycle financial needs with a single type of insurance coverage. The death benefit can be increased because of marriage, the birth of a child or an increase in income. The death benefit can be reduced later when the need for life insurance decreases. Cash withdrawals can be made for the down payment on a home or to pay college tuition. Premium payments can be reduced during those periods when a young family has pressing financial needs. As financial circumstances improve, premiums can be increased so that an adequate retirement fund can be accumulated. The usual settlement options found in traditional cash-value life insurance are available, so an employee can periodically elect to liquidate the cash accumulation as a source of retirement income.

Group Life Insurance—Term Coverage

Traditionally, most group life insurance plans were designed to provide coverage during an employee's working years, with coverage usually ceasing upon termination of employment for any reason. Today, the majority of employees are provided with coverage that will continue, often at a reduced amount, when termination is a result of retirement. Group term life insurance, which provides preretirement coverage.

The oldest and most common form of group life insurance is group term insurance. Coverage consists primarily of yearly renewable term insurance that provides death benefits only, with no buildup of cash values. The group insurance marketplace, with its widespread use of yearly renewable term coverage, contrasts with the individual marketplace, in which term insurance accounts for slightly more than one-third of coverage in force. This is primarily due to increasing annual premiums, which become prohibitive for many insureds at older ages. In group life insurance plans, the overall premium, in addition to other factors, is a function of the age distribution of the group's members. While the premium for any individual employee increases with age, the flow of younger workers into the plan and the retirement of older workers tend to result in a relatively stable age distribution and, thus, an average group insurance rate that remains constant or rises only slightly.

STATE REGULATION : Contractual Provisions in Group Insurance & Benefit Limitations

Contractual Provisions in Group Insurance
Through its insurance laws, every state provides for the regulation of contractual provisions. In many instances, certain contractual provisions must be included in group insurance policies. These mandatory provisions may be altered only if they result in more favorable treatment of the policyholder. Such provisions tend to be most uniform from state to state in the area of group life insurance, primarily because of the widespread adoption of the NAIC model bill pertaining to group life insurance standard provisions. As a result of state regulation, coupled with industry practices, the provisions of most group life and health insurance policies are relatively uniform from company to company. In most instances, an insurance company's policy forms can be used in all states. However, riders may be necessary to bring certain provisions into compliance with the regulations of some states.

Traditionally, the regulation of contractual provisions has focused on provisions pertaining to such factors as the grace period, conversion, and incontestability rather than on factors pertaining to the types or levels of benefits. These latter provisions have been a matter between the policyholder and the insurance company. However, in recent years this has changed in many states. In some states, certain benefits—such as well-baby care and treatment for alcoholism or drug abuse—must be included in any group insurance contract; in other states, they must be offered to group policyholders as optional benefits. Still other state laws and regulations specify minimum levels for certain benefits if those benefits are included.

It is interesting to note that, with few exceptions, the regulation of contractual provisions affects only those employee benefit plans funded with insurance contracts. This is because provisions of ERISA seem to exempt employee benefit plans from most types of state regulation. However, there are exceptions to this exemption; these include insurance regulation and therefore the provisions in insurance contracts. As a result of this ERISA exemption, states have few laws and regulations applying to the provisions of uninsured benefit plans. However, ERISA does not exempt uninsured plans from state regulation in such areas as age and sex discrimination, and laws pertaining to these areas commonly apply to all benefit plans. A few states are also trying to mandate other types of benefits for uninsured plans, and ultimately the issue will probably have to be settled by Congress or the Supreme Court.

Benefit Limitations
Statutory limitations may be imposed on the level of benefits that can be provided under group insurance contracts issued to certain types of eligible groups. With the exception of group life insurance, these limitations rarely apply in situations involving an employer-employee relationship. In the past, most states limited the amount of group life insurance that could be provided by an employer to an employee. Today, only Texas still has such a restriction, but its limit is so high that the limit has little practical effect. However, several states limit the amount of coverage that can be provided under contracts issued to groups other than individual employer groups. In addition, some states limit the amount of life insurance coverage that may be provided for dependents.

CHARACTERISTICS OF TRADITIONAL GROUP INSURANCE

Traditionally, group insurance has been characterized by a group contract, experience rating of larger groups, and group underwriting. Perhaps the best way to define group insurance is to compare its characteristics with those of individual insurance, which is underwritten on an individual basis.

Group Contract
In contrast to most individual insurance contracts, the group insurance contract provides coverage to a number of persons under a single contract issued to someone other than the persons insured. The contract, referred to as a master contract, provides benefits to a group of individuals who have a specific relationship with the policyholder. Most commonly, group contracts cover individuals who are full-time employees, and the policyholder is either their employer or a trust established to provide benefits for the employees. Although the employees are not actual parties to the master contract, they can legally enforce their rights. Consequently, employees are often referred to as third-party beneficiaries of the insurance contract.

Employees covered under the contract receive certificates of insurance as evidence of their coverage. A certificate is merely a description of the coverage provided and is not part of the master contract. In general, a certificate of insurance is not even considered to be a contract and usually contains a disclaimer to that effect. However, some courts have held the contrary to be true when the provisions of the certificate, or even the explanatory booklet of a group insurance plan, vary materially from the master contract.

In individual insurance, the coverage of the insured normally begins with the inception of the insurance contract and ceases with its termination. However, in group insurance, individual members of the group may become eligible for coverage long after the inception of the group contract, or they may lose their eligibility status long before the contract terminates.

Experience Rating
A second distinguishing characteristic of traditional group insurance is the use of experience rating. If a group is sufficiently large, the actual experience of that particular group will be a factor in determining the premium the policyholder will be charged. The experience of an insurance company will also be reflected in the dividends and future premiums associated with individual insurance. However, such experience will be determined on a class basis and will apply to all insured in that class. This is also true for group insurance contracts when the group's membership is small.

Group Underwriting
The applicant for individual insurance must generally show evidence of insurability. For group insurance, on the other hand, individual members of the group are usually not required to show any evidence of insurability when initially eligible for coverage. This is not to say that there is no underwriting, but rather that underwriting is focused on the characteristics of the group instead of on the insurability of individual members of the group. As with individual insurance, the underwriter must appraise the applicant, decide on the conditions of the group's acceptability, and establish a rating basis.

The purpose of group insurance underwriting is twofold:

- To minimize the problem of adverse selection (those who are most likely to have claims are also those who are most likely to seek insurance)

- To minimize the administrative costs associated with group insurance

- Because of group underwriting, coverage can be provided through group insurance at a lower cost than through individual insurance.

However, there are certain general underwriting considerations applicable to all or most types of group insurance that affect the contractual provisions contained in group insurance contracts as well as insurance company practices pertaining to group insurance. These general underwriting considerations include the following:

- The reason for the existence of the group

- The stability of the group

- The persistency of the group

- The method of determining benefits

- The provisions for determining eligibility

- The source and method of premium payments

- The administrative aspects of the group insurance plan

- The prior experience of the plan

- The size of the group

- The composition of the group

- The industry represented by the group

- The geographic location of the group

Reason for Existence
Probably the most fundamental group underwriting principle is that a group must have been formed for some purpose other than to obtain insurance for its members. Such a rule protects the group insurance company against the adverse selection that would likely exist if poor risks were to form a group just to obtain insurance. Groups based on an employer-employee relationship present little difficulty with respect to this rule.

Stability
Ideally, an underwriter would like to see a reasonable but steady flow of persons through a group. A higher-than-average turnover rate results in increased administrative costs for the insurance company as well as for the employer. If turnover exists among recently hired employees, these costs can be minimized by requiring employees to wait a period of time before becoming eligible for coverage. However, such a probationary period does leave newly hired employees without protection if their previous group insurance coverage has terminated.

A lower-than-average turnover rate often results in an increasing average age for the members of a group. To the extent that a plan's premium is a function of the mortality (death rates) and the morbidity (sickness and disability rates) of the group, such an increase in average age will result in an increasing premium rate for that group insurance plan. This may cause the better risks to drop out of a plan, if they are required to contribute to its cost, and may ultimately force the employer to terminate the plan because of its increasing cost.

Persistency
An underwriter is concerned with the length of time a group insurance contract will remain on the insurance company's books. Initial acquisition expenses, often including higher first-year commissions, frequently cause an insurance company to lose money during the first year the group insurance contract is in force. Only through the renewal of the contract for a period of time, often three or four years, can these acquisition expenses be recovered. For this reason, firms with a history of frequently changing insurance companies or those with financial difficulty are often avoided.

Determination of Benefits
In most types of group insurance, the underwriter requires that benefit levels for individual members of the group be determined in some manner that precludes individual selection by either the employees or the employer. If employees could choose their own benefit levels, there would be a tendency for the poorer risks to select greater amounts of coverage than the better risks would select. Similarly, adverse selection could also exist if the employer were able to choose a separate benefit level for each individual member of the group. As a result, this underwriting rule has led to benefit levels that are either identical for all employees or determined by a benefit formula that bases benefit levels on some specific criterion, such as position or salary.

Benefits based on salary or position may still lead to adverse selection because disproportionately larger benefits are provided to the owner or top executives who may have been involved in determining the benefit formula. Consequently, most insurance companies have rules for determining the maximum benefit that may be provided for any individual employee without evidence of insurability. Additional coverage either is not provided or is subject to individual evidence of insurability.

The general level of benefits for all employees is also of interest to the underwriter. For example, benefit levels that are too high may encourage overutilization and malingering, while benefit levels that are unusually low may lead to low participation if a plan is voluntary.

Determination of Eligibility
The underwriter is also concerned with the eligibility provisions that are contained in the group insurance plan. Many group insurance plans contain probationary periods that must be satisfied before an employee is eligible for coverage. In addition to minimizing administrative costs, a probationary period also discourages persons with known medical conditions from seeking employment primarily because of a firm's group insurance benefits. This latter problem is also addressed by the requirement that an employee be actively at work before coverage commences or, particularly with major medical coverage, by limiting coverage for preexisting conditions to the extent allowed by federal and state laws.

Most group insurance plans normally limit eligibility to full-time employees because, from an underwriting standpoint, the coverage of part-time employees may not be desirable. In addition to having a high turnover rate, some part-time employees may be seeking employment primarily to obtain group insurance benefits. Similar problems exist with seasonal and temporary employees and, consequently, eligibility is often restricted to permanent employees.

Premium Payments
Group insurance plans may be contributory or noncontributory. Members of contributory plans pay a portion, or possibly all, of the cost of their own coverage. When employees pay the entire portion, the plans are often referred to as fully contributory or employee-pay-all plans. Under noncontributory plans, the policyholder pays the entire cost. Because all eligible employees are usually covered, noncontributory plans are desirable from an underwriting standpoint because adverse selection is minimized. In fact, most insurance companies and the laws of many states require 100 percent participation of eligible employees under noncontributory plans. In addition, the absence of employee solicitation, payroll deductions, and underwriting of late entrants into the plan results in administrative savings to both the policyholder and the insurance company, thus favoring the noncontributory approach to the financing of group insurance benefits.

Most state laws prohibit an employer from requiring an employee to participate in a contributory plan. The insurance company is then faced with the possibility of adverse selection because those who elect coverage will tend to be the poorer risks. From a practical standpoint, 100 percent participation in a contributory plan would be unrealistic because, for many reasons, some employees neither desire nor even need the coverage provided under the plan. However, insurance companies require that a minimum percentage of the eligible members elect to participate before the contract is issued. The common requirement is 75 percent, although a lower percentage is often acceptable for large groups and a higher percentage may be required for small groups. A 75 percent minimum requirement is also often a statutory requirement for group life insurance and sometimes for group health insurance.

A key issue in contributory plans is how to treat employees who did not elect to participate when first eligible but who later desire coverage or who dropped coverage and want it reinstated. Unfortunately, this desire for coverage may arise when these employees or their dependents have medical conditions that will lead to claims once coverage is provided. To control this adverse selection, insurance companies commonly require individual evidence of insurability by these employees or their dependents before coverage will be made available. However, there are two exceptions: First, some plans have short, periodic open enrollment periods during which the evidence-of-insurability requirement is lessened or waived. Second, the Health Insurance Portability and Accountability Act effectively eliminates the use of evidence of insurability for medical expense plans, but not for other types of group insurance.

Insurance companies frequently require that the employer pay a portion of the premium under a group insurance plan. This is also a statutory requirement for group life insurance in most states and occasionally for group health insurance. Many group insurance plans set an average contribution rate for all employees, which in turn leads to the subsidizing of some employees by other employees, particularly in those types of insurance where the frequency of claims increases with age. Without a requirement for employer contributions, younger employees might actually find coverage at a lower cost in the individual market, thereby leaving the group with only the older employees. Even when group insurance already has a cost advantage over individual insurance, its attractiveness to employees is enhanced by employer contributions. With constantly increasing health care costs, employer contributions help cushion rate increases to employees and thus minimize participation problems as contributions are raised. In addition, underwriters feel that the lack of employer contributions may lead to a lack of employer interest in the plan and, consequently, to poor cooperation with the insurance company and poor plan administration.

Administration
To minimize the expenses associated with group insurance, the underwriter often requires that the employer carry out certain administrative functions. These commonly include communicating the plan to the employees, handling enrollment procedures, collecting employee contributions on a payroll-deduction basis, and keeping certain types of records. In addition, employers are often involved in the claims process. Underwriters are concerned not only with the employer's ability to carry out these functions but also with the employer's willingness to cooperate with the insurance company.

Prior Experience
For most insurance companies, a large portion of newly written group insurance consists of business that was previously written by other insurance companies. Therefore, it is important for the underwriter to ascertain the reason for the transfer. If the transferred business is a result of dissatisfaction with the service provided by the prior insurance company, the underwriter must determine whether the insurance company can provide the type and level of service desired. Because an employer is most likely to shop for new coverage when faced with a rate increase, the underwriter must evaluate whether the rate increase was due to excessive claims experience. Often, particularly with larger groups, excessive claims experience in the past is an indication of the same type of experience in the future. Occasionally, however, the prior experience may be due to circumstances that will not continue in the future, such as a catastrophe or large medical bills for an employee who has died, totally recovered, or terminated employment.

Past excessive claims experience may not result in coverage denial for a new applicant, but it will probably result in a higher rate. As an alternative, changes in the benefit or eligibility provisions of the plan might eliminate a previous source of adverse claims experience.

The underwriter must determine the new insurance company's responsibility for existing claims. Some states prohibit a new insurance company from denying (by using a preexisting-conditions clause) the continuing claims of persons who were covered under a prior group insurance plan if these claims would otherwise be covered under the new contract. The rationale for this "no-loss, no-gain" legislation is that claims should be paid neither more liberally nor less liberally than if no transfer had taken place. Even in states that have no such regulation, an employer may still wish to provide employees with continuing protection. In either case, the underwriter must evaluate these continuing claims as well as any liability of the previous insurance company for their payment.

Finally, the underwriter must be reasonably certain that the employer will not present a persistency problem by changing insurance companies again in the near future.

Size
The size of a group is a significant factor in the underwriting process. With large groups, prior group insurance experience can usually be used as a factor in determining the premium, and considerable flexibility also exists with both rating and plan design. In addition, adjustments for adverse claims experience can be made at future renewal dates under the experience-rating process.

The situation is different for small groups. In many cases, coverage is being written for the first time. Administrative expenses tend to be high in relation to the premium. There is also an increased possibility that the owner or major stockholder might be interested in coverage primarily because he or she, or a family member, has a medical problem that will result in large immediate claims. As a result, contractual provisions and the benefits available tend to be standardized to control administrative costs. Also, because past experience for small groups is not necessarily a realistic indicator of future experience, most insurance companies use pooled rates under which a uniform rate is applied to all groups that have a specific coverage. Because excessive claims experience for a particular group is not charged to that group at renewal, more restrictive underwriting practices relating to adverse selection are used. These include less liberal contractual provisions and, in some cases, individual underwriting of group members.

Composition
The age, sex, and income of employees in a group will affect the experience of the group. As employees age, the mortality rate increases. Excluding maternity claims, both the frequency and duration of medical and disability claims also increase with age.

At all ages, the death rate is lower for females than for males. However, the opposite is true for medical expenses and disability claims. Even if maternity claims are disregarded, women as a group tend to be hospitalized and disabled more frequently and require medical and surgical treatment more often than men.

Employees with high income levels tend to incur higher-than-average medical and dental expenses. This is partly because practitioners sometimes base charges on a patient's ability to pay. In addition, persons with higher incomes are more likely to seek specialized care or care in more affluent areas, where the charges of practitioners are generally higher. On the other hand, low-income employees can also pose difficulties. Turnover rates tend to be higher, and there is often difficulty in getting and retaining proper levels of participation in contributory plans.

Adjustments often can be made for all of these factors when determining the proper rate to charge the policyholder. Some states, however, require the use of unisex rates, in which case the mix of employees by sex becomes an underwriting consideration. Also, major problems can arise in contributory plans: to the extent that higher costs for a group with a less-than-average mix of employees are passed on to these employees, a lower participation rate may result.

Industry
The nature of the industry represented by a group is also a significant factor in the underwriting process. In addition to different occupational hazards among industries, employees in some industries have higher-than-average health insurance claims that cannot be directly attributed to their jobs. Therefore, insurance companies commonly make adjustments in their life and health insurance rates based on the occupations of the employees covered as well as the industries in which they work.

In addition to occupational hazards, the underwriter must weigh other factors as well. Certain industries are characterized by a lack of stability and persistency and thus may be considered undesirable risks. The underwriter must also be concerned with what impact changes in the economy will have on a particular industry.

Geographic Location
The size and frequency of health insurance claims varies considerably among geographic regions and must be considered in determining a group insurance rate. For example, medical expenses tend to be higher in the Northeast than in the South, and higher in large urban areas than in rural areas. Certain geographic regions also tend to have a higher frequency of disability claims.

A group with geographically scattered employees also poses more administrative problems and probably results in greater administrative expense than a group in a single location. In addition, the underwriter must determine whether the insurance company has the proper facilities to service policyholders at their various locations.

The Group Insurance Environment

The term group insurance, like the term employee benefits, can have different meanings to different persons. Most employees view group insurance in a very broad sense as any arrangement under which an employer makes benefits available to employees for life insurance, disability income, medical and dental expenses, legal expenses, and property and liability insurance. To employees, it usually makes little difference whether a benefit plan is funded with a traditional insurance contract or through some type of alternative arrangement; it still is group insurance.

Even though the broad meaning of group insurance is used, it is important to make a distinction between group insurance plans that are funded with traditional insurance contracts and those that use alternative funding methods. Although alternative funding methods, including total self-funding, are becoming more common, the majority of group insurance is still fully insured through insurance contracts.

The character of group insurance has been greatly influenced by the numerous laws and regulations that state governments and the federal government have imposed. The major impact of state regulation has been felt through the insurance laws governing insurance companies and the products they sell. Traditionally, these laws have affected only those benefit plans funded with insurance contracts. However, as a growing number of employers are turning toward self-funding of benefits, there has been increasing interest on the part of state regulatory officials to extend these laws to plans using alternative funding methods. The federal laws affecting group insurance, on the other hand, have generally been directed toward any benefit plans that are established by employers for their employees, regardless of the funding method used.