Risk Sharing - Group Life & Health Insurance
A basic principle of insurance is sharing the financial consequences of events that are unlikely to occur. The larger the group the more predictable the occurrence of events (remember your statistics?).
If events are predictable there is no need to share risk. The event of members visiting the dentist every 6, 9 or 12 months is extremely predictable if you know the frequency maximum of the dental plan. There is no need to insure or share the risk of preventive dental because it is a predictable occurrence controlled by the member.
If the financial consequences of an event are too large for the individual or group to bear then it makes sense to share that risk. Long term disability benefits can total millions of dollars per claim. Most groups need to share that risk through insurance.
The risk tolerance of a group is based on number of members, benefit plan design and financial strength of the organization. A large group already shares the risk among members. If a benefit schedule is not uniform the risk of paying the difference between schedules is only spread amongst those eligible for that excess coverage.
The fluctuation of claims decreases with the size of the group and the number of members. The following is a guide to when most groups consider accepting the full risk (self-insuring) their benefits.
Number of members x number of years exposure:
- 10 - Dental
- 20 - Medical (recurring, in Canada)
- 100 - Short Term Disability
- 10,000 - Life Insurance
- 20,000 - Accidental Death &: Dismemberment
Few organizations are large enough to consider self-insuring their Long Term Disability benefits. The risk of Out of Country and non-recurring Medical claims are often managed through pooling limits.
Method of Sharing the Risk
The underwriter, usually an insurance company, takes all the risk and charges a rate per unit of coverage. The underwriter is more likely to be cautious when assessing the price of the group since there is no sharing of the risk.
Non-refund Prospectively Experience Rated
The underwriter accepts all the risk and uses past claims along with demographics, trend factors and inflation factors to estimate future claims and arrive at a premium.
Refund Prospectively Experience Rated
Some underwriters offer an underwriting method that lets the plan sponsor take some of the risk but is not as detailed as retention accounting.
The underwriter uses past claims along with demographics, trend factors and inflation factors to estimate future claims and arrive at a premium. If at the end of the financial year premiums exceed costs then the surplus can be used to boost reserves or refunded to the plan sponsor. If at the end of the financial year costs exceed premiums exceed then the deficit is collected through a premium increase. The underwriter risks being left with deficit if the policy is terminated.
Administrative Services Only
A third party provides claims paying services and charges for services provided. The cost can be budgeted an remitted monthly based on a level amount or according to volume of coverage. Alternately the cost of claims and charges can be billed to the plan sponsor monthly.
The plan sponsor performs all administration functions including the payment of claims and accepts all risks associated with the benefit program. Careful attention should be paid to concerns that could arise from an employer having access to the medical information of employees.
In order to reduce the volatility of the experience, certain claim payments may be insured. The underwriter charges a monthly premium per person or percentage of claims as a pooling charge.
Examples of pooling strategies are as follows:
- all out-of-country medical benefits
- the portion of medical claims over $10,000 per individual
- the portion of life claims over $25,000 per individual
- the portion of life claims over $500,000 per year
- 25% of all life claims
- the portion of long term disability claims over $5,000 monthly per individual