Chapter 18

Group Insurance
LIFE & HEALTH INSURANCE
1 3 TH E D I T I O N
BLACK & SKIPPER
(WEEK 4)

Agenda
Employee Benefit Plans
Group Insurance:

Characteristics
Advantages & Limitations
Eligible Groups
Nature of Coverage
Benefits

Group Insurance*
Plans of Insurance
Marketing of Group Insurance
Group Insurance Pricing
Rate Making

Introduction
Employee Benefit Plans employer sponsored plans

that provide benefits to employees as part of their

total compensation.

Rationale:
for employee to achieve a smoother income / consumption
stream over their entire life cycle; some have preference for
future retirement income e.g. Employee Retirement Fund;
to meet competition for employees; direct compensation and
the benefit package make employers compete for employees;
Presence of plan may reduce turnover; lead to increase in
productivity.

Group Insurance
Relates to a group of persons who usually

have a business or professional relationship

to the contract owner insurance coverage
under a single contract.

Overtime, innovative underwriting

techniques of group insurers and liberalized

regulatory actions broaden its definition.

Group Insurance
Group insurance differs from other forms of

insurance in several ways.

Distinguishing characteristics:

Group underwriting;

Master contract;

Lower cost;

Flexibility on contract design;

Use of experience rating.

Characteristics
Group underwriting:
Individual evidence of insurability is usually not required;
Sufficient number of group of lives;
Reasonably homogeneous in nature;
Incidental, flow of persons, minimum participation etc.
Master contract:
Detailed document contractual relationship between group
contract owner and the insurer;
Group policy owner as group policyholder;
Insured persons usually employees / beneficiaries.

Characteristics
Lower cost:

Lower cost protection than that of individual insurance;

Mass distribution approach & admin;
Economies of operation.

Flexibility:

Although contract follow certain std provision more flexible

than individual contract;
Degree of flexibility permitted; size of group involved.

Characteristics
Experience rating:
Premiums are often subject to experience rating;
The experience have bearing on dividends or premium-rate
adjustment;
Based on employers own experience, class or type of industry
(age, gender and income level).

Advantages
Effective solution to fulfill need for employee

benefits.

Extended protection to large numbers of persons

with little or no life insurance.

Enabled life insurance operators to reach many

peoples within short time of period and at low cost.

Employers subsidized cost.

Limitations
Temporary nature of the coverage conversion involves

cost.

Many fail to recognize their own need for individual life

insurance.

Fail to provide mechanism for any analysis of the

financial needs of the individual.

Just as basic policy - cannot help to cover all insurance

needs.

Eligible Groups
Employees of a single employer;
Debtor-creditor groups the policy owner is the

creditor such as banks e.g. if debtors die,

insurance company will pay to the creditor;

Labour union groups;

Multiple-employer trusts market group benefits to

employers that have small number of employees.

Nature of Coverage
Minimum size and proportions before 50 lives, now at

least 10 lives:

Non contributory plan - premium paid by employer 100%

participation;
Contributory plan - certain portion pay by employee 75% must be
included.

Individual eligibility requirements:

Employees must meet certain participation requirements:

Regular, active and full-time employees;
Satisfy a probationary period (1 6 months);
Apply for coverage during the eligibility period - during the eligibility
period, the employee can sign up for coverage without furnishing
evidence of insurability.

Nature of Coverage
Duration of coverage:
Protection as long he/she in the service of the employer;
Permanent termination of service - coverage continues for 31
days after termination date;
Extension provide employee opportunity to replace expiring
protection.

Benefits
To minimize adverse selection, usually determine by
a system:
Fixed amount for all employees;
A function of employee compensation-earning;
A function of employee position;
A function of employee length of service;
Combination both salary & length of service.

*Group Insurance
Basis of a group insurance is that (subject to certain

conditions), it is possible to insure lives in large

groups at low rates of premium and often without
medical examination.
Covers all or certain class or classes of employees of a
company, unions, associations etc.
Selection:

Group existence for some purpose other than insurance;

Stipulated % of all the lives in the group must be included to
secure average mortality experience.

*Group Insurance
Selection:
Must consist a minimum number of lives if medical
examination is to be waived e.g. 10 and above;
The lives assured must be in the regular employment of the
assured employer.
The contract of group insurance is solely between the

insurance company and the employer, who is named

in the Master Policy as Grantee.
Section 186 of the Insurance Act 1996 provides
that no person shall arrange a group policy for
persons in relation to whom he has no insurable
interest without disclosing each person details.

*Group Insurance
Minimum Requirements:
The minimum number of employees to be covered must be 10;
Non-contributory: 100% of all eligible employees must join the
plan; Contributory: at least 75% of all eligible employees must
join the plan.

Eligibility:
Full-time employees between the ages of 16 and 55 and actively
working.
Evidence of Insurability:
No medical underwriting is necessary, less than FCL.

*Group Insurance
Amount of Insurance:
Various ways in which the amount of insurance can be fixed.
The simple method is to fix the same amount e.g. RM 10,000
across for all;
Another method is to classify employees to salary or by
designation.

Calculation of Premium:
According to age and sex distribution, allowing for
occupational rating where applicable;
Premium is paid annually within the 60-days premium
warranty;
Experience rating large schemes of 2000 lives or more.

Plans Of Insurance
Yearly Renewable Term Insurance

Provides low-cost protection to employees (rate per $ 1,000);

Coverage is yearly renewable term (without evidence of
insurability & possible increase in rate);
Amount of coverage is typically 1-5 times the employees
annual salary;
Coverage usually ends when the employee leaves the company;

Can convert to an individual cash value policy.

Plans Of Insurance
Supplementary Life Insurance
Normally contributory
Credit Life Insurance
Death benefit = Unpaid consumer debt (balance) of the
insured
Accelerated Death Benefit
Advance payment (portion of face amount) associated with
terminal illness

Marketing of Group Insurance

Sale and renewal of group insurance products is very price

sensitive.

Group insurance market very segmented and developing

premium rates must be considered.

Segmented by size, type and funding method.

Distribution sales through corporate agents, specialized

brokers and on direct basis.

Mass and worksite marketing.

Group Insurance Pricing

Insurance companies must generate enough

revenue to cover costs of its claim and contribute

surplus of the company.

Price based on expected future events and

experience rating.

Consist of two (2) steps:

Determination of a unit price for each unit of benefit e.g.

$1,000 per life insurance;
Determination of the total price - premium that will be paid by
the contract holder for all of the coverage purchased.

Rate Making
Manual rating:
Premium rate is determined independently of a
particular groups claim experience;
Not looking at experience claim;
Based on premium rates that are established for broad
classes of group.
Experience rating:
Past claims experience of a group is considered in
determining future experience;
Charging same rate for all groups regardless of their
experience will lead to adverse selection.