Insurance Notes: January 2016

Butter-flavored popcorn oil is in high demand at Oasis Foods, a manufacturer of cooking oils, mayonnaise and other products that restaurants and distributors often purchase by the ton. "We get a rush this time of year with all the movie-going at the holidays," says Duke Gillingham, president of Oasis,at his factory in Hillside, N.J., just west of Newark Liberty Airport.

The company's health insurance coverage is not as popular as its popcorn oil. Oasis offered health insurance to all employees for 2015, to comply with a new Affordable Care Act mandate. And while some employees did sign up for the insurance — the company doubled the number of people on its health plan over previous years — about two-thirds of the employees declined the coverage. With monthly premiums of roughly $350 for a family of four, and with a $2,500 annual deductible, it was too expensive for factory workers, many of whom earn between $10 and $15 an hour. Gillingham says he hasn't been able to find decent insurance much cheaper than that, and he cannot afford to significantly raise his employees' wages. "The sad fact is we're in a very competitive business," he says. "We wish we could make [insurance] more affordable, but it's essentially what the business can bear. If we don't watch what we're doing, we can be high-cost, and that doesn't serve any of the employees well." Companies Look To Avoid Penalties Oasis Foods, a subsidiary of a Swedish food manufacturer, has about 180 workers. As of Jan.1, smaller firms — those that employ between 51 and 100 workers — are being phased into the same mandate that Oasis faced in 2015. Companies must offer affordable coverage to all employees, and will be subject to a penalty if their workers instead turn to the health exchange to buy subsidized coverage. There's no penalty for companies, it turns out, if workers qualify for Medicaid — though there could be controversy.

At firms like Oasis, low-wage workers are candidates more often for Medicaid than for the state or federal insurance exchange. To qualify for Medicaid, applicants may earn no more than 138 percent of the federal poverty level — or roughly $16,000 for a single person and around $33,000 for a household of four. Employers have not historically played a significant role in helping workers enroll in Medicaid. But Gillingham's insurance broker told him about a startup calledBeneStream, which is based in New York City and facilitates enrollment in the government program. Company Shifts Insurance Costs To The Government Founded two years ago with seed money from theFord Foundation, BeneStream now helps more than 6,500 workers at 125 companies across the country get Medicaid. CEOBenjamin Geyerhahnsays moving workers from private insurance to Medicaid helps firms shift their costs to the government. "The savings is quite significant," he says. "Our average is about 250 percent — so about two-and-a-half times the money you spend on us comes back to you in the form of saved premium." Geyerhahn says going onto Medicaid, which is nearly free for employees, is a good deal, though it lacks the generous benefits of more expensive plans.

If employees make so little that they're eligible for Medicaid, he says, they probably can't afford regular insurance premiums, especially when combined with the high deductibles that undermine much of the benefit of insurance. "Yes, this [level of coverage] is something that will help them if they get in a car accident or have a heart attack," he says, "but this isn't something that's going to help them manage their health over the course of the year." Wal-Mart, McDonald's and some large companies havedrawn firefor not providing employees with health insurance, but instead relying on taxpayers to fund workers' health needs via Medicaid. Ken Jacobs, chair of the University of California, Berkeley's Labor Center, says companies whose workers get Medicaid should bear some of the burden of the cost to taxpayers. Critics Think Employers Should Pay Bigger Share "Those employers should be paying more into the general pot that pays for health care, rather than putting those costs onto everyone else," he says.

California legislators considered imposing a state tax penalty for companies whose workers get Medicaid, but lawmakers ultimately rejected the proposal. Linda Blumberg, an economist at the Urban Institute, says that whether you are looking at a vast company like Wal-Mart or a modest-sized one like Oasis Foods, compensation is about trade-offs. The more you pay for people's insurance, the less you have to put in their paychecks. "When workers are low-income," Blumberg says, "I would rather that we publicly finance their medical care, make it very accessible to them, have low cost-sharing so that's not a barrier to them getting necessary care, and let them have a little bit higher wages in order to compensate."

And even the large increases in the minimum wage currently being contemplated or phased in by several states and cities might still not be enough for those workers to afford most employer-sponsored insurance, given the high premiums and deductibles of such plans. At Oasis, Gillingham says his company pays a lot in taxes, so getting almost-free health care for some workers amounts to a "fair deal." He contrasts this system to one he and his family of six experienced in England. "My kids didn't suffer from having a five- or six-minute checkup," he says, compared with doctor visits in the United States — that may have been twice as long, and at much higher expense, but without any noticeable difference in results. "We didn't see any of the demons that people speak of when they talk about socialized medicine," Gillingham says. "There were no lines, no poor standard-of-care." But despite being relatively upbeat about government healthcare, he concedes that Oasis workers so far have given Medicaid mixed reviews. Some doctors and hospitals take the insurance, but many don't. Still, that's true of most health insurance, Gillingham says.

Insurance Underwriting

Underwriting is the process that insurance companies use to select, classify and rate risks. Insurance companies use the underwriting process to prevent adverse selection, which could cause the insurance company to become insolvent. Underwriting is used to classify risks and assign premium rates that accurately reflect the amount of risk undertaken by the insurance company. While the selection, rating, and classifying of risks are part of the underwriting process, the notification of risks is NOT part of the underwriting process.

Underwriting is the process that insurance companies use to select, classify and rate risks. The insurance company assigns a premium based on the risk.

Underwriters seek to answer two big questions when deciding whether to issue an insurance policy:

Is the applicant insurable?
Does the applicant have an insurable interest in the insured?

Remember: Insurable interest is a valid concern for the continued life or well-being of the insured. Insurable interest exists if the applicant is the insured, is related to the insured by blood or marriage, or is a business partner or creditor of the insured.

Typically, the applicant for a life or health insurance policy is also the insured and would certainly have an insurable interest in his or her self. However, this is not always the case. Third party ownership is when a person other than the insured applies for a policy. This frequently occurs when a person applies for a policy for a family member or as part of a business or debt agreement. If the applicant is not the insured, the agent must verify that the applicant has an insurable interest in the insured.

Applicant, Policyowner, Insured, Beneficiary

The applicant is defined as the person applying for the policy who fills out the application to be submitted to the insurer.

The policyowner (synonymous with policyholder) is the person who has all ownership rights under the policy (such as assignment and naming beneficiaries), pays premiums and accepts the policy when delivered. In most cases, the policyowner is the applicant.

The insured is the person who is covered under the policy.

The beneficiary is the named person or persons who receive policy benefits.

Underwriting Process

Once the underwriter establishes that an applicant is insurable, the underwriting process begins. The underwriter will evaluate information about the applicant and select a risk classification and premium rate that matches the degree of risk undertaken. After the application clears underwriting, the insurer will issue the policy for delivery, and the insurance producer will deliver the policy to the policyowner.

Underwriting Risk Factors

The following are risk factors which are considered when underwriting life insurance:

Age
Gender
Lifestyle
Smoking
Hobbies
Hazardous Occupations
Medical History
Family Health History
Aviation

Major Risk Factors for Underwriting Health Insurance:

In life insurance there is only one claim – payment of the death benefit upon the insured’s death. Health insurance, on the other hand, may have many claims for one insured. Since there are more claims made on a health insurance policy, it is crucially important those policies are underwritten correctly and risks are classified accurately. Underwriters aren’t simply accepting or declining coverage; they are analyzing the applicant’s degree of risk. The most important factors in underwriting a health insurance policy are: physical condition, moral hazards, and occupation.

Physical Condition

An applicant’s physical condition is the most important factor in evaluating health risks. The underwriter must know if the applicant has any medical conditions. For example, a person who has chronic headaches and migraines may have a neurological condition that needs medical attention at some point in the future. A person who is extremely underweight or overweight may also pose a higher risk to the insurance company. While past surgeries and other physical conditions of the insured do materially affect the insurer’s decision to accept of decline a risk, any childhood diseases the insured had do not materially affect the insurer’s decision.

Moral Hazards

An applicant’s lifestyle and habits also have an effect on risk selection and classification. A careless or accident prone person may pose a higher risk to the insurer. Alcohol abuse and drug use are red flags for the insurer.

Occupation

An applicant’s occupation is important for predicting the likelihood and severity of a disability. Some occupations, such as office jobs, pose little threat for disability. While others, such as construction workers, factory workers and mine workers, expose people to a wide array of hazards – chemicals, heavy machinery, or precarious work conditions. Other circumstances that contribute to higher risks include irregular work hours, fluctuating income, and a nonspecific place of employment.

Insurance companies classify occupations into five classes: AAA, AA, A, B, and C. The AAA class is for professional workers and those who work in an office. The lower classes (B and C) are for more hazardous occupations.

The premium for health insurance policies is directly affected by an occupation’s degree of hazard. Applicants with less hazardous occupations have lower premiums; applicants with more hazardous occupations have higher premiums. If the applicant changes to a less hazardous occupation, the insurance company will return excess unearned premium. If the applicant changes to a more hazardous occupation, the insurance company will reduce the benefits proportionately, but the premium will stay the same.

Other factors that affect an applicant’s underwriting for health insurance include age, sex, medical history, family history, and hobbies. Older applicants tend to represent higher risks and have higher premiums. Insurance companies typically limit an insured’s coverage under an individual health insurance plan to age 65. Women tend to have higher disability rates than men. Medical and family history is often a good indicator for the reemergence of health problems. Finally, dangerous hobbies an applicant pursues, such as cave diving, heli-skiing and bull riding, increase the insurance company’s risk.

Sources of Underwriting Information

The sources used to gather information during the underwriting process include: Application, Medical Report, Attending Physician Statement, Investigative Consumer (inspection) report, Credit report, Medical Information Bureau, and Medical examinations and lab tests; and Special questionnaires.

Application

The application is the primary source of insurability information used in underwriting. The person who applies for coverage must complete and submit the application. In most cases, the application is attached to, and becomes part of, the contract. If the application is attached to the contract and the insurer discovers intentional misstatements, it can be used as a legal document. Agents should do their best to review the applicant’s answers to questions on the application to avoid delays in underwriting from inaccuracies.

An insurance application has three basic parts: Part I General Information, Part II Medical Information, and Part III Agent’s Report.

Part I – General Information: This part of the application contains general information about the applicant such as the applicant’s name, date of birth, age, sex, social security number, smoking status, marital status, address, occupation and income. Part I states the type of insurance policy for which the applicant is applying and the amount of coverage requested. Part I also includes information about existing policies if the proposed coverage is intended to replace existing coverage. Beneficiaries are stated in Part I of the application. The agent’s name and license number, as well as the name of the insurance company, are required to appear on the first page of the application.

Part II – Medical Information: Part II of the application covers the applicant’s medical history. Information about the applicant’s diagnoses, diseases, visits to the doctor, treatments, surgeries, drug and alcohol use, dangerous hobbies, family health history, name and address of physician(s) are included here. Life insurance for coverage larger than $100,000 usually requires the prospective insured undergo a medical examination performed by a paramedic or physician. The medical examination is paid by the insurer.

Part III – Agent’s Report: The third part of the application is the agent’s report, which is used for underwriting, but does not become part of the contract. Here, the agent records his observations of the applicant, information about the applicant’s financial condition, background and character, and a disclosure of the agent’s relationship to the applicant. The agent will note whether or not the proposed coverage is replacing existing coverage. If so, the policy application is considered a replacement, to which the agent must comply with certain regulatory steps for submitting the application. An agent should complete the agent’s report before sending the completed application to the insurer’s home office.

Medical Report and Attending Physician Statement (APS)

A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant’s medical conditions, the underwriter may need an attending physician statement (APS). The attending physician statement is the report from the applicant’s physician or other qualified medical examiner, such as a paramedic or nurse, who completes the applicant’s medical examination as requested by the insurer. Once the medical report is completed, it is sent to the insurer for use in underwriting.

Consumer (Inspection) Reports

Consumer reports provide information about the applicant's character, lifestyle, and financial stability. Consumer reports are generally only used for policies with large coverage amounts because the reports increase underwriting expenses. There are two types of consumer reports: inspection reports and investigative reports.

Inspection reports are performed by a credit reporting agency. Insurers must abide by the rules of the Fair Credit Reporting Act.
Investigative reports are based on interviews with friends and neighbors, employers and coworkers, and other individuals who know the insured. Investigative reports cannot be made unless the insured is notified of the report in writing.

Credit Report

An applicant’s credit history is sometimes used for underwriting. The Fair Credit Reporting Act requires the applicant be notified at the time of application that a credit report may be requested, regardless if a credit report will be requested or not. Consumers must also be informed that they have the right to request additional information about the report, such as the name of the company that provided them with a report. Such additional information must be provided to consumers within five days if requested.

Note: that the insurance company cannot tell the client what was in the report or why the client has been denied. The FCRA requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Medical Information Bureau (MIB)

The Medical Information Bureau is a nonprofit trade organization that maintains medical information about individuals that is used by life and health insurers. The main purposes of the MIB include preventing misrepresentation and fraud, providing insurers with tools to assess risk and holding down the cost of life insurance. Member insurers supply the MIB with confidential information about an applicant for insurability purposes. This information is collected from insurance applications and claims.

Information collected includes underwriting information such as an individual's hazardous activities and impairments to insurability; however, the MIB does not collect claims information or how much coverage an individual has. Insurers may access MIB information on an applicant only if needed for additional investigation. Insurers cannot refuse to issue policies solely on information supplied by the MIB. In addition, an applicant or insured cannot receive information from the MIB. The MIB only provides information to the insurance company, never the individual.

Medical Examinations and Lab Tests

Medical examinations are more often required for life insurance policies, but some health insurance policies may also require a medical examination. A life insurance policy that does not require a medical examination is referred to as “simplified issue life insurance” or “non-medical application.” A medical examination may be required for whole and term life policies, especially those with higher face amounts. Medical exams may be required because an applicant’s health affects his life expectancy, and consequently the underwriting of a life insurance policy. Insurers pay the cost of medical examinations.

HIV and AIDS

Each state has its own laws regarding HIV testing. However, most states allow insurers to include a question on the application asking if the applicant has tested positive for AIDS. Insurers are also permitted to request applicants undergo an HIV test as part of the application requirements, at the insurer's expense. This is typical of life insurance with higher face amounts. The requirement is fair as long as all individuals of a class are required to undergo the test, and the test is in compliance with all state and federal laws. Insurers cannot target a population based on sexual orientation, marital status or geographic location as the basis for an HIV test. In some states, an insurer may be permitted to deny coverage based on a positive HIV test; however, coverage issued to individuals who have tested positive for HIV cannot contain special policy limits or exclusions for losses due to HIV or AIDS.

Insureds must sign a consent form before the HIV test may be performed. HIV test results are confidential, and the insured must sign a release form if the results are to be disclosed to a non-entitled party. If there is a positive result, the applicant and the insurer's underwriter will be notified. If the applicant has not indicated a physician to receive positive test results, then the state Department of Health will receive the information, including the name and address of the lab reporting the results. Insurers may provide HIV test information to the MIB, but may only indicate that the insured has "abnormal blood test results."

Special Questionnaires

Special questionnaires are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant’s time is spent in these activities.

Individuals who indicate on their life insurance application that they are commercial or private pilots will be asked to complete an aviation questionnaire. The purpose of the questionnaire is to provide the insurer with information regarding the individual’s piloting schedule and FAA ratings before making a decision on what policy restrictions to apply.

Selection Criteria and Unfair Discrimination

Insurers are in the business of selecting good risks that will not jeopardize the financial stability of the company. Insurers use discrimination to determine good risks. However, insurers cannot unfairly discriminate against individuals who are part of the same risk class and have the same life expectancy in any policy condition or coverage. If an underwriter determines that the risk does not meet the criteria for at least standard issue, the company may choose to decline to accept the risk, issue the policy with anexclusion rider, or issue the policy with a higher than standard premium.

Unfair discrimination includes discrimination against the blind, the physically or mentally impaired, or based on sexual orientation.

Classification of Risks

Underwriters at the insurer's home office classify risks by analyzing applicants' medical history, hobbies, occupation, and character. The following rating classification system is used to categorize the favorability of a given risk: preferred, standard, substandard, and declined. Lower risks tend to have lower premiums.

Preferred

Preferred risks are individuals who are above average in terms of physical condition and lifestyle and present a less than average risk to the insurer. These risks have lower premiums than standard risks. In life insurance, these are healthy non-smoking individuals with long life expectancies.

Standard

Standard risks are individuals in average physical condition with average lifestyles and habits for people of their respective sex and age group. Standard risks are the average risks of an insurer.

Substandard

Substandard risks are termed extra risks or rated risks because they pose a higher risk to the insurer than standard risks. This rating may be due to the applicant's physical condition, disease history, hazardous occupation or dangerous hobbies or habits. A stunt pilot or chain smoker would be considered substandard risks. Substandard risks pay higher premiums because their life expectancy is shorter.

Declined

Declined risks are uninsurable. These individuals are too risky for an insurer, and are declined coverage.

Loss Ratios

Loss ratio is the proportion of losses incurred by an insurer with respect to the total dollar value of premiums received (total losses divided by total premiums). Expense ratio is the insurer's expenses divided by the total premiums received. If the sum of an insurer's loss and expense ratio is 100%, then the insurer has reached the break-even point. Greater than 100% is a loss, and less than 100% is a gain. Underwriters keenly analyze loss ratios to determine the renewability of insurance contracts and the adequacy of premiums.

Health Insurance Premium Factors

Health insurance premiums are based on three factors:

Morbidity (rate of accident or sickness),
Interest, and
Expenses.

Morbidity

Morbidity is the rate people are expected to become disabled from accident or sickness in a year. Morbidity data helps insurers estimate how many people will become disabled, and the duration of disabilities.

Interest

In health insurance, premiums are paid in advance before a claim is made. These premiums are invested to earn interest. Higher interest rates allow insurers to charge lower premiums.

Expenses

Insurers’ expenses are called loading. These are the daily expenses of operating an insurance company. Loading includes the following costs:

Acquisition Costs: cost of effectuating insurance policies, of which a producer’s first year commission makes up the greatest portion
Overhead: insurer’s salaried staff, rent, and furniture
Contingency Funds: additional premium may be required if original premium is insufficient – only some insurers (i.e., assessment insurers) have the right to charge additional premium
Immediate Claims Payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year

Other Factors

Other factors that affect health insurance premiums are:

Policy benefits
Past claims experience
Age
Gender
Occupation
Hobbies

Some policies provide very limited benefits while others provide broad coverage. Both the type and amount of benefits will affect the premium. Policies with limited benefits are likely to have lower premiums than those with more coverage.

Policies that provide a greater amount of protection are likely to have higher premiums.

The insurer’s claim experience also has an impact on premiums. The more claims an insurer has, the more premium it must charge to pay future claims.

As stated earlier, women, especially those in their working years, tend to have more disabilities than men. In advancing populations, the rate of disability for men and women is about the same. Finally, more hazardous occupations and hobbies subject the insurer to greater risk, and require a higher premium.

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