Characteristics of Group Health Insurance
Group health insurance provides coverage to a defined group of people, typically employees of a company. Understanding how group coverage differs from individual coverage is essential for the licensing exam.
Master Policy and Certificates
Master Policy (Contract)
| Feature | Description |
|---|
| Holder | Employer (policyholder) |
| Contains | All terms, conditions, benefits, exclusions |
| Negotiations | Between employer and insurer |
| Amendments | Made to master policy |
Certificates of Insurance
| Feature | Description |
|---|
| Recipient | Each covered employee |
| Content | Summary of coverage |
| Legal status | Not the actual contract |
| Purpose | Proof of coverage |
Key Point: The employer holds the master policy; employees receive certificates that summarize their coverage. The certificate is NOT the contract.
Group vs. Individual Underwriting
| Factor | Group Insurance | Individual Insurance |
|---|
| Underwriting basis | Group as a whole | Individual applicant |
| Medical exams | Generally not required | Often required |
| Health questions | Limited or none | Detailed health history |
| Guaranteed issue | Usually | Not typically |
| Adverse selection control | Through eligibility rules | Through underwriting |
Group Underwriting Factors
| Factor | Consideration |
|---|
| Industry | Hazard level of work |
| Group size | Larger = more predictable |
| Age distribution | Younger = lower costs |
| Gender mix | May affect costs |
| Geographic location | Regional cost variations |
| Prior claims experience | Loss history |
Experience Rating
Experience rating adjusts premiums based on the group's actual claims experience:
| Group Size | Rating Approach |
|---|
| Small groups (< 50) | Community rated or manual rated |
| Medium groups (50-500) | Blended experience rating |
| Large groups (500+) | Full experience rating |
Experience Rating Formula
New Premium = (Experience Factor × Claims) + (Credibility Factor × Manual Rate)
| Term | Definition |
|---|
| Experience factor | Weight given to group's own claims |
| Credibility | Statistical reliability of group's experience |
| Manual rate | Standard rate for similar groups |
Example
- Group's claims last year: $800,000
- Manual rate premium: $1,000,000
- Credibility: 70%
- Experience adjustment: ($800,000 × 70%) + ($1,000,000 × 30%) = $860,000
Contributory vs. Noncontributory Plans
Contributory Plans
| Feature | Details |
|---|
| Funding | Employer AND employee share cost |
| Typical split | Employer pays 50-80% |
| Participation requirement | Usually 75% minimum |
| Employee portion | Payroll deduction (pre-tax if Section 125) |
Noncontributory Plans
| Feature | Details |
|---|
| Funding | Employer pays 100% |
| Participation | 100% of eligible employees |
| Adverse selection | Lower risk (all must participate) |
| Administrative simplicity | No employee contributions to track |
Exam Tip: Contributory plans require 75% participation; noncontributory plans require 100% participation. This helps prevent adverse selection.
Advantages of Group Insurance
For Employers
| Advantage | Benefit |
|---|
| Tax deduction | Premiums are business expense |
| Attract talent | Competitive benefits package |
| Retain employees | "Golden handcuffs" effect |
| Employee productivity | Healthier workforce |
| Lower rates | Group purchasing power |
For Employees
| Advantage | Benefit |
|---|
| Lower cost | Group rates below individual |
| No underwriting | Guaranteed coverage |
| Pre-tax premiums | Section 125 cafeteria plans |
| Convenience | Payroll deduction |
| Employer contribution | Reduced personal cost |
Key Group Insurance Principles
Flow of the Master Group Contract
Insurer → Master Policy → Employer → Certificates → Employees
Eligibility Safeguards
To prevent adverse selection, group plans use:
| Safeguard | Purpose |
|---|
| Minimum participation | Ensures healthy mix of risks |
| Eligibility waiting period | Prevents job-hopping for coverage |
| Probationary period | New employees wait before eligibility |
| Active work requirement | Must be working to be covered |
| Definition of eligible employees | Full-time, hours per week |
Common Eligibility Requirements
| Requirement | Typical Standard |
|---|
| Employment status | Full-time (30+ hours/week under ACA) |
| Probationary period | 0-90 days |
| Waiting period | First of month after hire |
| Active at work | Must be working on effective date |