Exam 3 Part B

Question 1

Health Insurance

Answer 1

• Premium cost is entirely income tax free for the EE (no limit)
• Favorable tax treatment exists only for qualified plans:
  1. Does not discriminate in favor of key EEs or highly compensated EEs
  2. IRS sets the guidelines

Question 2

Group Insurance

Answer 2

• GI vs Individual Insurance (II)
• Exposure unit is a group of individuals
  1. Insure group as a whole
  2. . No individual underwriting
• Group Underwriting
• Usually experience Related

Question 3

Group Insurance (Underwriting)

Answer 3

• Looks at broad characteristics of a group to determine rates
• Still must control adverse selection

Question 4

Group Insurance (Experience Rated)

Answer 4

• Premium rate now based upon past claims experience of the group
• Low claims = save in rates
• High claims = penalized
• Provides an incentive to control losses

Question 5

Group Insurance Advantages

Answer 5

• Rates are generally lower than Individual Insurance: for same level of P*, GI is less expensive per EE than II
• No individual underwriting
• ER helps collect the money
• Commissions tend to be lower

Question 6

Adverse Selection

Answer 6

• AKA - anti selection or negative selection
• Demand correlates to Risk
• Information is only known to insured
• Impact on price could lead to collapse of insurance pool, product or market

Question 7

Methods to Control Adverse Selection

Answer 7

• Reason Group Exists
• Should exist for reasons other than the purchase of insurance
• Waiting Period
• Pre existing condition exclusions (PCE)
• Minimum Group Size
• Minimum Participation Requirements
• Steady Flow of Persons

Question 8

Acceptable Groups

Answer 8

• ER/EE based groups
• Professional Associations
• Alumni Associations
• Veterans Groups

Question 9

Waiting Period

Answer 9

• A period of time an EE must work before being covered by group insurance (CGI)

Question 10

Pre-Existing Condition Exclusions (PCEs)

Answer 10

• Condition that has been treated and claim filed for with an insurer
• Coverage is somehow limited

Question 11

Minimum Group Size

Answer 11

• Smaller groups tend to have higher risks
• Rate smaller groups separately
• No experience rating
• Possibly engage in some individual underwriting

Question 12

Minimum Participation Requirements

Answer 12

• ## Insurer may require a minimum % of eligible EEs be covered under group plan

Question 13

Steady Flow of Pearson

Answer 13

• Newer, younger, better risks enter to replace older, less healthy risks
• If a group is closed, premium increases dramatically and goal risks drop out if optional coverage exists

Question 14

Disadvantage of Plans

Answer 14

• Coverage may be temporary
• An EE leaves the group coverage might terminate
• More compensation for an EE with a family than a single EE