Group insurance has been gaining a significant amount of publicity recently – both in the life and general insurance markets. This article discusses the main features of group insurance and why it has been getting so much publicity in recent times.
WHAT IS GROUP INSURANCE?
Group insurance is typically offered by a large scale entity or employer as part of an employee or membership benefit package. The International Risk Management Institute (IRMI) defines group insurances as “Insurance provided to groups of people involving the substitution of group selection, the use of experience rating, and the use of a master insurance contract.” The experience rating approach means that the group’s past performance will be used as a proxy for future risk.
According to IRMI the aspects listed above “yield lower administrative costs than would individual policies written for members of the group”, as a result of coverage being provided on a ‘wholesale’ basis. The fact that the individuals eligible to purchase insurance belong to the group for reasons other than the purpose of obtaining insurance is why Group insurance can assist in reducing the problem of adverse selection.
Types of group insurance include life, health, disability, dental, professional indemnity, travel and other similar types of coverage.
Group Insurance in Australia
In Australia, a common form of group insurance is life and disability insurance provided through superannuation funds. A 2008 survey1 showed 96% of the workforce had at least one life insurance policy through superannuation (67% for TPD). Recent legislation changes now require all funds offering a default MySuper product to offer life and total and permanent disability (TPD) cover on an opt-out basis. This legislative change may lead to further increases in the industry premium in force which currently sits just below $4b.2
For many Australians, their gold or platinum credit card comes with overseas travel insurance. Coverage is not overly restrictive, for instance this group insurance can in some circumstances extend to the cardholder’s family.
Some Australian employers provide employee benefits of subsidized health insurance. In many cases, the underlying health insurance is a corporate (group) insurance policy.
Closer to home, the Actuaries Institute has worked closely with insurance broker Marsh Pty Ltd to provide a competitive professional indemnity insurance scheme for self-employed and semi-retired actuaries. This is an example of a group insurance scheme at the association level.
Group insurance is also available to companies. A single insurance policy covering different companies within the same industry (but otherwise not related) is an example of corporate group insurance. For instance, From circa 1980 until 20013, New Zealand electricity distribution businesses used to purchased insurance through the group insurance scheme – Transmission Reticulation Insurance Program (TRIP).
WHAT ARE THE PROS AND CONS OF GROUP INSURANCE
We summarise the pros and cons of group insurance, from the insurer’s point of view, in the table below:
Yields lower administrative costs
Lack of underwriting control – not offer and acceptance but automatic acceptance
Insurer gets access to a diversified portfolio of insureds
Lack of claims management control (this may be outsourced to the relevant group/ association)
Increased access to insurance purchasers
Experience rating delay may lead to cyclic pricing or pricing lagging worsening claims’ costs
WHAT ARE THE PROS AND CONS OF GROUP INSURANCE?
The reasons for the publicity differ for the various forms of group insurance but they do touch on some of the pros and cons already mentioned. Gaining a significant amount of publicity recently, and discussed in further detail below, are group insurance in superannuation and brokered corporate group insurance.
Group Insurance in Superannuation
Australian life insurers have announced profit downgrades over the past 12 -18 months, as poorer than expected claim experience emerges from group insurance in superannuation. Shareholder shock has reverberated to insured shock as premiums rates increased. Premium increases have been particularly high as superannuation trustees have resisted the other medicine of coverage restrictions which would normally occur during market hardening. As per the cons of group insurance noted previously, claims delays may have reinforced pricing lagging emerging claims costs.
Various reasons have been proffered for the industry wide underpricing: reliance on low quality data, increased automatic acceptance limits (AAL’s), social-media empowered adverse selection, law firms seeking alternative sources of income4 and higher mental illness claims.
To stabilise the situation APRA has released Prudential Standard SPS 250 and Draft Practice Guide LPG 270 relating to Insurance in superannuation. These documents discuss identification and monitoring of risks, tendering and data management for both superannuation trustees and life insurers. For instance, LPG 270 has been drafted around the three main issues that have been seen in driving the current experience. These areas include the risk management, tender process, and data management.
Data management heavily influences the initial tender pricing calculation. Additional periods of data may help tenderers gain more comfort in pricing. However, this will only be helpful once a consistent data definition is created, as these data definitions can create significant changes to pricing and valuations.5
Not only does the data management and risk management process have to be in place, the overall philosophy of the insurer and trustee needs to be agreed upon. Inconsistencies have led to a significant difference of opinions as to which claims are to be approved, which in turn has led to significant differences in the performance of some group insurers.
Brokered Corporate Group Insurance
Most multinational brokers offer exclusive insurance facilities. Previously these facilities were limited to bespoke risks such as infrastructure property risks. The status quo changed in early 2013 – Berkshire Hathaway now offers 7.5% coinsurance on all the retail subscription business6 placed by insurance broker Aon in the Lloyd’s market. This equates to an annual gross written premium of $0.3b.7 Berkshire Hathaway uses a full-follow modus operandi – coverage and premium rating is the same as the other 92.5%. The Corporation of Lloyd’s (which oversees the Lloyd’s market) is concerned that the lack of underwriting control may lead to a less efficient insurance marketplace.
Facilities such as the one described above may expand in the future, leading to a weaker pricing market i.e. less pricing signals and the increased ability of one insurer to move the market. Some have regarded this move as a part of the shift from risk underwriter to risk investor-trader. This is because Berkshire Hathaway’s facility can be considered an index tracker fund. I.e. Berkshire Hathaway can receive Lloyd’s market returns without choosing individual policies to reinsure.
IS IT ALL BAD?
Group insurance is far from a burning platform. Group insurance continues to provide lower administrative costs, making insurance more affordable and accessible to insureds whilst Insurers are able to access a diversified portfolio of insureds.
Whilst some of the downside risks inherent in group insurance have been realised in the life and disability insurance areas, in other areas, such as corporate group insurance, it is the upside benefit which is being realised. Both life and non- life insurers may benefit from considering the recent publication of the draft LPG 270. Similarly, looking beyond one’s traditional practice area for lessons learnt may be fruitful.
3 HIH was the primary insurer, so things changed in 2001
6 Much of Lloyd’s business works by subscription, where more than one syndicate takes a share of the same risk. Business is conducted face-to-face between brokers and underwriters in the Underwriting room.
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by Andrew Ngai