When a small business buys a group health insurance for its employees, the insurer takes into account certain factors to calculate the insurance premium. The small business pays the amount to the insurer. One of the major aspects considered in the pricing process of the policy is medical underwriting.
What is the process of medical underwriting?
In simple words, medical underwriting is assessing medical history and related details of the people to be insured before setting the price of the policy. The insurer uses the information to get a clearer overview of the past and current medical conditions of the people going to be insured.
Group insurance is provided to a group of people together as opposed to an individual. The insurance company focuses on the group as a whole, rather than individual members while pricing the risk. There are typically no medical questions; thus, no actual medical underwriting takes place. Hence it is possible for individuals with poor health to receive group insurance benefits. In fact, all eligible participants may obtain coverage. But the risk selection process does happen in group insurance policies as well which helps insurers to avoid any selection of members.
Medical Underwriting in Group health insurance:
Medical underwriting for Individual health policies are usually carried out without any deviation from the insurance companies. The proposal request from the customer is studied and processed based on the plan, benefits, sum insured limits and demography. The rates are subjected as per age, family size as per the guidelines of the insurance company. In case the customer has an existing insurance, review of claims experience under their health insurance is done prior to accepting the proposal.
Medical underwriting for Group health insurance is carried out differently.
The proposals for group health insurance are evaluated as per the guidelines of the insurance company. Depending on the group size, the insurance company decides on the cover for pre-existing and chronic conditions in the policy. A closer review of claims experience under the health insurance is done for all cases and is reviewed for applying the rates.
Factors that determine Group Insurance premiums
In group insurance the insurance company must consider various risk characteristics and the probability of the particular group being an adverse risk to the insurance company before pricing the policy. The following items are relevant for group underwriting:
– size of the group
– type of the group (voluntary ore compulsory)
– geographic distribution of employees
– sex distribution
– age distribution
– number of dependants including age and sex distribution – number of dependant children
– salaries of insured group
– policy holder‘s (employer‘s) administrative facilities
If the group plan is noncontributory (one in which the employer pays the entire insurance premium), each individual becomes immediately covered. If the plan is contributory (the employee pays at least part of the premium), the employee must fulfill the condition of funding the premium out of pocket and sometimes employees may not enroll in the insurance plan to avoid any additional costs. Therefore, contributory plans have a higher chance of selection where only a select list of employees tend to participate.
Why is underwriting carried out in group health insurance policies?
Hence insurance companies do underwriting of group policies to ensure viability and long-term sustainability of insurance. One of the most important concepts in underwriting of group policies is the concept of “Adverse selection”
“People are more likely to know when they will get sick than when they will die.”
“People can easily influence the time and scope of treatment.”
Adverse selection occurs when those who anticipate needing healthcare choose to buy insurance more often than others. Group policies have a higher risk of adverse selection as insurers lack full information about the risk of individual insured persons and there is an asymmetry of information. This will mean that an insurance plan with adverse selection will be full of people with high risk of illness. This in turn results in a financial drain on the insurance policy and may challenge the viability of the scheme.
So, through health insurance, these people are protected from high medical costs, because this is cross-subsidised by the healthy.
Ways of countering adverse selection are by having a large enrolment unit, e.g. all employees in the group (non-contribution basis) and making the insurance scheme compulsory. This means that those with low risk cannot opt out of the scheme and will subsidise the high risk.
Responsibilities of Small Business
Small businesses buy the policy on behalf of its employees. It is their responsibility to ensure the required information is provided to the insurance company upfront prior to purchase of the insurance policy. Group health insurance does not require employees to declare their medical histories to the insurer, but businesses should ensure all relevant details on the group, employee and their dependent details, and existing insurance details are represented with full disclosure to the insurance company.
Taking advantage of the convenience provided by group health insurance should be avoided although it can aid in lower costs in a few instances. Any misrepresentation of information to the insurer can be damaging for businesses as the insurance company has all rights not to pay claims and cancel the policy without any refund of premium if they find any breach of material information that could have altered their evaluation of the group health insurance plan.
Talk to a renowned insurance broker
It is wise to discuss the matter of medical underwriting with a reputable and certified insurance broker such as PlanCover. You will get clear ideas about the subject. Ask any questions about the process and get your doubts solved. The broker provides full support in understanding the dynamics of group health insurance policies.