Want Voluntary Market Profitability? Manage All The Risks
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The bread and butter of group insurance carriers has traditionally been "core" benefits–insurance coverages offered to all employees and paid for, totally or in part, by the employer.
Voluntary versions of those products have generally been considered riskier because of anti-selection (the likelihood that only employees who will use the insurance will buy it) and costlier because of the expense of enrollment and administration.
But, in todays workplace, the range of "core" benefits is shrinking as employers pull back from the concept of providing one-size-fits-all benefits. Now, the trend is to offer employees choice. As that happens, group carriers are jumping into the voluntary market, knowing that if they want to be successful with a given product line, they must be successful with the voluntary version of that line.
This begs the question: "Can we make money in the group voluntary market?" The answer, from insurers that can segment and analyze their voluntary business, is, "Definitely!"
Id like to suggest that the key to profitability for group voluntary marketers is underwriting for two forms of risk–the traditional insurance risk, and a second form that I call "process risk".
Insurance professionals are familiar with insurance risk–the likelihood that claims will occur among a given population of insured employees.
Where voluntary products are concerned, insurance risk is controlled with features like pre-existing condition limitations, medical underwriting and participation requirements, and the overall group underwriting process.
The challenge, though, is that voluntary product marketers dont know their insured population until after the enrollment is complete and coverage is in force. So, how can they assess whether they are going to get the participation level needed to make an account profitable? This is where "process risk" comes into the picture.
Specifically, to assess expected participation beforehand, each prospective account should be underwritten for "process risk," as well as insurance risk.
To put this issue in perspective, lets look at the impact that participation level can have on claim results. In an analysis of the impact of participation on the claims ratio of voluntary disability plans, Andy Baillargeon, a disability actuary with John Hewitt & Associates, Inc. in Portland, Maine, found these telling statistics:
- Increasing participation from 25% to 30% will have an expected improvement in risk results of approximately 7% to 9%.
- Even at 50% participation, the improvement in risk results for a 5% improvement in participation can be expected to be approximately 4% to 5%
(The actual study used voluntary group STD data, but results should be similar for LTD.)
