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.)

In addition, of course, increasing the participation level improves a companys top-line growth and helps to spread expenses on a case.

That is a pretty compelling argument for investing in achieving consistently strong participation results!

So how does an insurer underwrite “process risk?” It starts by selling process as well as product–making sure an employer understands that an effective enrollment marketing process is in everyones best interest.

This means company sales representatives and brokers must promote the enrollment process up front.

Deciding whether to accept a case and embark on the expense of enrolling it can be based on a number of account characteristics. Some of them are shown in the accompanying chart.

Companies that underwrite groups for these kinds of requirements, and that are willing to decline prospects not meeting them, are the same ones that say their group voluntary business is profitable. They treat “process risk” with the same respect that they treat insurance risk.

Alan F. Barthelman is president of AB & Associates, a worksite marketing consulting firm based in Cape Elizabeth, Maine. He can be e-mailed at: albarthelman@earthlink.net.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 17, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.