Underwriting Group Policies

As the name implies, group insurance is written on a group of people together as opposed to an individual. The insurance underwriter focuses on the group as a whole, rather than its singular members. Each group participant is required to complete a short application form which usually consists of the individual's name, address, Social Security number, dependent information and beneficiary designation. There are typically no medical questions; thus, no actual medical underwriting takes place. It's therefore possible for individuals with poor health to receive group insurance benefits. In fact, all eligible participants may obtain coverage. But underwriting (the formal name of the risk selection process) does occur, which helps insurers to avoid adverse selection.

Adverse selection is the tendency of those individuals who would be considered poor risks to seek and be covered for insurance more often than average-risk persons. In a group insurance setting, the underwriter must consider such things as the type of work being performed, the ages of the participants, and the probability of the particular group being an adverse risk to the insurance company. A group of coal miners, for example, would normally present a much greater risk than, say, a group of office employees.

The group underwriter typically will also be concerned with the number of new group entrants. Insurers are not necessarily fond of groups that have no turnover. If the insurer's loss ratio is to be favorable, some employees must leave the group due to retirement or terminations and new (and hopefully younger) employees must take their place. This turnover of employees helps bring a measure of stability in terms of insurance losses and possible adverse selection.

Often, individuals joining an insured group will be required to serve a probationary period before becoming eligible for the insurance coverage. Some groups experience high turnover in their memberships. It would therefore be a prohibitively expensive to cover all workers in such a business from the first day of employment. To avoid or curtail this cost, the insurer will require that employees be on the job for a specified period of time before they become eligible for coverage. This time period is often ninety days, though it can be of either longer or shorter duration.

If the group plan is noncontributory (one in which the employer pays the entire insurance premium), each individual becomes immediately covered after the probationary period ends. If the plan is contributory (the employee pays at least part of the premium), the employee must first fulfill his or her probationary period, and then must enroll within the eligibility period in order to avoid medical underwriting. (This also helps to protect the insurance company against adverse selection.) The eligibility period typically runs for one month after the end of the probationary period. If the group member does not apply during the eligibility period but decides to enroll later, he or she will generally be required to take a physical examination and will be selected (or rejected) on an individual basis, just as if the policy were being underwritten for an individual.