Chapter 7 - Multilife Underwriting Flashcards
Multilife Underwriting
The underwriting of groups of life insurance applicants primarily using non-traditional approaches to risk selection using
1. Guaranteed Issue (GI), which does not include any traditional individual underwriting
2. Simplified Issue (SI), which includes some nominal amount of individual underwriting.
Can use products such as UL, variable life, and private placement products and can involve corporate owned life insurance (COLI), bank owned life insurance (BOLI) or variations.
COLI (corporate owned life insurance)
Intended to provide benefits to meet the needs of the executives. Possible tax advantages to meet these needs.
BOLI (banked owned life insurance)
A cost efficient and effective means for banks to offset rising employee benefit costs.
I.e., Executive retirement plans, deferred compensation plans, and even retiree medical obligations.
CHOLI (charity owned life insurance) [aka FOLI - foundation owned life insurance]
CHOLI refers to plans designed to unsure multiple or large numbers of lives on behalf of a charity foundation. Purpose is to provide a stream of ongoing revenue to the charity from the life insurance proceeds.
Principles of Multilife Underwriting
- Voluntary vs Nonvoluntary Plan Design
2. Eligibility: Executive vs Nonexecutive
Voluntary vs Nonvoluntary Plan Designs
Nonvoluntary - plan participation is compulsory and the amount of life insurance to be place on each life is fixed. Concern for anti-selection is eliminated. Life insurance usually determined by a multiple of salary.
Voluntary - Not as protected from anti-selection. Since life insurance is open some measure of evidence is required. These are called SI programs.
Eligibility: Executive vs Nonexecutive
If executive, the benefits of this definition are:
- The company’s management is provided with g/l to ensure that all current and future eligible employees are properly enrolled.
- The plan administrator is provided with g/l as to who to enroll in the program.
- The insurance company can be confident that the employer remains consistent with the agreed upon eligibility requirements.
Executive Implication
1, The availability of GI or SI underwriting. Where nonexecutives are included, pricing may have to be adjusted upwards to reflect the less favourable aggregate mortality experience for nonexecutives.
2. Employer can also wish to receive max benefit of tax advantages - this requires that all executive also meet the definition of key person.
Reasons for potential adverse mortality when GI underwriting is used on executives only
- A greater amount of coverage generally tends to be on the older lives simply because on average, they have acquired the higher positions and higher salaries due to longer employment.
- The number of very highly compensated company executives is typically made up of a very small groups of lives. Small groups do not allow for the same spread of risk as large groups, since a single claim will have a much larger impact on overall group mortality if the group is small.
How Plan Design impacts underwriting
- Spread of Risk
- Aggregated-Funder Plan Design
- Tiered Plan Design
Spread of Risk
Relates to how much insurance is permitted on any one life relative to the size of the group, and how much is permitted on any one life relative to the average death benefit for the group.
Most life insurers in this line of business will set either flat amount upper limits of life insurance for various size groups or will more typically utilize what are known as multiples, or increments, of insurance that are multiplied b the number of participating eligible lives to determine the max on one life.
Aggregate-Funded Plan Design
Most deferred compensation plans are this structure.
The employee can allot any amount of salary he or she wishes within the constraints of the employer’s plan. No correlation between the individuals financial contribution and the amount of life insurance purchased. All monies are pooled. The plan administrator designates the premium. The employee has no ownership right in the insurance.
Tiered Plan Design
The amounts of insurance vary by title or salary groupings - can produce a highly variable spread of risk problems. Comprised of several differing employee classes.
Less favourable then multiple of salary plans - significant risk when an unhealthy employee moves up a band.
CHOLI and FOLI (how they differ from COLI And BOLI)
- Key difference is the lack on an employer/employee relationship. As such, there is little or no control over who is and who is not insured because the charity cannot mandate participation in the plan. Purely voluntary plan on the part of the participants and thus increases the potential for adverse selection.
- If the lives are in fact donors to the charity/foundation, the ages for these groups tend to skew to a significantly old demographic than actively-at-work employee groups, resulting in less favourable mortality expectations.
- There is no assurance these individuals can be classified as “actively at work”. Therefore absence results in the loss of the more favourable mortality that the qualification provides.
Methods of underwriting
Full Underwriting Bundle Underwriting Simplified Underwriting Guaranteed Issue Combination of GI/SI/Full Underwriting
Full Underwriting
Least desirable method, and least used method - best evidence, permit the least expensive premium - it raises several impediments to the most efficient and effective means of serving the best interests of the client, producer, and insurer.
Bundle Underwriting
Full underwriting with one difference - one or more modestly substandard risks can be accepted at standard pricing in order to avoid the problems that arise when having to rate a risk.
Still involves costly underwriting and the excess mortality is not an exact science. There still could be lives that are too substandard to accept.
Simplified Issue
An abbreviated form of underwriting with less evidence required than full underwriting, but there are differing consist of an abbreviated application containing fewer risk based questions than is typical of full underwriting. App can be accepted or rejected based on that alone.
Typically more expensive premium than the fully underwritten group.
Altered approach allows for APS and ratings, and decreases the declines.
Guaranteed Issue
Most desirable method of underwriting.
Usually conditional that the insured must be working and that they have not been absent from work due to illness or injury for (example) the last 3 months for more than a minimal amount of days.
Least expensive, most efficient, and expeditious method of underwriting groups.
Most abbreviated application.
GI Underwriting Method - Factors influencing price:
- In an employer sponsored plan, the insured population is comprised of actively-at-work employees. This excludes elderly risk and helps assure an average age fro the group that has relatively favourable mortality.
- Most employee groups will be considered standard or better. Thus, while some number of risks is less favourable, any extra pricing is spread out and diluted over the entire group.
- The underwriter contributes to relatively favourable mortality by making sure
a. the plan design is non-selective as to coverage and participant.
b. The group does not present an untoward risks inherent in this business
c. the spread of risk within the plan is acceptable.
Combination of GI/SI/Full Underwriting
Options include GI for employees but full underwriting for CEO d/t increased risk
Employer provides a set benefit for all, but those wanting more can purchase for additional requirements.
