Back

Everything Employers Need to Know About Group Insurance Underwriting

By: Benefits by Design | Tuesday March 9, 2021

Updated : Monday November 29, 2021

Everything Employers Need to Know About Group Insurance Underwriting | Benefits by Design

Group insurance underwriting is happening behind-the-scenes all of the time. It’s very complex and is woven into virtually every facet of group insurance.

What is Group Insurance Underwriting?

Group insurance underwriting is the assessment of financial risk for the purpose of pricing group insurance. Financial risk is the likelihood that a claim will be submitted (and therefore a cost incurred to the Insurer).

As a basic example: there are Smoker and Non-Smoker rates for Extended Health Care (EHC). Smokers will pay higher premiums for their EHC coverage due to the overwhelming evidence supporting increased health risks associated with smoking.

However, underwriting a group insurance policy vs.an individual policy like the example above is much more complicated. The process involves underwriting the risk for the entire organization and all employees on the plan. This can range from ten employees to ten-thousand (or more)!

Underwriters do this by looking at a variety of different factors to determine the financial risk of a claim.

What Factors Do Underwriters Consider?

When underwriting a group benefits plan, here are a few of the most common things underwriters consider:

Industry — some industries are more dangerous than others (consider an office job vs. construction). Therefore, the industry is an important factor in determining risk of a claim. An employee’s occupation is also a factor here. Even though two employees both work in the “construction” industry, the risk of a claim for a laborer vs. an administration worker in an office is not the same.

Demographic Information — underwriters look at how long the company has been in business, how long employees have been employed (turnover), whether the demographics are relatively stable, and whether the business is changing carriers, if applicable. Other demographic factors may be considered as well.

External Factors — this includes factors outside of the control of the Insurer, such as regulatory or legislative changes, or economic factors such as interest rates or recessions.

Renewal Factors — when it comes to renewals, underwriters will look at claims patterns, including the frequency of claims, cost of claims, and any non-recurring claims, such as claims from employees no longer at the company. Additionally, they’ll review demographic changes, such as changes in the number of employees, average age, or division of male/female employees.

It should be noted that the above factors are not the only factors under consideration during the underwriting process. However, they are some of the most notable for the purposes of this article.

Other Underwriting Factors and Considerations

Other potential factors and considerations for underwriting, depending on circumstances, could include:

Age — generally speaking, the older a person is, the more likely they are to make certain claims. So a company with an average employee age of 55 is likely to see higher premiums than a tech startup with an average employee age of 25.

Sex — men and women are physiologically different, and may be more prone to certain illnesses and injuries than the opposite sex, and vice versa. As an example, men have a shorter life expectancy, and so the premiums for their Life Insurance may be higher than women of the same age.

Salary — some benefits, such as Life Insurance or Disability Insurance, are paid out based on salary (a common example is two times annual salary for Life Insurance). Underwriters will take salaries into consideration when assessing risk in some cases, as the higher the salaries, the higher the payment (and therefore, the more money removed from the pool).

When Does Underwriting Occur?

The underwriting process is almost always working in the background. However, there are a few key times and places where underwriting will play a more significant and obvious role in a group benefits plan.

#1. Quoting a New Benefits Plan

During the quoting process for a new benefits plan, underwriters will use the factors mentioned above (as provided by the employer and their Advisor) to determine the premiums and rates based on the assessed risk.

#2. Benefits Plan Renewal

Benefits plans are set up for a set period of time. When that time period’s end is approaching, a renewal of the plan is necessary. At this stage, underwriters will review the factors and claims history to determine if the premiums and rates are still accurately reflecting the associated risk. Rates may increase or even decrease based on this review.

Everything You Need to Know About Benefits Renewals

#3. Requesting New or Additional Coverage

Underwriters are involved in assessing the risk of new products or coverages added to a group benefits plan. The underwriting process may differ depending on which products are being added.

Why is Underwriting Important?

The concept of insurance is based on risk vs. reward. Employees pay a premium to the Insurer in exchange for benefits coverage, and the Insurers weigh the risk of the claim and price premiums accordingly. Pooled benefits, like Life, Disability, or Accidental Death and Dismemberment (AD&D) Insurance, have all premiums paid put into a “pool” of money, split across all groups within the pool. If claims costs outweigh the premiums going in, then all groups within the pool may have to be re-rated to increase the premiums going into the pool.

Without the established underwriting processes, Insurers would be guessing how much risk a group brings (and therefore how much premium to collect), which opens up the Insurer and the employer to unnecessary risk.

Accurate underwriting processes are essential to the success and sustainability of a benefits plan over time. If premiums are not accurately reflecting the group’s claiming patterns, Insurers will increase premiums and rates to match. Suppose claims patterns are much higher than expected. In that case, increases can become unsustainable, leading to frustrating renewals and price increases for both employers and employees, depending on the cost-sharing arrangement.

Why Focusing on Employee Benefits Sustainability is Your Best Shot at Success

What is “Medical” Underwriting?

Medical underwriting is the individual underwriting undertaken prior to being confirmed for coverage. In most cases, employees will not be required to submit medical evidence for underwriting when joining a group benefits plan. However, this will not be the case if they are applying as a late applicant.

However, optional benefits offered beyond their group benefits plan may be subject to medical underwriting. As examples, individual policies or additional benefits like Optional Life Insurance would qualify. You may also need to provide medical evidence is when applying for excess coverage beyond the No Evidence Maximum (NEM).

Employees will need to provide health evidence to the Insurer when medical underwriting is requested. The Insurer will use this information to determine eligibility, rates, and any possible exemptions of coverage due to underlying or pre-existing conditions.