Comparison of Group and Individual Insurance

COVER PAGE

COURSE TITLE: LIFE AND HEALTH INSURANCE AND PENSIONS ASSIGNMENT PROJECT

DATE: 2013 May 14

A. COMPARISON OF INDIVIDUAL & GROUP HEALTH INSURANCE COVERAGE

Individual health insurance refers to a contractual arrangement in which coverage is provided to a specific individual for themselves or their families under a sole policy that is issued solely to that individual. Group health insurance refers to commercial arrangements in which coverage is provided for a group of individuals by an employer or institution under a master contract which is issued to the group policy-owner or master policy-holder. Health insurance coverage mainly constitutes coverage for medical expense insurance and disability income. Medical expense insurance provides recompense and/or financial aid to an insured and covered dependents for scheduled expenses relating to medical, surgical and hospital care. Disability income insurance provides compensation periodically when an insured is unable to work due to illness or injury. Both types of insurance coverage- medical expense and disability- are proffered in both individual and group health insurance plans. There are also key differences between individual and group health insurance plans. Persons with pre-existing or previously diagnosed and treated health problems are considered high-risk by insurance companies and may find individual health insurance very costly or be denied health insurance on a whole. Within group insurance plans, which provide coverage for two or more individuals, high-risk individuals are not singled our or denied health coverage. All persons belonging to the group are covered regardless of their existing health problems which may then be factored into the total cost of the group plan. Other notable differences between individual and group health insurance coverage relate to underwriting practices; adverse selection, administrative costs and available benefits.

UNDERWRITING PRACTICES
Insurance underwriting is the process of classification, rating, and selection of risks1. This selection process involves evaluation of the information and resources to determine how an individual will be classified -whether standard or substandard risk. After this is completed, the policy is rated in terms of the premium that the applicant will be charged.
For individual health coverage, the underwriter will look for factors such as occupation or dangerous hobbies that could make the applicant more likely to die before their natural life expectancy or gauge the probability that the individual may become ill or involved in an accident that will engender high medical expenditure. In other words, the underwriter wills determine an applicant’s insurability. The premium cost or fee for individual health insurance is based on the risk associated with the insured like age and location.
For group health insurance coverage, evidence of insurability is not required. Group coverage is not concerned with the health or insurability of any single individual. The premium cost therefore is not individually risk-based. Insurance principles are then applied to the group like morbidity and mortality as a single unit like an individual.

ADVERSE SELECTION
The term adverse selection describes a situation where an individual's demand for insurance is positively linked or caused by a anticipated higher risk of loss occurrence for that individual. It is argued that the potential for the occurrence of adverse selection is greatly reduced by group health insurance coverage. This is due to certain particular characteristics required for a group to obtain health insurance coverage:
1. Insurance Incidental to the Group- the members of the group must belong to the group for reasons other than obtaining insurance e.g. employees of a company
2. Minimum Participation – a maximum or minimum percentage of the group that are eligible for insurance be covered. In some cases, 100% participation by all group members is required.
3. Flow of Persons – there must be an expected flow of persons through the group as members leave; new members are expected to replace them.

ADMINISTRATION
For an insurance company, the administration costs of group health insurance coverage are expected to be cheaper than individual health insurance. As one master contract is prepared in the group scenario, its administration is simpler and usually shared with the institution or policy owner. It also significantly reduces the selling and servicing of individual insurance policies.

BENEFITS
There are varying benefits offered under individual and group health insurance coverage. These include: