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Talking About Financial Matters That Affect You and Your Organization
Anatomy of a Group Insurance Death Spiral
Aug 18th, 2015
Group insurance in its simplest form is a promise of an employer to provide protection against unforeseen or unwanted financial loss due to illness or injury. In its most complicated form, group insurance is a part of wages which can be acquired or disposed of based on the net economic benefit seen by the participating party.
Over the last few months, I have had an opportunity to meet with some potential new clients to discuss their challenges in managing and maintaining an affordable group insurance plan. One of my first questions is to ask if the plan is mandatory. For those clients with upward spiraling costs, the typical answer is no, the plan is not mandatory. The client's perspective is that they can save money by allowing participants to opt out by choice. Makes sense right? Wrong. While yes, premium costs will initially fall, come renewal, the total premiums will increase back to previous levels or worse. What clients often don't realize is that by allowing the plan to be managed through adverse selection, the program will eventually collapse under the weight of the bad risk it attracts.
Within group insurance, when a member enrolls for coverage, their risk profile is spread across the entire group enrolled. As risks are added and removed from the group with members entering and exiting, the "health" of the group changes. This dynamic is directly connected to the performance of the group and therefore the costs of the program. As the group becomes "less healthy", rates go up and members choose to opt out. The shrinking of "good risk" speeds up the deterioration of the group and accelerates premium increases till the plan implodes under the unsustainable weight of costs - the death spiral.
Ensuring that you populate your plan with the widest variety of risk (especially young single members), will help spread the risk and ensure the plan's overall health is good. Ensuring that premium cost-sharing encourages the participation of all members will help maintain a reasonable spread of risk. Designing the plan to ensure the coverage provides equitable and sustainable protection will also help ensure the risk does not outweigh the program.