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MTHEL 131 (32)
Chapter 18

Chapter 18 Reading Notes

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University of Waterloo
Mathematics Electives
David Kohler

Chapter 18: Group Insurance Employment benefit plans are employer-sponsored plans that provide benefits to employees as part of their compensation Rationale for employee benefit plans - deferred age theory: retirement benefits is an employee agreeing to defer current wages in favour of payments during retirement - companies use benefits to meet competition for employees - the decision to install a benefit plan involves comparing the value arising from is installation to the cost of the program - governments often provide tax advantages to encourage employers to do this - may reduce turnover, increasing productivity - companies can use benefit plans to discourage employees from joining unions Growth in employee benefit plans Due to: - expansion of mandated benefits - escalation in insurance costs Advantages of multinational pooling to international organizations: - reduced cost of providing benefits - reduced underwriting requirements - consolidated summary of global benefits - detailed financial information - enhanced control and coordination of benefits - increased negotiating power with insurers Multinational pooling - A method global companies use to manage the risk of their employee benefit plans throughout the world - The different employee benefit programs of a multinational company are combined to form an international pool - The result of multinational pooling is financial savings and better control of the risks Experience rating: accounting system under which costs charged to the group depend on the group’s own history Group insurance fundamentals Group insurance is the means through which a group of people who have a business relationship with a policyowner are provided coverage under one contract Distinguishing characteristics 1. substituting individual underwriting for group underwriting 2. master contact 3. lower administrative cost 4. flexibility in contract design 5. use of experience rating 1. Group underwriting - Is not concerned with health or other insurability aspects of an individual - Aims to obtain a group of lives that yields predictable mortality rate - Features should be present for it to work:  insurance should not be the reason that the group exists  flow of new people through the group  benefits are automatically determined (not by employer or employees)  75% of employees must join  cost of the plan should be covered by employer or unions  there are 2 types of plan: where employees also contribute, or when they do not  single organization should represent the group (ex. employer) 2. Group policy - one contract is held by the policyowner - the insureds are not parties to the contract, just third-party beneficiaries 3. Lower cost protection - no extra administrative costs - no commissions for agents deducted from premiums 4. Flexibility - employer has more flexibility than an individual would 5. Experience rating - the more reliable (larger) a particular group, the lower the rates Advantages and Limitations of group mechanism Advantages - lots of people are reached fast, and at low costs - people who wouldn’t be able to be insured otherwise - employer pays large share, gets tax reductions Limitations - temporary nature of coverage  if contract ends, or employee retires, they lose coverage unless they buy individual plan (more expensive) - people who need individual life insurance don’t get it - the employees’ plans aren’t actually flexible Eligible groups - employees of a single employer - debtor-creditor groups  ex. bank. Debt is paid by insurance - labour union groups - multiple-employer trusts - miscellaneous groups  ex. religious groups, alumni associations Group life insurance - accounts for almost %40 of all life insurance Coverage: - there is a minimum proportion
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