12.2 Group Underwriting and Contribution/Participation

Group Underwriting Philosophy

Group underwriting evaluates the characteristics of the group, not the health of each member. Underwriters look at the group's size, industry/occupational hazard, age and gender distribution, geographic location, prior claims experience, and the stability of the group (turnover). The goal is a stable, predictable risk pool where healthy and unhealthy members offset one another.

Two rating methods dominate:

• Manual (community) rating — used for small groups; rates come from standard tables based on demographic and industry factors. The group's own claims history is not credible enough to use.
• Experience rating — used for large groups; the group's actual past claims drive the premium, rewarding healthy groups with lower rates and penalizing high-claim groups.

Contributory vs. Noncontributory Plans

Who pays the premium determines the participation requirement the insurer imposes to avoid adverse selection:

The logic: if employees must pay, some healthy ones will opt out, so the insurer demands that a high percentage still enroll to keep the pool balanced. In a noncontributory plan there is no reason for a healthy employee to decline, so the insurer can require everyone in. Memorize the 75% contributory / 100% noncontributory benchmarks — they appear on nearly every group exam.

Worked Example — Participation Test

A contributory plan requires 75% participation. An employer has 80 eligible employees. How many must enroll?

• Required = 80 × 0.75 = 60 employees.
• If only 52 elect coverage, participation = 52 / 80 = 65%, below the 75% threshold — the insurer can decline to issue or non-renew the group.

Now a noncontributory plan with the same 80 eligible employees: the employer pays the full premium, so all 80 must be covered. There is no opt-out, which is exactly why insurers accept the lower per-life risk of these groups. Watch for questions that switch the plan type after giving you a participation number — the required percentage changes with it.

Group Conversion and Continuity

When a member leaves the group, the conversion privilege lets them convert to an individual policy without evidence of insurability, usually within 31 days of termination. Key conversion traps:

• The converted policy is typically issued at standard (or substandard) individual rates — it is not the same premium as the group rate.
• The insurer can offer a limited menu of conversion products; the member is not entitled to identical benefits.
• No EOI is required only if the conversion is requested within the 31-day window; miss it and insurability must be proven.

For disability income and medical-expense group coverage, the coordination of benefits (COB) rules prevent a member with two group plans from collecting more than 100% of the loss — the plan covering the person as an employee is usually primary, and a child's coverage follows the birthday rule (the parent whose birthday falls earlier in the calendar year is primary).

Rating Factors and Group Disability Underwriting

Beyond plan type, underwriters adjust group rates using objective factors. The two most tested are the probationary period (a longer waiting period lowers cost by excluding short-tenure, high-turnover workers) and the benefit level itself. For group disability income, additional underwriting controls keep the pool sound:

• Benefit caps — DI benefits are limited to a percentage of salary (commonly 60–66⅔%) so the insured always has an incentive to return to work.
• Elimination period — a deductible measured in days (e.g., 30, 90, 180) before benefits begin; longer elimination periods cut premium.
• Benefit period — how long benefits pay (e.g., 2 years, 5 years, to age 65).

Worked elimination-period example: An employee with a 90-day elimination period and a $3,000 monthly benefit is disabled on March 1. Benefits begin only after 90 days (about June 1) and the first check arrives at the end of that benefit month. The 90 days of lost income before benefits begin are the insured's own responsibility — the elimination period acts like a time deductible, not a dollar deductible.

Putting Participation and Underwriting Together

A producer marketing a group plan must align three moving parts: the rating method (manual vs. experience), the funding split (contributory vs. noncontributory), and the participation requirement that flows from the funding split. A mismatch causes the application to be declined.

The practical takeaway: when an employer wants the broadest, cheapest pool, recommend a noncontributory design — full participation eliminates adverse selection and supports the most favorable experience rating over time. When the employer needs employees to share cost, the producer must drive enrollment communication hard enough to clear the 75% bar, or the case fails underwriting.

Coordination of Benefits — Ordering Rules

When a person is covered by more than one group plan, COB establishes a strict order of payment so the total reimbursement never exceeds the actual expense. Memorize this priority ladder:

1. The plan covering the person as the employee/named insured pays before the plan covering them as a dependent.
2. For a dependent child, the birthday rule applies — the parent whose birthday is earlier in the calendar year is primary (the year of birth is irrelevant; only month and day matter).
3. In divorce, a court decree assigning responsibility controls; absent a decree, the custodial parent's plan is primary.
4. Active employee coverage is primary over COBRA/retiree coverage.

Worked COB example: An $800 covered expense is incurred. The primary plan pays $500 of it. The secondary plan will pay up to its normal benefit but only enough to bring total payment to no more than $800 — so the secondary pays at most $300, not a second full benefit. This 100%-of-loss cap is the principle of indemnity applied to overlapping group coverage.