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Insurance and Risk Finance 640

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Cost of Helen's medical expense insurance = $4,000 if purchased individually or by employer ... Most people in US obtain medical expense insurance through employers ... – PowerPoint PPT presentation

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Title: Insurance and Risk Finance 640


1
Insurance and Risk Finance 640
  • Class 13
  • November 8, 2004

2
Automobile Insurance Review Questions
  • Why might a person rationally buy liability
    limits with greater than his or her limits for
    underinsured motorist coverage? (p. 273)
  • In view of moral hazard, explain why it might be
    optimal for a person to have a lower deductible
    for other-than-collision coverage than collision
    coverage? (p. 273)

3
Automobile Insurance Review Questions (cont.)
  • Explain why insurers have an the incentive to
    sell coverage voluntarily to a driver as long as
    the price that can be charged is greater than or
    equal to the fair premium? (P. 274)
  • Why does this imply that residual markets usually
    will lose money?

4
HO 3 Policy - Revisited
5
Universal Life Cash Value Formula
  • Interest credited for the policy period (Cash
    value at beginning of period premium payment
    mortality cost expense cost) x Interest rate
  • Cash value at end of period
  • Cash value at beginning of period
  • Premium payment at beginning of period
  • Mortality charge at beginning of period
  • Expense charge at beginning of period
  • Interest credited at end of period

6
Universal Life Policy Question p. 329
7
Net Single Premium Question Term Life, Question
6, p. 330
  • What is the net single premium for 1,000 face
    amount three-year policy for a 50 year old male,
    assuming an interest rate of 5?
  • (1000)(.00671)/1.05 (1000)(6502/896662)/1.052
    (1,000)(7038/896662)/1.053
  • 6.39 6.58 6.78
  • 19.75

8
Overview Major Types of Employee Benefits
  • Medical Insurance
  • Retirement Plan
  • Life Insurance
  • Short-term Disability
  • Long-term Disability
  • Dental Insurance

9
Description Major Types of Employee Benefits
10
Who Pays the Cost of Benefits?
  • In the long run, employees pay the cost
  • contributory plans - directly
  • noncontributory plans - indirectly
  • In short run, return to owners is likely to
    decrease if benefit costs increase

11
Flexibility in Choice of Benefits
  • Extent of employee choice varies
  • No choice lt--------------gt cafeteria (flexible
    benefit) plans
  • Advantage of flexibility
  • greater matching with employee needs
  • Disadvantages of flexibility
  • potential adverse selection
  • administrative costs

12
Why Firms Provide Employee Benefits
  • Alternative to employee benefits
  • pay higher cash wages and let employees purchase
    benefits on their own
  • Explanations for employee provision of benefits
  • Taxes
  • Cost savings with group insurance
  • Productivity effects
  • Regulation

13
Income Tax Advantages of Employee Benefits
  • Qualified plan gt has preferential tax treatment
  • Tax treatment of qualified plans
  • Employers perspective
  • Same as cash wages, I.e., the cost of employee
    benefits are deductible expenses
  • Employees perspective
  • Benefits are either not subject to income taxes
    or income taxes are deferred
  • Benefits purchased individually would not receive
    the same tax treatment

14
Example of Income Tax Advantages
  • Assume
  • Cost of Helens medical expense insurance
    4,000 if purchased individually or by employer
  • Helens income tax rate 20
  • Which compensation package would Helen prefer
  • 1 Salary 40,000 and no medical insurance
  • 2 Salary 36,000 and medical insurance

15
Example of Income Tax Advantages
  • After-tax cost to employer is the same for 1 and
    2
  • Helens after-tax income after obtaining medical
    expense insurance
  • 1 40,000 x 0.8 - 4,000 28,000
  • 2 36,000 x 0.8 28,800
  • Difference 800 income tax paid on 4,000

16
Cost Savings with Group Insurance
  • Lower insurer administrative costs with group
    insurance
  • marketing costs
  • underwriting costs (see below)
  • billing costs
  • premium collection costs
  • Lower search costs for employees
  • Reduced adverse selection
  • group insurance limits choice of coverage
  • gt less adverse selection if insurer does not
    classify
  • gt group insurance lowers need for individual
    underwriting

17
Productivity Effects of Employee Benefits
  • Idea Employee benefits increase productivity
  • How?
  • Improve health of employees
  • Reduce turnover
  • Especially important with retirement plans (see
    Ch. 17)

18
Regulatory Restrictions on Employee Benefits
  • Regulations are numerous and complex
  • Some general types of regulations
  • Benefits offered
  • Management of plans
  • Information provided employees
  • Examples
  • Proposals to require employers to offer child day
    care
  • Manage plans in the best interest of
    beneficiaries
  • Inform employees about changes in plans

19
Group Medical Expense Coverage
  • Most people in US obtain medical expense
    insurance through employers
  • Traditional fee-for-service plans
  • Employer provides coverage
  • deductibles and coinsurance
  • Employer either self insures or purchases
    insurance
  • insurers
  • Blue Cross/Blue Shield organizations
  • Employees choose service provider
  • Provider charges fee to employee or insurer

20
Background on Health Care Market
  • Three major players
  • Providers
  • Consumers
  • Employers / Insurers
  • Providers often can influence demand
  • Providers better informed
  • Consumers do not pay marginal cost due to
    insurance

21
Moral Hazard Problems
  • Two types
  • Ex ante moral hazard - incentive to take care
  • Group insurance gt premium does reflect
    individual expected claim cost
  • Ex post moral hazard - once sick, incentive for
    excessive utilization
  • utilize to the point that cost of care gt benefit
  • why? - with insurance, consumer does not pay the
    full cost
  • result excessive quality

22
Excessive Utilization and Fee-for Service
  • Fee-for-service plans aggravate excessive
    utilization problem b/c of the separation of
  • Provision of insurance
  • Provision of care
  • Reducing excessive utilization
  • Increase deductibles and coinsurance
  • Managed care
  • insurer monitor use
  • limit choice in service providers
  • Preferred provider organizations

23
Health Maintenance Organizations (HMOs)
  • Main features
  • Reduces excessive utilization with contracts
    between providers and insurers
  • Providers compensation depends on utilization
  • Extreme form service providers also provide
    insurance
  • Employees choice of providers is restricted
  • choose primary care physician (acts as a
    gatekeeper for other services)

24
HMO Backlash
  • Critics
  • HMOs have too little incentives for quality care
  • Factors limiting problem
  • too little care can lead to greater costs later
  • malpractice claims
  • competition

25
Provisions/Issues in Group Medical Plans
  • Dependent coverage
  • usually requires an additional employee
    contribution
  • Premiums within a plan usually vary less than
    expected claim costs vary
  • cross-subsidies
  • group plans can still be beneficial to low risk
  • Mandated benefits
  • e.g., mental health services

26
Provisions/Issues in Group Medical Plans
  • Portability
  • Pre-existing conditions clauses
  • why? - reduce adverse selection
  • problems
  • discourages job changes
  • exposes those who switch jobs to less coverage
  • COBRA
  • 1996 legislation
  • can still have pre-existing conditions clause for
    12 months
  • but coverage under a prior employers plan counts

27
Provisions/Issues in Group Medical Plans
  • Renewability
  • Individual coverage typically is guaranteed
    renewable
  • gt those who learn about illnesses continue to
    get insurance on the same terms as those who
    dont
  • Group coverage typically is not guaranteed
    renewable
  • Why the difference?
  • Switching costs higher for individuals
  • gt less likely to get those with good experience
    switching insurers

28
Health Care Cost Inflation
  • Health care costs increased substantially during
    the 1980s and early 1990s

29
Why Have Health Care Costs Increased?
  • Excessive utilization
  • Increased demand for quality care
  • Technological advances
  • Increased proportion of elderly people
  • Other factors
  • Uninsured people obtain care via expensive means
  • Increased number of malpractice suits
  • defensive medicine

30
The Uninsured
  • About 14 of people uninsured
  • most for short periods of time
  • Why so many uninsured?
  • High cost of care
  • Other sources of indemnity

31
Health Care Reform
  • Inevitable tradeoffs
  • Fewer uninsured gt higher total health care
    costs
  • Lower health care cost gt lower quality
  • Possible policy objectives
  • Reduce excessive utilization
  • Minimum level of quality to all
  • All insured

32
Possible Approaches to Reform
  • Nationalization
  • Government specifies for all
  • insurance coverage
  • quality of care
  • expenditure
  • Little or no choice for individuals
  • gt little support in US

33
Possible Approaches to Reform
  • Universal insurance
  • Mandatory employer provision
  • Play-or-pay
  • Would reduce
  • uninsured
  • cost shifting from uninsured to insured
  • inefficient provision of service
  • However
  • worker wages would decrease
  • moral hazard would increase

34
Possible Approaches to Reform
  • Selective Intervention
  • Deal with specific problems
  • But not major change in system
  • Examples
  • COBRA
  • legislation on pre-existing conditions

35
Possible Approaches to Reform
  • Changes in Tax Law
  • Lower tax benefit for employer provided insurance
  • reduce insurance coverage
  • gt reduce excessive utilization
  • Medical savings accounts (MSAs)
  • insurance for large medical expenses
  • small expenses (e.g., lt 3,000 per year) paid
    from MSA
  • MSA receives preferential tax treatment
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