Accident and Sickness Insurance 9781512817911

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ACCIDENT AND SICKNESS INSURANCE

T H E S. S. H U E B N E R F O U N D A T I O N FOR INSURANCE EDUCATION David McCahan, Editor

Lectures LIFE INSURANCE: T R E N D S AND PROBLEMS T H E BENEFICIARY IN LIFE INSURANCE LIFE INSURANCE TRENDS A T MID-CENTURY INVESTMENT OF LIFE INSURANCE FUNDS A C C I D E N T AND SICKNESS INSURANCE

Studies AN ANALYSIS OF G O V E R N M E N T LIFE INSURANCE AN ANALYSIS OF G R O U P LIFE INSURANCE T H E ECONOMIC T H E O R Y OF RISK AND INSURANCE

ACCIDENT and SICKNESS INSURANCE Edited by David McCahan, Ph.D., C.L.U. Executive Director The S. S. Huebner Foundation for Insurance Education

Philadelphia

UNIVERSITY OF PENNSYLVANIA PRESS LONDON: GEOFFREY CUMBERLEGE OXFORD UNIVERSITY PRESS

Copyright 1954 UNIVERSITY OF PENNSYLVANIA PRESS Manufactured

in the United States of America

THE

S. S. H U E B N E R INSURANCE

FOUNDATION EDUCATION

FOR

T h e S. S. H u e b n e r Foundation for Insurance Education was created in 1940, under the sponsorship of the American Life Convention, the Institute of Life Insurance, a n d the Association of Life Insurance Presidents (now the Life Insurance Association of America). Its primary purpose is to aid in strengthening insurance education on the collegiate level. It functions along three principal lines: 1. Providing fellowships and scholarships to aid teachers in accredited colleges and universities of the United States and Canada, or persons who are contemplating a teaching career in such colleges and universities, to secure preparation at the graduate level for insurance teaching a n d research. 2. Building u p and maintaining a research service center in insurance books and o t h e r source material which will be available through circulating privileges to teachers in accredited colleges and universities desirous of conducting research in insurance subjects. 3. Publishing research theses and other studies which constitute a distinct contribution directly or indirectly to insurance knowledge. Financial support for the Foundation is provided by more than o n e h u n dred life insurance companies which contribute on the basis of their ordinary life insurance in force. T h e program of activities is u n d e r the general direction of a Board of Trustees representing the life insurance institution. Actual operation of t h e Foundation and of its affairs has been delegated to the University of Pennsylvania u n d e r an administrative plan submitted by the University a n d approved by the Foundation Trustees. In accordance therewith the University has established an Administrative Board consisting of seven officers a n d faculty members of t h e University of Pennsylvania and three faculty members of other universities. It has also appointed an Executive Director. BOARD OF TRUSTEES T h o m a s I. Parkinson, Chairman of the Board, Equitable Life Assurance Society of the U.S. (Chairman) Harrison L. Amber, President, Berkshire Life Insurance Co. Harold J. Cummings, President, Minnesota Mutual Life Insurance Co. Ernest M. Hopkins, Chairman of t h e Board, National Life Insurance Co. Leroy A. Lincoln, Chairman of the Board, Metropolitan Life Insurance Co. E d m u n d M. McConney, President, Bankers Life Co. William M. Rothaermel, Altadena, California Adolph A. Rydgren, Chairman of the Board, Continental American L i f e Insurance Co. Frank F. Weidenborner, Vice President, G u a r d i a n Life Insurance Co. of America ADMINISTRATIVE BOARD S. S. Huebner, Honorary Chairman Harry J. Loman, Chairman David McCahan, Executive Director C. Canby Balderston Edison L. Bowers Roy F. Nichols R a l p h H . Blanchard Charles C. Center Edwin B. Williams C. A. K u l p

PREFACE

T h e frequency with which disability strikes and the financial problems which it generates are so manifest to the general public as to produce a keen awareness of the need for coverage. But the meeting of that need on a sound and adequate basis is beset with complex and baffling problems, some of which have thus far defied solution. These problems have political as well as economic and social implications, and anyone who wishes to approach them intelligently must of necessity have a broad background of knowledge and experience in many areas. T h e preparation of this volume was undertaken in the hope that it might comprise a valuable contribution to such a background. One of the most interesting insurance phenomena of recent years has been the spectacular growth in the field of accident and sickness insurance. This has been characterized by: (1) substantial relative as well as absolute increases in the number of persons covered and in the aggregate premiums paid; (2) concentration of coverages primarily around three broad types of disability costs, namely, hospital, surgical, and general medical, on the one hand, and replacement of income lost through disability, on the other; (3) emergence of numerous types of insurance or quasi insurance carriers having aims, philosophies, principles and practices that vary quite widely in nature; (4) differing concepts as to the role of the individual, the employer and the state in the initiation of, and financial support for, the provision of coverage; and (5) active experimentation and aggressive competition. T h e attention of readers is called to the fact that most of the emphasis in this volume, particularly in the last nine chapters, is upon principles and practices of insurance companies. This seemed desirable in part because of the fact that such carriers write the big bulk of all the premiums, and in part because they have made available all types of coverage, whereas other carriers, vii

viii

PREFACE

such as Blue Cross and Blue Shield organizations, have been limited to specific areas. Distinctive characteristics of the "Blues" have, however, been presented in the chapters on "Meeting Hospital Costs" and "Meeting Surgical and Medical Expenses" which will enable the reader to comprehend their comparative advantages or disadvantages. T h e presentation of a volume such as this is in conformity with the policy established by the Administrative Board of T h e S. S. Huebner Foundation for Insurance Education, which places considerable emphasis upon the publication of material that will be especially useful to college or university teachers of insurance in their instructional work. As elsewhere stated, this publication policy has been influenced by the following primary considerations: (1) T h e conviction that every teacher who keeps faith with the ideals of his profession wants to be fully informed on all matters of consequence in the realm of his specialty. (2) T h e realization that college and university instruction in insurance has already reached, and will continue to reach, far more students in the broad domain of economics, government, sociology and their subdivisions than in such specialized vocational subjects as insurance law, actuarial science and insurance medicine. (3) T h e recognition that a teacher in the social science subjects must obtain a broad comprehension of the life insurance institution as a whole in its social setting. This must be an "overall" view which not only includes the structure, functions and services of this institution but also its manifold interrelationships with other institutions which make up American life today. (4) T h e realization that analysis and thorough study of all the technical literature in life insurance is a time-consuming process which is frequently prohibitive for the teacher whose duties require that he have an equally broad grasp of other important economic and social institutions. T o keep himself conversant with all the developments and the new ideas which are presented in the journals of the actuarial societies, the medical directors, the agency executives, the insurance lawyers, the life underwriters, etc., and to be reasonably well informed on matters of importance which have not been there presented, is no small task.

PREFACE

xx

T h u s far, the Foundation has undertaken the issuance of two series of volumes, known as "Huebner Foundation Lectures" and "Huebner Foundation Studies," the first series comprising a compilation of addresses on selected insurance topics and the second presenting the results of thorough research in specific areas. This is the fifth volume in the "Lectures" series. As was the case with its predecessors, it contains a series of lectures given under the auspices of the Foundation at the University of Pennsylvania. Each of the lectures in the present series was delivered at a dinner meeting attended by fellows and scholars of the Foundation and teachers from the Insurance Department faculty. In following this procedure, members of the Foundation's Administrative Board had in mind the desirability of enabling these present and future teachers of insurance to enjoy the privilege of hearing outstanding authorities, with a background of broad experience in the life insurance field, discuss the subjects assigned to them. T h e primary directing principle followed in the selection of the speakers was their capacity to make a worthwhile contribution to the thinking of this teaching group. Publication of these manuscripts was authorized by the Administrative Board of the Foundation with the sincere hope, and in the confident belief, that their range of usefulness might be extensively widened through making them available to other teachers and students of insurance who could not hear the original presentation. It was felt that such publication would be in full accord with the policy above set forth. As was the case with the first four volumes of lectures, this one is of significance, not alone because of the high standing in the life insurance world of those who have made it possible and the inherent quality of their respective contribution to it, but because it reflects the continuance of an organized effort to provide a literature especially intended for teachers in the broad field of the social sciences. Conscious as these teachers are of the complexities and ramifications of the subjects with which they deal and the frequent inconclusiveness of the researches therein, they are nevertheless zealous to broaden their understanding and enrich their teaching. T o them this volume is dedicated. T h r o u g h them k is hoped that research may be stimulated. From them will be welcomed substantial participation in the subsequent studies,

x

PREFACE

monographs and other materials which are published under the auspices of this Foundation. T o Adolph A. Rydgren who proposed that a series of lectures be given on Accident and Sickness Insurance; to Ray D. Murphy who made numerous worthwhile suggestions as to the general planning of the series; to Drs. Ralph H. Blanchard, Edison L. Bowers, S. S. Huebner, C. Arthur Kulp and Harry J . Loman who helped in divers ways with advice and guidance; to each of the various lecturers whose name appears in the T a b l e of Contents and in the specific chapter which he prepared, and who has helped to make this volume possible by his gracious, competent and generous participation; and to Miss Mary Drever who has rendered valuable editorial assistance, the editor acknowledges his deep indebtedness and hearty appreciation. It should in no wise detract from the quality of the volume to point out that expressions of opinion which may appear in publications of the Huebner Foundation are those of the authors and not of the Foundation itself. DAVID

Philadelphia January 1954

MCCAHAN

CONTENTS

CHAPTER

PACF.

PREFACE I

vii

T H E N A T U R E OF ACCIDENT AND SICKNESS INSURANCE,

by Edison L. Bowers

1

C o n f u s i o n of T e r m s I n s u r a b i l i t y of t h e Disability Hazard Malingering O t h e r P r o b l e m s of I n s u r i n g Disability T h e Catastrophe Hazard O t h e r T r e n d s in Disability I n s u r a n c e A C o - E q u a l Coverage Intensified C o m p e t i t i o n D o m i n a n t Position of Life Companies B l u e Cross Reasons for Increases in Disability Coverages A d e q u a c y of Present Disability Coverages O r g a n i z e d L a b o r and Disability Insurance G o v e r n m e n t a n d Disability I n s u r a n c e Conclusions II

R E P L A C E M E N T OF INCOME—PERSONAL CONTRACTS,

1 2 4 5 6 8 8 9 9 9 10 11 12 12 13 by

E. J. Faulkner

16

T h e Origin T h e I n s u r i n g Clause Definition of Disability A m o u n t of Benefit D u r a t i o n of Benefits D e d u c t i b l e Frequently Used O t h e r Benefit Provisions Significant T r e n d s III

REPLACEMENT

OF

INCOME—GROUP

C. Manton Eddy N a t u r e of G r o u p C o n t r a c t Characteristics of a Good G r o u p Accident a n d Sickness Benefits Customary Limitations xi

18 20 25 28 29 30 31 33 CONTRACTS,

by

35 36 38 39 39

xii

CONTENTS

CHAPTER

PACE

Other Considerations Compulsory Nonoccupational Disability Benefit Plans Problems of Compulsory Health Insurance IV

M E E T I N G H O S P I T A L COSTS, by

40 42 46

Gilbert W. Fitzhugh

50

T h e Nature and Extent of Hospital Costs Methods of Meeting Hospital Costs T h e Service Approach and the Indemnity Approach Modifications in Practice Experience Rating Retirement and Termination of Employment Hospital Admission Procedures Integration with Other Employee Benefit Plans Individual Policies Extent of Coverage Future Problems V

M E E T I N G SURGICAL AND M E D I C A L E X P E N S E , by J .

51 57 61 67 69 70 72 73 73 74 74

Henry

Smith

76

General Description of Benefits Surgical Expense Insurance General Medical Insurance Diagnostic Expense Insurance Miscellaneous and Special Benefits Major Medical ("Catastrophe") Insurance "Independent" (Miscellaneous) Insurers Adequacy and Comprehensiveness Coverage Problems Underwriting Problems Conclusion VI

STANDARD

PROVISIONS—PERSONAL

CONTRACTS,

77 78 79 80 80 81 84 85 89 92 96 by

H . Lewis Rietz T h e New Uniform Law Old and New Mandatory Provisions Compared Standard Provisions 1 to 15 New Mandatory Provisions Old and New Optional Provisions Compared Standard Provisions 16 to 20 Exceptions and Reductions Standard Provisions Still Significant VII

98 99 100 100 108 109 109 112 113

CONTRACT PROVISIONS OF G R O U P ACCIDENT AND SICKNESS INSURANCE, by W e n d e l l M i l l i m a n

Differences Between Personal and Group Insurance Announcements and Certificates

114

114 116

xiii

C O N T E N T S CHAPTER

VIII

T h e Structure of the Contract T h e Parties to the Contract Period of the Insurance T h e Consideration—Premiums, Dividends and Contributions Notice, Proof and Payment of Claims Benefit Provisions UNDERWRITING,

REINSURANCE

AND

CLAIM

M E N T — P E R S O N A L C O M M E R C I A L CONTRACTS,

Sommer

UNDERWRITING,

REINSURANCE

MENT—PERSONAL

AND

CLAIM

NONCANCELLABLE

ADJUST-

CONTRACTS,

by

146

Selection Factors in Selection Underwriting Field Underwriting Lay Underwriting Medical Underwriting Alternatives in Handling Applications Reinsurance Claim Adjustment Claim Procedure Dishonest Claims Differences in Accident and Sickness Claims Handling Bona Fide Claimants Significance of Interrelationship UNDERWRITING,

REINSURANCE

M E N T — G R O U P CONTRACTS,

Underwriting General Background Considerations or Factors

129 129 131 134 135 137 138 139 140 141 142 143 144 145

Alfred W. Perkins

X

118 118 120 122 123 124

ADJUST-

by Armand

Underwriting and Re-Underwriting Factors Affecting Risk Underwriting Special Lines Sources of Information Alternatives in Handling Applications Economic Conditions Reinsurance Types Services of Reinsurance Claim Adjustment Procedure Methods of Investigation Importance of Application IX

PACE

AND

147 147 148 149 149 154 156 157 158 159 160 161 161 162

CLAIM

by Edward

A.

ADJUST-

Green

164 165 165 168

XIV

C O N T E N T S

CHAPTER

PAGE

Reinsurance Mechanics Cost Claim Settlement Proof of Claim P o l i o holder Draft Prevention of Abuse An Underwriting Organization XI

RATES

AND

RESERVES

177 178 179 179 180 181 181 181

PERSONAL

NONCANCF.LLABLF. CONTRACTS,

COMMERCIAL

by John

H.

AND

Miller

T h e Pure Premium Method of C o m p u t a t i o n Basic Data T he Subjectivity Factor Field Force as a Factor T h i r d Party Interest Factor Classification of Risks Effect of Ignoring Equity Level P r e m i u m s Loading Acquisition and O t h e r Costs T h e Persistency Factor Margin for Profit and Contingencies Reserves Policy Reserves Unearned Premium Reserves Loss Reserves Unreported Claim Reserves Contingency Reserves Importance of Reviewing Experience XII

R A T E S AND R E S E R V E S — G R O U P CONTRACTS,

184 184 185 186 187 188 188 189 190 191 191 192 19!) 193 195 195 196 196 197 197 198

by Edward

M. N e u m a n n Premium Rates Reserves Unearned Premium Reserve Present Value of Amounts Not Yet Due on Claims Reserve for F u t u r e Contingent Benefits (Deferred Maternity and O t h e r Similar Benefits) Reinsurance Special Reserves Contingency Reserves Dividends and Retrospective Rating Accidental Death and Dismemberment Accident a n d Sickness (Weekly Payment) Hospital and Surgical Expense Medical Expense

200 201 202 202 203 204 205 206 206 207 209 211 216 220

xv

C O N T E N T S CHAPTER

PAGE

M a j o r Medical Expense Poliomyelitis Expense Conclusion X I I I

REGULATION

221 224 225

OF A C C I D E N T AND S I C K N E S S

INSURANCE,

by J. F. Follmann, Jr.

226

R e g u l a t i o n of I n s u r a n c e G e n e r a l l y T h e P r i n c i p l e of R e g u l a t i o n by t h e S t a t e s T h e Insurance Commissioner R e g u l a t i o n of C o r p o r a t e E x i s t e n c e a n d F i n a n c i a l Solvency R e g u l a t i o n of G e n e r a l C o m p a n y P r a c t i c e s R e g u l a t i o n of A c c i d e n t a n d Sickness I n s u r a n c e Specifically T h e Contract P r a c t i c e s P e c u l i a r t o A c c i d e n t a n d Sickness I n s u r a n c e S u r v e i l l a n c e of R a t e s a n d Loss R a t i o s Special C o n s i d e r a t i o n of G r o u p I n s u r a n c e Special C o n s i d e r a t i o n of B l a n k e t I n s u r a n c e Special C o n s i d e r a t i o n of F r a n c h i s e I n s u r a n c e X I V

REGULATION

OF

ACCIDENT

AND

SICKNESS

INSURANCE

(Continued), by J. F. Follmann, Jr.

217

S o m e T r e n d s a n d S p e c i a l P r o b l e m s in t h e R e g u l a t i o n A c c i d e n t a n d Sickness I n s u r a n c e Over-Regulation Nonrealistic Regulation " R e a s o n a b l e n e s s " of B e n e f i t s i n R e l a t i o n t o P r e m i u m s Uniformity APPENDIX A — T H E

1 9 1 2 U N I F O R M STANDARD PROVISION

of 247 248 252 254 259

LAW

—N.A.I.C. APPENDIX B — T H E

263 1 9 5 0 U N I F O R M I N D I V I D U A L A C C I D E N T AND

S I C K N E S S P O L I C Y PROVISIONS L A W — N . A . I . C . APPENDIX C—FEDERAL

TRADE

272

COMMISSION—RELATING

T H E ADVERTISING AND S A L E S P R O M O T I O N O F M A I L

TO

ORDER

INSURANCE APPENDIX D — T H E

226 226 227 228 229 232 233 239 239 241 243 245

286 ALL-INDUSTRY—N.A.I.C.

ACCIDENT

AND

H E A L T H REGULATORY L A W

294

A P P E N D I X E — C A N A D I A N STATUTORY PROVISIONS

296

APPENDIX F — T H E OFFICIAL G U I D E — N . A . I . C .

301

APPENDIX G—STATEMENT

OF

PRINCIPLES—PERSONAL

D E N T AND H E A L T H I N S U R A N C E

ACCI313

xvi

CONTENTS

CHAPTER

PACE

A P P E N D I X H — A D M I N I S T R A T I V E P R O C E D U R E R E C O M M E N D E D BY N.A.I.C.

R E L A T I V E TO R E N E W A B I L I T Y AND C A N C E L L A T I O N

PROVISIONS IN T H E A P P R O V A L O F ACCIDENT AND POLICIES

DRAFTED

INDIVIDUAL

IN

ACCIDENT

ACCORDANCE AND

SICKNESS

WITH

THE

POLICY

HEALTH UNIFORM

PROVISIONS

LAW

318

APPENDIX

I — N . A . I . C . F O R M FOR F I L I N G A C C I D E N T AND SICK-

NESS INSURANCE E X P E R I E N C E APPENDIX

J—THE

N.A.I.C.

U N I F O R M DEFINITION OF FRAN-

CHISE INSURANCE APPENDIX K — G R O U P

320

321 F O R M S O F A C C I D E N T AND SICKNESS IN-

SURANCE

322

A P P E N D I X L — G R O U P H O S P I T A L INSURANCE F O R M

324

INDEX

327

CHARTS: PAGE I

R a n g e o f Daily Hospital Charges

53

II

D i s t r i b u t i o n o f H o s p i t a l C o n f i n e m e n t by D u r a t i o n

55

III

D i s t r i b u t i o n o f Charges for Special Hospital Services

56

IV

I l l u s t r a t i o n s o f A c t u a l Cases Involving S u b s t a n t i a l Special Hos p i t a l Service C h a r g e s

58

CHAPTER I

THE

NATURE

OF ACCIDENT

SICKNESS

AND

INSURANCE

By Edison L. Bowers* Of all the risks that can be insured, accident and sickness, particularly the latter, are the most serious and persistent hazards confronting people everywhere. T h i s recognized fact is a growing concern of the American people. T h e increasing disability-cost consciousness has brought about a rate of growth in accident and sickness coverage unparalleled in the long history of insurance, and the end is not in sight. With this growth, and in part responsible for it, has been experimentation. There has been correction of certain past mistakes. And some new errors have developed. Most persons outside the insurance profession, and probably some within it, do not appreciate what is happening. Many persons are still thinking of accident and sickness insurance in terms of its many shortcomings of not too many years ago; others have the erroneous impression that the majority of families now have all the disability protection they need. CONFUSION OF TERMS Before considering the nature of the accident and sickness hazards and the development of insurance plans to redistribute their burdens, I would like to suggest that considerable confusion has resulted because of the historical use of terms. It is not merely a pedantic question of definition but a matter of understanding the fundamental nature of the hazards and the coverages necessary to cope with them. T h e subject for discussion, by using the term "sickness" instead of health, avoids the historical error, so faithfully perpetuated by so many persons both within and without the insurance profes• Chairman, Department of Economics, Ohio State University.

1

2

A C C I D E N T A N D SICKNESS I N S U R A N C E

sion, of combining an undesirable h a p p e n i n g , an accident, with a desirable condition, health. W h e t h e r or not the use of the A. a n d H . symbols has misled many persons in respect to the relative importance of the accident and sickness hazards, it would seem that the substitution of the more descriptive and inclusive term "disability" is desirable. Despite the use of a general expression, the actuary, the h o m e office underwriter, the agent, a n d others in the insurance profession could, and presumably would, still keep in m i n d that sickness accounts for a b o u t 90 per cent of all days lost through disability, whereas injuries of all kinds account for only about 10 per cent. If the inclusive term disability is used, however, it will be necessary to avoid the mistake into which some textbook writers have fallen of referring to "disability and sickness." W h i l e we are suggesting the shifting of terms, it also probably would be well to d r o p the word "accident" a n d substitute the word " i n j u r y . " A n y t h i n g can be caused by an accident. It is the injury resulting t h e r e f r o m which may impair e a r n i n g power a n d require medical care that gives us concern. W h e n serious disability strikes, the typical person changes f r o m a n income producer to a large-scale consumer. Disability insurance, therefore, obviously has a d o u b l e task to p e r f o r m : it must protect income by providing weekly or monthly cash indemnities a n d it must provide f u n d s to meet the increasing costs of medical care. Breaking down medical care i n t o hospital, surgical a n d medical benefits, plus various other additional benefits, fringe or otherwise, can be explained historically a n d probably justified on actuarial a n d u n d e r w r i t i n g grounds, b u t to the person who must pay the bills they all add u p to the same thing.

INSURABILITY

OF

THE

DISABILITY

HAZARD

Disability meets in varying degrees the basic r e q u i r e m e n t s of a n insurable risk. Everyone is exposed to disability every day of his life; practically everybody sooner or later suffers a disability, usually a n u m b e r of them over a lifetime. W e can die b u t once, b u t if we should follow the average p a t t e r n , we shall have seven non-minor disabilities d u r i n g o u r lifetime. T h e chance of loss a n d the a m o u n t of loss are influenced by m a n y variables but these variables still p e r m i t of large exposure units for which the chance

ITS

NATURE

3

of loss can be reasonably calculated; in other words, the statistical samples are at least fair. T h e potential loss from disability causes economic hardship, sometimes to an extreme degree. W i t h a p r o p e r geographical distribution of risks, a n d in the absence of a plague, widespread atomic b o m b i n g attacks, or other catastrophes, n o large portion of insured persons should suffer a loss simultaneously. A l t h o u g h the cost of a d e q u a t e disability insurance coverage is beyond the capacity of some persons to pay, employed persons generally, if they place a high e n o u g h priority on disability protection, can purchase a fair a m o u n t of coverage, particularly if it is in the form of joint-contributory g r o u p insurance. In certain other respects, however, disability does not present the qualities of an ideal hazard for insurance purposes. Disability is n o t a sharply definable condition. Its c o m m e n c e m e n t a n d term i n a t i o n are rarely susceptible to exact a n d absolute determina tion. T h e character of the a p p l i c a n t often outweighs his physical condition. Disability insurance losses are affected by many factors including age, sex, earnings, education, e n v i r o n m e n t , heredity, residence, occupation, physical condition, general economic conditions and n u m e r o u s psychological considerations—many of which are not clearly understood even by the psychologists themselves. Disability insurance losses also d e p e n d u p o n the actions a n d attitudes of physicians a n d surgeons a n d others w h o provide medical care. Ample insurance coverage may rightly or wrongly increase the a m o u n t s a n d kinds of medical care as well as influence the length of the convalescent period. Disability insurance plans, especially those providing catastrophic medical coverage, c a n n o t hope to succeed without the intelligent cooperation of the members of the medical profession. T o date it cannot be said the insurance companies a n d those persons w h o provide medical care are seeing eye to eye on all matters affecting disability insurance. T h e r e is no single disability experience standard. Assume, for example, a policy which pays " X " dollars to cover medical care for a broken leg, a n d such occurs. Providing there is n o u n d u e exposure, the state of disability is relatively easy to determine, and the remedy is obvious. If, however, we are t h i n k i n g of a policy which pays "Y" dollars for an appendectomy, the question of diagnosis and t r e a t m e n t immediately arises. Is an o p e r a t i o n neces-

4

A C C I D E N T A N D SICKNESS I N S U R A N C E

sary and are there likely to be complications which would affect other provisions of the policy? If a policy provides five dollars or more for a home visit, how many calls are necessary? T h e really serious problem arises, however, in connection with a sickness in which the mental condition of the patient has much to d o with the money cost of his disability. Disability is a subjective hazard. If a person claims to have a pain, it is practically impossible to prove him wrong and there are a lot of real pains in this world. MALINGERING

Malingering, often cited as the leading problem in underwriting the disability risk, depends u p o n many facts and factors which are difficult to evaluate. General economic conditions, for example, have a very significant bearing u p o n the number and duration of disability claims. It was tempting and relatively easy for the victims of business failure d u r i n g the thirties to feign illness and to collect disability benefits from the insurance companies. Some of them probably were indeed sick—at least sick of mind. It was during this period that insurance companies learned a great deal about the dangers of noncancellable disability insurance, including the permanent and total disability provisions in life insurance policies. O n e wonders if the absence of depression conditions d u r i n g the past twenty years, the period of greatest advance in the disability insurance business, has not lulled to sleep some persons connected with this segment of the insurance profession. In the event of a return of adverse economic conditions (some of you may wish to say when there is a return), there may be a considerable diminution in the enthusiasm that some underwriters now have for writing disability coverages. Income status is another factor that has a bearing u p o n malingering. Whether the convalescent period is short or long frequently depends u p o n the patient's need for income a n d the relative amounts of income to be derived from insurance payments in relation to income derived from employment o r other sources. In considering the relation of benefits to normal earnings, it must be remembered that money received from the insurance company is not subject to payroll deductions and income taxes. Also, while a person is not working he does not incur certain ex-

ITS

5

NATURE

penses incidental to his employment, such as transportation, meals away from home and work clothes. Moreover, by doing some home work he may forego the expense of hiring others. T h e true income received by the disabled person may not be disability benefits alone but in addition there may be residual earning power which he gains as a result of not working at his customary occupation. Malingering in some respects is only a part of a much larger probLem associated with disability arising from injuries. T h e underwriting of the disability risk has been complicated indirectly by the fact that an increasing number of persons have become claims-minded. Included in this number are not only those who have real injuries and those whose injuries are fraudulent, but also those who stand to gain from the collection of claims, whether through voluntary settlement or court action. Although the principal impact of the growing number of larger injury claims and settlements falls upon liability insurance coverages, disability insurance also is feeling the effects. As an injury comes to be regarded as an opportunity for financial gain to be exploited to the fullest, some persons who own disability insurance policies may also be expected to be influenced by the philosophy of getting "something-for-nothing." T o the extent that this philosophy is effective the results are translated into higher disability insurance costs.

OTHER

PROBLEMS OF

INSURING

DISABILITY

In general, it may be said that disability insurance presents a greater problem in conservation than is generally true of other types of coverage. Lapse rates usually run much higher on disability than on life insurance. More claims usually arise per given number of insured persons in disability insurance than in insurance against other types of hazards. Much more could be said about the general nature of the disability insurance hazard but let us pass on to a few of the more direct problems of insuring this risk. Some of these are general in the sense that they apply to all types of disability contracts; others relate principally to a specific branch of the business, to a specific type of contract or to a particular provision of a policy.

6

A C C I D E N T AND SICKNESS

INSURANCE

On the rating side, the determination of proper premiums for disability is more difficult than in some other leading lines. Disability insurance has no "morbidity" tables comparable to life insurance mortality tables. Even if one were compiled, it probably would soon lose most of its value for sickness insurance. New medicines, new testing procedures, new operating techniques and other advancements in medical care keep changing the situation in respect to the incidence of disease, the period of hospitalization, the time necessary for convalescence—all of which affect disability costs to be met with insurance. Injury costs, too, while presenting less of a problem, are influenced by some of the same factors which affect sickness, plus some additional ones which vary from one type and one cause of injury to another. For these and many other reasons injury and sickness rates are not made in concert; the business is exempt from rating laws, thereby introducing flexibility into the underwriting and rating technique. T h i s procedure has brought both good and bad results. Most of the disability insurance problems are associated in some way or another with the question "How much for how long?" In attempting to exercise desirable controls, the insurance companies run counter to deep-seated public convictions concerning the nature of the disability coverage. A sizable segment of the public apparently believes that the purpose of injury and sickness insurance is to pay all the costs of disability. T h e y think of premiums as "putting money away" to be drawn upon in an emergency. In the group field, for example, hospitalization and medical care insurance has almost ceased to be insurance in the traditional sense and has become rather a method of budgeting for hospital expenses. From an insurance viewpoint, it seems questionable whether the trend to cover the total loss, and particularly the smaller losses, is a healthy condition.

THE

CATASTROPHE

HAZARD

Until recently, the only objective of disability insurance underwriters seems to have been to insure the "average" risk; almost no one was insured against prolonged illness. Only about one illness in five is of such long duration that at least a part of the medical care costs cannot be covered by some of the existing insurance

ITS N A T U R E

7

p l a n s or policies. T h e remaining 20 per cent minority, however, p r o b a b l y accounts for more than 50 per cent of the country's medical care bill. T h i s disparity arises because within the 20 per cent are those cases of such prolonged illness that the economic effects u p o n the families involved are catastrophic. T h e illness as such may not be of the disaster type but the costs of meeting it are so great that the family experiences what is in effect financial catastrophe. Progress is now being made in providing coverage for this hazard. In the d r a m a t i c development of catastrophic medical expense insurance—probably the most promising personal insurance idea since g r o u p insurance originated—we are having a test (conclusive results of which are not yet known) whether people generally will be willing to accept both the deductible a n d coinsurance features of the plan so that what might otherwise be a catastrophe in family budgeting will be a far less serious expense item to be taken in stride; in other words, can people be persuaded to forego the first dollar of benefits so that they can collect the last dollar, or almost the last dollar? G r o u p medical catastrophe plans have exhibited high costs a n d left some carriers in no mood for f u r t h e r experimentation. A high p r o p o r t i o n of claims originate in the first two months of coverage. In addition to the opportunity which the individual sometimes has to "select against the insurance plan," there are special moral hazards in g r o u p medical catastrophe coverages. T h e r e have been cases of small employers, for example, who apparently insured their work force as a means of paying m a j o r medical bills for their own i m p e n d i n g disabilities. A high per cent of catastrophe cases involve hospital confinement with its increasing costs. W i t h the deductible feature removing minor claims in the g r o u p catastrophe contract and with a very high m a x i m u m , the lengthy claims incident to old age are given additional weight. T h e n a t u r e of catastrophic illness is such that there is need for different patterns of insurance coverage. T h e economic impacts of serious illness vary considerably from one family situation to another, d e p e n d i n g u p o n variations in economic, social, geographic a n d o t h e r factors in the U n i t e d States. T h e sponsors of medical care programs will need to make available a n u m b e r of plans to meet varying conditions. Although the foregoing discus-

8

ACCIDENT AND SICKNESS INSURANCE

sion has been limited to illness, it must not be forgotten that injuries, too, sometimes create adverse economic conditions of catastrophic proportions. O T H E R T R E N D S IN D I S A B I L I T Y

INSURANCE

Along with the development of catastrophic medical expense coverages, there have been other significant trends in the disability insurance field. A start has been made, particularly within the past five years, to insure substandard disability risks. T h e development of substandard rating makes possible the writing of full coverage at a rated premium. Also, more risks, formerly unacceptable because of age, are now being insured. More emphasis is being given to "key man" disability coverages and there has been a significant increase in the number of disability policies covering aviation risks, both passengers and crewmen. There has been a revival of interest in noncancellable coverages. Although the premiums written on this type of business currently account for less than 1 per cent of total disability insurance premiums, there is a growing demand on the part of the general public for the noncancellable feature. Remembering their unfortunate experiences with this coverage, however, and in spite of the increasing demands for it, companies may be expected to proceed slowly in offering a type of protection which is fraught with so much danger, particularly during periods of business recession. A

CO-EQUAL

COVERAGE

Overshadowing all other trends in the disability insurance field is the rapidly growing importance of this type of coverage to the buying public, to the companies and organizations which underwrite it and to the agents who sell it. Time was when disability insurance was a relatively unimportant "side-line" which an agent might sell on occasion to supplement his income. Today, disability insurance not only is the largest of the casualty lines in terms of premium income but it is rapidly becoming a "co-equal" coverage with other leading lines. T h e rate of growth of disability insurance is fantastic. In the past decade, annual premiums paid for

9

ITS N A T U R E

disability policies, including Blue Cross and Blue Shield, increased from $372 million to $2,200 million-over 600 per cent! In this remarkable growth, group policies, with an annual premium income nine times higher than a decade ago, led the way. In 1951 total group disability policy premiums passed total individual disability policy premiums. All branches of disability insurance shared in the increase but larger gains were made in provisions for surgical, medical and hospital expenses than for loss of income, accidental death and dismemberment. INTENSIFIED

COMPETITION

This great surge forward in disability insurance sales has greatly intensified competition among increasing numbers and types of companies and organizations writing this coverage. Among the carriers, depending upon the classification used, one finds life and casualty companies, mono-line disability insurers, stock, mutual, assessment, and reciprocal companies, fraternals, Lloyd's, government funds (Federal and state), Blue Cross and Blue Shield, employee benefit associations, labor union plans, state and local medical society plans and private group clinic plans. DOMINANT

POSITION

OF L I F E

COMPANIES

In terms of premium volume, life insurance companies now account for over 80 per cent of the disability insurance business. This result is due to the fact that while they receive only about half of the individual policy premiums, they write between 85 and 90 per cent of the group disability coverages. T h e entry of so many life insurance companies into the disability field is due to a number of considerations, most of them having their origin with the efforts of agents to gain new selling contacts and to provide protection needed by their clients. Since both life insurance and disability insurance replace loss of personal earnings, their sale by the same company is logical. BLUE

CROSS

T h e tremendous gains made by Blue Cross are highly significant because they indicate the intense desire of persons generally to

10

ACCIDENT AND SICKNESS INSURANCE

make advance provision for medical care. With more than 45 million members, 60 per cent of whom are concentrated in six industrial states, and an annual income of approximately $600 million, Blue Cross contributes over 30 per cent of the hospital patient income for the country as a whole. Facilities to enable patients to gain quick access to hospitals on a prepayment basis also are being provided by the joint action of groups of commercial insurance companies in a number of cities.

REASONS

FOR INCREASES

IN D I S A B I L I T Y

COVERAGES

T h e great increases in disability coverages are due to many causes, some of them applying principally to individual policies, some to group policies and some to both. A growing population, an increase in the number of employed persons at higher wages and salaries, rising prices, especially for medical care, and changing social and economic relationships which have made people more dependent upon personal incomes are among the underlying factors responsible for the increase in disability protection. T h e depression of the thirties, demonstrating the inability of many persons to meet the unpredictable costs of medical care without advance preparation, encouraged people to make cooperative efforts to distribute the burden; the insurance idea received greater acceptance. T h e insurance companies writing disability coverages responded with new and improved policies and with service better adapted to changing needs. Under competitive pressures they greatly extended their selling efforts with the result that many more persons gained protection. T h e insurance companies in their efforts to extend disability coverages had two powerful allies. Once the courts established the principle that insurance benefits were a proper subject for collective bargaining, the labor unions, estopped in their efforts because of government controls to gain wage increases beyond certain limits, turned to life and disability insurance and to old age pensions as a means of augmenting their incomes. In a labor market in which the demand for workers in many lines exceeded the supply, many employers were quite willing to provide disability benefits for their workers. In many cases collective bargaining resulted in group disability contracts, but many other

ITS NATURE

11

employers, frequently encouraged by their trade associations, as well as the insurance companies, voluntarily established g r o u p disability plans to i m p r o v e labor relations. T h e O h i o Disability U n e m p l o y m e n t Commission, on the basis of a very large sample, concluded that some 64 per cent of Ohio's i n d u s t r i a l workers at the end of 1949 had some kind of cash i n d e m n i t y protection for nonoccupational disability and that over 65 p e r cent of the workers so covered were participants in g r o u p disability plans, of which over 90 per cent had been established since 1930. About two-thirds of these plans were on a 50-50 cont r i b u t i o n basis. T h e average m a x i m u m weekly cash benefit was $30.61. Over 80 per cent of the plans, covering 62 per cent of the participating employees, had a m a x i m u m duration period of thirteen weeks or less. Many of these g r o u p plans also included medical care coverages while still other plans provided only medical care benefits.

ADEQUACY

OF

PRESENT

DISABILITY

COVERAGES

Despite the great advances which have been made in e x t e n d i n g disability insurance in recent years, there are still very serious gaps in the protection afforded, a fact which is fully recognized by many persons in the insurance profession. Those who have least protection in relation to their needs are lower income groups, especially agricultural workers, some of the self-employed a n d certain classes of older persons. T h e figures look much better in respect to "how m a n y " persons are covered than they do in relation to "how m u c h " protection they have. W e tend to "count noses" a n d to forget adequacy. T h e probability that more than 85 million persons in the U n i t e d States are now covered by some k i n d of hospital and surgical insurance is a real achievement b u t the fact remains that the coverage they have in some instances is barely a d e q u a t e to care for a routine illness a n d wholly inadeq u a t e in cases where serious ailments are involved. It has been estimated that less t h a n 20 per cent of private expenditures for medical care are indemnified u n d e r insurance plans. Probably only slightly more t h a n one-half of the employed p o p u l a t i o n is indemnified against loss of time due to disability. I n d i v i d u a l commercial disability polices offer both the best a n d

12

A C C I D E N T A N D SICKNESS INSURANCE

the worst protection. T h e difficulty is not that satisfactory coverages are not available but that many persons are unable or unwilling to purchase one of the better contracts. Instead, they may buy a policy because of its low premium which necessarily must be hedged about with numerous restrictions which reduce its effectiveness. T h e sale of such policies usually requires much effort and money in advertising, prospecting and sales promotion with resulting high acquisition costs. Good policies as well as poor ones may lapse because of failure to pay premiums. Protection may also cease because the insurance company may find it undesirable to renew the policy.

ORGANIZED

LABOR

AND DISABILITY

INSURANCE

Many forces which are playing upon the disability insurance business today will influence it in the years ahead. Of these forces, organized labor and the government probably are of most significance. Organized labor has recognized the value of disability protection and has made such coverage one of its principal demands in negotiations with employers. Organized labor will be increasingly interested in the kinds and amounts of disability benefits, particularly those provided by group coverages. It will be concerned about the amount of premiums and who will pay them. In some cases it will wish to have a voice in the selection of the insurance carrier. Spokesmen for organized labor generally take the view that the cost of insurance against the hazards of disability should be considered a part of normal business expenditures to take care of the temporary or permanent depreciation of the "human machine." T o attain these objectives organized labor seeks a more comprehensive type of "disability protection" which will give workers access to high quality medical care for a longer period of time than is presently the case.

GOVERNMENT

AND

DISABILITY

INSURANCE

Both the state and Federal governments have entered the disability insurance field, although the experience of the states with this coverage is a much longer and more comprehensive one. With

ITS

NATURE

13

forty-eight workmen's compensation insurance systems and four nonoccupational disability insurance plans in operation, the states are gaining valuable insurance experience in dealing with injuries and sickness. With California on the west coast and New York on the east coast, along with Rhode Island and New Jersey, insuring part of the nonoccupational disability risk, it would seem that other states in time may follow. A number of states have made studies of this subject and additional ones are in prospect. T h e commercial insurance companies are more concerned about what the Federal government may do in respect to a national health insurance program than they are about the extension of state plans for insuring nonoccupational disability. Some spokesmen for the companies writing disability insurance apparently believe that a national health insurance plan operated by the Federal government can be avoided over the long run only if enough prepaid voluntary insurance can be written to provide adequate medical care at a price which the persons who need the service most can pay. In his excellent text on Casualty Insurance, Professor C. Arthur Kulp divides the history of accident and health insurance into three eras—the Era of the Promoter (prior to 1890); the Era of the Salesman (1890-1930); the Era of the Home Office (1929- ). When one considers the unprecedented growth in the activities of the commercial companies writing disability insurance to fill up the gaps in coverage as much as and as rapidly as possible, there is suggested a fourth era, beginning with the passage of the Federal Social Security Act in 1935 and extending into an unpredictable future. This perod in the history of disability insurance might well be labeled the "Era of Containment" because of the efforts of the commercial companies to prevent any further extension of either the state or Federal governments into the disability insurance field.

CONCLUSIONS

Disability insurance fills a fundamental human need; it protects the greatest human asset—the earning power of the individual— against the most widespread hazards to which persons everywhere

14

ACCIDENT AND SICKNESS INSURANCE

are continually exposed. It provides a way to pay at least a part of the cost of medical care when there is least capacity to pay. Disability meets reasonably well the standard requirements of an insurable hazard but it presents challenging underwriting problems, some of which still remain unsolved. Disability by its very nature is an elusive condition, difficult to describe and to measure, and inherently costly to insure. Most of the problems which it raises insurance-wise are, in one way or another, associated with the thoughts and actions of the individual and are therefore subject to many complicating psychological considerations. T h e disability insurance business is in a period of dynamic change marked by a very rapid rate of increase in the number of persons insured, the number of companies writing the insurance, and the amount of premium income received by these companies. While all types of disability insurance are sharing in the expansion, disability insurance under group contracts is increasing more rapidly than that under individual policies. Medical care coverages are winning greater favor than income indemnity provisions. There is a renewed interest in noncancellable coverages and the newer medical catastrophe plans are attracting much attention. T h e insurance industry as a whole is very apprehensive concerning the extension of government into the disability insurance field and is making every effort to increase the number of persons insured, to liberalize the coverages, and to give better service to pol icy holders, particularly in respect to the handling of claims. In their fight to contain government insurance, the companies are relying upon all types of disability protection, but principally upon group coverages. It probably is safe to say that the ultimate target is the insurance of catastrophe risks. Despite the advances which have been made, disability insurance faces many difficulties, including the ever-present problems raised by the nature of the disability risk. T h e enlarged volume of disability insurance coverage has all come about during a period of prosperity, and no one in the insurance business or out of it has a very clear picture of what might happen in even a moderate depression. In spite of the problems facing disability insurance, its future over the long run is one of great promise. T h e need for disability

ITS N A T U R E

15

protection is a continuing and growing one. T h e American people are showing a willingness to put an increasing proportion of their incomes into medical care and to provide substitute incomes against the day when injury or sickness may deprive them of their productive capacity.

C H A P T E R II

REPLACEMENT OF INCOME-PERSONAL CONTRACTS By E. J . Faulkner* T h e p r i m e purpose of disability insurance is to replace income lost to the worker w h o has been incapacitated through accident or sickness. T h e need of some social device for the continuance of income d u r i n g disability has long been recognized a n d stems directly f r o m the very wide dependence on earned income by the individual a n d his family. T h e importance of current e a r n i n g ability of the b r e a d w i n n e r to the average family cannot be overemphasized. A study of family income statistics demonstrates the almost complete reliance of most families on current income. In 1948, it is estimated there were 38.5 million families in the U n i t e d States. Of these, f o u r million, or 10.6 per cent of all families, h a d money incomes of less than $1,000 per a n n u m ; 5.6 million families, or 14.5 per cent, had incomes of $1,000 to $2,000 per a n n u m ; only slightly more than one million families enjoyed an a n n u a l income of $10,000 or over. In 1949 the arithmetic m e a n income for all families was $3,068. Although this was almost $500 m o r e t h a n the average for the war years, 1944-45, the increase in m o n e y income was more than offset by the rise in cost of living. I n the same year, 1949, three-fourths of the families in the U n i t e d States h a d incomes of less than $4,500. It is interesting to note what a relatively high proportion of families d e p e n d on cash income earned by b o t h husband a n d wife. For instance, in 55 per cent of the families enjoying an income of $6,000 to $10,000 per year, the wife c o n t r i b u t e d to the cash earnings. Except in the relatively few affluent families, reliance is entirely on c u r r e n t earnings for the necessities of life. T h e Federal Reserve Board's "Study of C o n s u m e r Finances in 1952" developed the fact that 31 per cent of all spending units (families) held no liquid assets of • President, Woodmen Central Life Insurance Company. 16

INCOME

REPLACEMENT

17

any kind. An additional 30 per cent had from $1 to $499 of liquid assets. Nineteen per cent of spending units held from $500 to $1,999 in such assets, and only 20 per cent h a d $2,000 or more available for emergency or quick expenditure. Even such sketchy statistics as these lead to the presumption that the vast majority of all Americans are dependent on current earned income for their daily bread. T h e earned income of the individual is i m p o r t a n t not alone to himself and to his immediate dependents b u t to the c o m m u n i t y wherein he resides. W h e n an income producer is disabled he becomes a large scale consumer. W i t h o u t the income on which the family must rely to defray current living costs, the erstwhile producer becomes a charge on the community, or too often a debtor of d o u b t f u l value to the grocer, the landlord, the doctor a n d all others w h o supply the goods a n d services consumed by h i m a n d his family. Nearly everyone in the community has a stake in the ability of the breadwinner to continue to earn a n income. It was Dr. S. S. H u e b n e r w h o first expressed the concept that h u m a n e a r n i n g ability is a capital asset that can be guaranteed only t h r o u g h the m e d i u m of insurance. Economically, the productive value of a h u m a n life is comparable to that of a valuable machine. W h e n a business invests its f u n d s in costly e q u i p m e n t , the value of the machine or e q u i p m e n t purchased is set u p as a part of the assets of the firm, a n d its worth is depreciated over the years. T o guarantee that the business will receive the full anticipated return from the machine, to assure the owner against loss d u r i n g the useful life of the e q u i p m e n t , the concern takes out fire insurance, steam boiler and explosion insurance, a n d business i n t e r r u p t i o n insurance. So with h u m a n life—it has a definite asset value which can be guaranteed only through insurance. T h e life of the breadwinner is the biggest asset, frequently the only asset, of the average family. Viewing the home and the family as m a n ' s primary business, it is a p p a r e n t that without insurance against the loss of that life value, the family is vulnerable to what is usually a catastrophic blow. Since the life of the b r e a d w i n n e r is important economically to the family because of the income that it produces, any insurance program directed toward g u a r a n t e e i n g that the life value will be realized should assure a c o n t i n u a t i o n

18

A C C I D E N T A N D SICKNESS I N S U R A N C E

of the breadwinner's income. T h i s e n d is accomplished through life insurance a n d accident a n d sickness insurance. Four hazards to which every income producer is subject are (1) premature n a t u r a l death—dying too soon; (2) economic d e a t h living too long; (3) disability d u e to accident; (4) disability d u e to disease. Life insurance is the i n s t r u m e n t that provides protection against the first two hazards. By means of its policies the family is g u a r a n t e e d against the economic consequences of the husband's or father's d e a t h a n d the insured himself is protected against the time when his e a r n i n g days are over and he may become a b u r d e n to the family. Disability insurance finds its useful function in c o n t i n u i n g the income of the insured d u r i n g the time when by reason of illness or i n j u r y he is u n a b l e to earn. Dr. H u e b n e r recently remarked that in his j u d g m e n t life insurance has been misnamed a n d should more properly be called "time insurance," a caption that has been applied frequently to accident a n d sickness insurance. T h e kinship between life and disability insurance should be obvious since they are complementary parts of the whole socio-economic mechanism for capitalizing the h u m a n life value. Since this is b u t one of a n u m b e r of papers in a series of lectures on accident a n d sickness insurance, it is desirable that we define the specific phase of the entire field t h a t we intend to cover. Disability insurance has many useful functions besides c o n t i n u i n g the income of the insured d u r i n g the time when he is disabled. A vast array of collateral functions, emphasizing particularly indemnification against the heavy additional expenses which disability entails, have been developed. T h e s e are beyond the scope of this paper, which will be confined to a description and analysis of the principal benefits of the accident a n d sickness contract having to d o with replacement of income. It should be recognized also that society has developed a n u m b e r of other mechanisms, such as paid sick leave, for the c o n t i n u a n c e of income d u r i n g disability but they, too, are beyond the scope of our consideration.

THE

ORIGIN

W e are i n d e b t e d to our English cousins for originating accident a n d sickness insurance in a n y t h i n g like its m o d e r n form. But as

INCOME

REPLACEMENT

19

with some other insurance lines, notably life insurance, it rem a i n e d for the Americans to a d o p t the idea and to develop it vigorously. Accident insurance had its English b e g i n n i n g in 1848 with the establishment of the Railway Passengers Assurance Company of L o n d o n , for the p u r p o s e of providing benefits for death and specified accidental injuries resulting from railroad accidents on a defined journey. T h i s company was the inspiration for the Travelers Insurance Company of H a r t f o r d , Connecticut, the first successful American company. In 1863, the Travelers was set u p to sell travel policies exclusively b u t the following year its charter was a m e n d e d to include insurance against all accidents. T h e early American policies, like their English counterparts, were highly restricted and, except for spectacular d e a t h benefits, paid nominal weekly indemnities for total disability d u e to injuries sustained u n d e r prescribed circumstances. In the first three decades of its development in this country, accident insurance suffered from hectic competition a n d was characterized by the enthusiasm of its promoters, who for the most p a r t were u n h a m pered by any knowledge of sound u n d e r w r i t i n g principles and practices. As a result, although literally scores of companies were organized, a mere h a n d f u l e n d u r e d u n t i l the t u r n of the century. By then some semblance of order was coming into the business. Benefits were being liberalized a n d restrictions a n d exclusions simplified. Sickness insurance, which had disappeared from the scene with the failure of a few experiments a b o u t the m i d d l e of the nineteenth century, was reborn in the nineties. Its early years were less marked t h a n accident insurance by wild u n d e r w r i t i n g a n d extravagant benefits because its development was largely in the hands of concerns with a b a c k g r o u n d of experience in accident insurance. T h e first sickness policies were scheduled forms covering only specified diseases b u t these soon gave way to general coverage contracts. By 1915, a start had been m a d e in writing the noncancellable, g u a r a n t e e d renewable contracts which came into prominence d u r i n g the early twenties. T h e y were designed to give a greater stability and p e r m a n e n c e to the insurance by vesting in the policyholder the option of renewal. It was d u r i n g this same period that some of the h a r d i e r carriers u n d e r t o o k to extend the benefits of accident a n d sickness protection to lifetime coverage.

20

A C C I D E N T AND SICKNESS INSURANCE

T h e process of liberalization which went forward so merrily during the halcyon days of the twenties was arrested and reversed abruptly by the ruinous losses of the depression. But once again, with underwriting results pleasing to observe during World W a r II and the postwar years, competition has stimulated successive improvements in the policy contract. Let us now consider a typical accident and sickness policy of the commercial variety, noting its primary benefits and indicating the principal deviations from it found in noncancellable contracts and some of the better industrial forms.

THE

INSURING

CLAUSE

T h e general definition of the coverage intended to be conferred by the contract is found in the insuring clause. T h e vast variety in company practice and policy wording which is characteristic of accident and sickness insurance is reflected even in so fundamental a provision as that which states in broad terms what is covered. One typical insuring clause that has been much in use provides: T h e c o m p a n y h e r e b y insures ( I ) a g a i n s t loss r e s u l t i n g d i r e c t l y a n d indep e n d e n t l y o f all o t h e r causes f r o m b o d i l y i n j u r y s u s t a i n e d d u r i n g the t e r m o f this p o l i c y a n d e f f e c t e d solely t h r o u g h a c c i d e n t a l m e a n s , and ( 2 ) a g a i n s t loss r e s u l t i n g d i r e c t l y a n d i n d e p e n d e n t l y o f all o t h e r causes f r o m disease c o n t r a c t e d d u r i n g t h e p o l i c y t e r m , as h e r e i n l i m i t e d and provided.

Such a clause has five principal elements, each of which is worthy of comment. First of all a loss must be sustained. T h i s must be a loss defined in the policy, else there can be no recovery. Injury and sickness as such are not insured against. No matter how severe an injury or an illness may be, if it results only in pain and inconvenience there is no liability on the part of the company. Only when a loss enumerated in the contract is sustained is the company liable. Some insurers recognize the incomplete definition given to coverage in the insuring clause by stating at its conclusion that it is modified by the limitations and provisions that follow in the contract. Dr. C. A. Kulp, in his authoritative volume Casualty Insurance, points out that the insuring clause gives only half a definition of the coverage, namely, "a statement of the

INCOME

REPLACEMENT

21

causes or origins required to establish eligible disability loss and expense. T h e remainder of the definition, which is in terms of results, is f o u n d in the disability and related clauses." T h e second element of the insuring clause to be particularly n o t e d is that the loss sustained must result "directly a n d indep e n d e n t l y of all other causes." Historically, the purpose of this phrase is to exclude from coverage cases where pre existing disease (in the case of accident) or abnormality is a contributing factor. W e see, thus, that in the accident only policy or the accid e n t half of the combination accident and sickness policy, the effort of the insurer is to segregate for accident insurance coverage only such death or disability as is due exclusively to accidental means. Benefits provided for accident are generally more liberal t h a n those provided for sickness. Hence the necessity for precise delineation. However, in spite of the best efforts of insurers to establish a clear and definite distinction, the tendency of courts has been to construe the accident portion of the policy broadly a n d the sickness portion narrowly. T h e t h i r d significant element of the insuring clause prescribes t h a t the loss must result f r o m "bodily injuries effected solely t h r o u g h accidental means or from disease." Considerable confusion has arisen over the years a m o n g policyholders, claimants a n d the courts in recognizing the necessary distinction between accidental means causing i n j u r y and injury which is merely an unforeseen result of means not accidental, or between effects due to and conditions merely subsequent to an accidental occurrence. T h e insuring clause requires that the insured must have suffered bodily i n j u r y following accidental means, not simply that he shall have suffered an accident. T h i s distinction is a somewhat tenuous one that has developed over the years. T h e earliest accid e n t policies insured simply against "accident" or "death or disability the result of accident." Very soon, to their sorrow, the underwriters f o u n d that their policies were being construed to cover m u c h more t h a n they had intended. Accident insurance, at best, is necessarily a limited form of insurance. It insures against death, b u t not all deaths; against disability, b u t not all disabilities. If it were to be construed to comprehend all such contingencies, it would not be accident insurance alone, but life a n d health insurance as well. Webster defines "accident" in the p o p u l a r

22

A C C I D E N T A N D SICKNESS I N S U R A N C E

sense as "an event that takes place w i t h o u t one's foresight or expectation; an undesigned, sudden a n d unexpected event; chance or contingency." Since this is the p o p u l a r concept of accident, it was not surprising that companies which initially insured simply against accident or d e a t h a n d disability the result of accident, were soon paying claims covering all fortuitous a n d unexpected bodily injuries, defects, lesions a n d other changes in a person's health b r o u g h t a b o u t by disease. T o protect themselves from liability for accidental results and in an effort to define the coverage intended, the companies t u r n e d to the accidental means clause as the best way of e l i m i n a t i n g ambiguity from the coverage. Some companies went f u r t h e r than simply using the accidental means phrase a n d qualified it by specifying that the means be not only accidental, but also violent a n d external. T h u s , the policy came to require that the means p r o d u c i n g the result as well as the result itself must be accidental. It is an interesting development that as important as the distinction created by the accidental means clause seems to the existence of accident insurance, there has been a growing trend in the last decade away from its use. A l t h o u g h the U n i t e d States Supreme C o u r t recognized a n d u p h e l d the accidental means clause as long ago as 1889, distinguishing the difference between i n j u r y which is the result of accidental means and the unforeseen or accidental results of means not accidental, courts have by n o means been one in applying this doctrine. While the distinction is still m a i n t a i n e d , courts have so tortured the m e a n i n g of plain words as almost to destroy the significance of the accidental means clause in any except a theoretical or academic way. As a result of this, many companies in their newer policy forms are a b a n d o n i n g the use of the accidental means clause a n d are a d o p t i n g in its place the phrase "accidental bodily injuries." T h e more conservative underwriters decry this trend which would seem to be r e t u r n i n g the business to the chaos of the earlier days when accident insurance was so o f t e n construed to include life insurance and sickness insurance as well. Precise definition of the exact coverage of accident insurance in terms of the accidental means clause does not imply a disservice to the insuring public or a denial of adequate protection. W h a t accident insurance does not cover, sickness and life insur-

INCOiME

REPLACEMENT

23

ance do. Since c o m b i n e d accident a n d sickness protection is bec o m i n g more a n d more the rule, the line of d e m a r c a t i o n d r a w n by the insuring clause serves simply to d e t e r m i n e whether benefits are p a y a b l e u n d e r the accident portion or the sickness portion of the policy. It is true that accident benefits are somewhat m o r e liberal than sickness benefits in variety, d u r a t i o n a n d a m o u n t , a fact that is reflected in the p r e m i u m charged for the two parts of the disability insurance contract. T h e trend toward s u p p l a n t i n g the accidental m e a n s clause with the accidental bodily injury clause has been given some i m p e t u s by a few state I n s u r a n c e D e p a r t m e n t s . It is not u n k n o w n for some p e o p l e in positions of supervisory authority to have the notion that their responsibility goes beyond regulation of the business a n d should include dictation of the content of the policy contract whether such dictation is sanctioned by statute or not. For instance, o n e d e p a r t m e n t official, c o m m e n t i n g on the use of the accidental m e a n s clause, recently had this to say: T o d a t e we h a v e not o u t r i g h t d i s a p p r o v e d an " a c c i d e n t a l m e a n s " contract, o n e of o u r p r i n c i p a l reasons b e i n g that the courts, by d e m o n s t r a t i n g their ingenuity in b e n d i n g the I n s u r i n g C l a u s e to cover all m a n n e r of s i t u a t i o n s never c o n t e m p l a t e d by the c o m p a n i e s , h a v e shown that there is p e r h a p s not too m u c h difference between " a c c i d e n t a l m e a n s " a n d " a c c i d e n t resulting in b o d i l y i n j u r y . "

Whether as underwriters we favor or decry the s e e m i n g obsolescence of the accidental m e a n s clause, this trend may well c o n t i n u e until the distinction between accident insurance a n d sickness insurance has been obliterated. S h o u l d this c o m e to pass, the benefits provided by the disability insurance policy w o u l d have to be altered radically to c o n f o r m . B e c a u s e the m o r a l hazard inherent in sickness insurance is substantially greater than in accident insurance, benefits presently p r o v i d e d for the latter might well have to be drastically curtailed. Unless the coverage c o n t e m p l a t e d p a y m e n t for all death, the accidental d e a t h benefit conceivably w o u l d have to be omitted. P e r h a p s in the l o n g r u n such coverage w o u l d prove s o u n d in p r o v i d i n g for r e p l a c e m e n t of income a n d r e i m b u r s e m e n t of e x p e n s e without being concerned over nice distinctions as to the cause of disability. I d o not a r g u e against it but simply suggest it as a possible u l t i m a t e result of the continued attrition of the accidental m e a n s clause.

24

A C C I D E N T AND SICKNESS INSURANCE

Fortunately, the portion of the insuring clause dealing with sickness does not labor under the same difficulties as that applying to accidents. It is a simple statement that the policy insures against loss due to disease. T h e decision as to what is disease must remain in the hands of the physicians and courts, for no clearer wording of the intent of the policy seems possible. Roughly, any abnormal physical condition which is not caused solely by accidental means is classified as disease. In policies covering sickness only, some difficulty arises if an insured attempts to make claim for disability resulting from accidental means. Such policies uniformly provide that injury effected by accidental means will be excluded from the coverage. T h e fourth principal segment of the insuring clause provides that the injuries must be sustained or the disease contracted during the term of the policy. Obviously, insurance can be granted only for the term for which the premium is paid. T h e provision thus serves to exclude illness which antedates the policy since it is assumed that the insured was in sound health at the time application was made for coverage. Likewise, loss due to injuries sustained prior to the effective time of the coverage are beyond the scope of the insurance. Commercial policies are normally issued for a term of one year, although there is a vast volume of so-called quarterly commercial business in force in which the term is one-quarter of a year and much monthly term business as well. T h e term of the commercial policy is for a specified number of months and the option of renewal is not reserved to the insured. T h e carrier can decline to renew the contract or may condition renewal upon a change in the policy or in the premium rate. With the noncancellable guaranteed renewable policy, not only is the so-called cancellation provision omitted, as is frequently done with the commercial policy, but the option of renewal is specifically vested in the insured to a certain age, usually 60 or 65, conditioned only on the timely payment of renewal premiums. Finally, the insuring clause specifies that the coverage outlined generally therein is subject to the conditions and limitations which follow and which modify the general statement of coverage and delineate the specific benefits that are payable.

INCOME

REPLACEMENT

DEFINITION OF

25

DISABILITY

Accident and sickness insurance, as we have noted, is above all else earnings protection. It is designed to continue an income to the worker who is disabled. Accordingly, the clauses providing indemnity for disability are of particular importance, as is any definition contained in the policy that sets out what constitutes reimbursable disability. T h e definition of disability may be made in the same clause that provides the amount of the benefit payable and limits the time for which such benefits are payable. T h i s was the older practice. A new trend is to define disability in a separate clause. W e have remarked that in order to be entitled to recovery, the claimant must show not only that the loss sustained meets the requirements of the insuring clause as to origin or cause of the disability, but also that it has certain effects, namely, loss of time or of income because of injury or illness. A typical accident disability benefit clause reads as follows: If such injuries shall within 2 0 days from the d a t e of t h e a c c i d e n t w h o l l y a n d c o n t i n u o u s l y disable the insured a n d p r e v e n t h i m f r o m p e r f o r m i n g a n y a n d every d u t y p e r t a i n i n g t o his o c c u p a t i o n , for t h e p e r i o d of s u c h c o n t i n u o u s disability, but not e x c e e d i n g 5 2 c o n s e c u t i v e weeks, the c o m p a n y will pay $ p e r week.

It has been customary for companies to make a distinction between the inability of the insured to perform the duties of his occupation and the duties of any occupation. Patently it is more liberal to indemnify the insured if he cannot carry on the duties of his own vocation than to require that his condition prevent him from performing the duties of any occupation. An obvious example of this distinction is the dentist who suffers an injured hand and cannot practice his profession, but who would not be prevented from engaging in any one of many other pursuits. It is still typical practice for the companies to indemnify as total disability the inability to perform the duties of the insured's own occupation up to one year and thereafter to continue indemnity if the insured is unable to carry on the duties of any occupation, subject to an over-all maximum limit. T h e distinction between his occupation and any occupation was placed in many policy forms because of the tendency of courts to construe a clause that simply provided indemnity in the event of inability to perform

26

A C C I D E N T A N D SICKNESS I N S U R A N C E

the duties of his occupation without restrictions as to time, as m e a n i n g any occupation for which the insured was reasonably suited by education, background a n d training. Hence, some underwriters felt the necessity of discriminating in the policy contract between his occupation a n d any occupation. Even when this distinction has been spelled out, it has not been u p h e l d uniformly a n d many courts are still prone to e x p a n d the coverage beyond the rather clear intention of the insurer. O t h e r definitions of what constitutes total disability have been couched in these words: "Inability to engage in any occupation or e m p l o y m e n t for wage, profit or gain," a n d "total loss of business time." It should be noted that the various definitions incorporated in accident a n d sickness policies have referred to (1) general disability, or (2) occupational disability, or (3) a combination of occupational a n d general disability, or (4) disability based on a business time factor. It has been observed that with the possible exception of the definition based on a c o m b i n a t i o n of occupational and general disability, courts have not been influenced to a very great degree by the policy language. Courts have seemed to adhere to one of the three case law rules which are referred to as (a) T h e Middle R u l e ; (b) T h e Liberal R u l e ; (c) T h e Common Care and Prudence Rule. T h e Middle R u l e holds, in essence, that mere inability of an insured to carry on his usual or customary occupation is insufficient to establish total disability. T o recover there must be inability to p e r f o r m any and every duty pertaining to the entire range of g a i n f u l pursuits but in light of the insured's age. T h e Liberal R u l e specifies that general or occupational total disability exists if the insured is u n a b l e to pursue the duties of his occupation. T h e application of this rule does not preclude recovery even t h o u g h the insured is able to earn a substantial income from some other occupation or e m p l o y m e n t . T h e Common Care and Prudence R u l e states that the insured is totally disabled if work would increase his disability or aggravate the illness or i n j u r y , e n d a n g e r his life, imperil his health, shorten his life, cause him pain or inconvenience. As insurers have sought to state more clearly the intention of the coverage, the variety of practices described has arisen and confusion has been f u r t h e r proliferated. Some carriers have aband o n e d the idea of defining total disability at all, and rely entirely

INCOME

REPLACEMENT

27

on the case law as established by the courts in the various jurisdictions. T h e r e seems m u c h merit to this in the interest of policy simplicity a n d since in a contest the court-made law would prevail, the carriers' position is not worsened materially by the absence of a defining clause in the policy contract. Of current interest is the attitu.de of some of the larger companies now coming into the business—companies u n h a m p e r e d by organization precedent. O n e such company uses the definition: " T o t a l disability is incapacity of the insured, resulting from bodily injury or disease, which prevents him from p e r f o r m i n g substantially all of the work p e r t a i n i n g to his occupation or any other occupation for which he is or may be suited by education, training or experience." Another large carricr defines total disability d u r i n g the first 24 m o n t h s as "ability to p e r f o r m no duties pertaining to his own occupation," a n d after 24 m o n t h s as "ability to perform n o duties pertaining to any occupation for which he may q u a l i f y by training, education, or experience." In this discussion, lest we lose o u r perspective, it should be recorded that in the daily operation of the carriers, the technical distinctions of what constitutes total disability play but a small part. T h e industry recognizes that the coverage must be or become what the insuring public expects it to be. Irrespective of literal interpretation of policy definitions, almost any carrier will recognize liability if the insured is u n a b l e to work in an occupation for which he is reasonably fitted by age, training, education a n d physical and mental capability. Many policies establish the presumption of total disability in the event that the disabling condition is one of a specified type, as for instance, total a n d irrecoverable loss of sight of both eyes or the loss of two or more limbs. Formerly, accident policies required that disability be immediate and continuous from the date of the accident. Later, companies recognized t h a t in some cases this worked an unfairness on the policyholder a n d provided that benefits would be payable if the disability commenced within 20 days of the d a t e of the accident. T o d a y it is q u i t e c o m m o n to find the 20-day period extended to 90 or 120 days. T h e reason for any restriction, of course, lies in the necessity of being able to relate the disability to the accident alleged to have caused it. In sickness insurance it is common to make a distinction be-

28

ACCIDENT AND SICKNESS

INSURANCE

tween total confining disability and total nonconfining disability. In older policy forms, in addition to being wholly and continuously disabled and prevented from performing any and every duty pertaining to his occupation, the insured's condition must necessitate his "continuous confinement strictly within doors." Modern usage has ameliorated the apparently harshly restrictive condition so imposed and the benefit is paid if "the insured is necessarily confined within doors." Courts, of course, are inclined to construe the confinement clause liberally in favor of the insured. Leaving the house or hospital for treatment or therapeutic reason does not abridge the claimant's right to benefits at the confining total disability rate. More and more companies are eliminating the distinction between confining and nonconfining total disability, particularly in those policy forms that do not provide for the payment of benefits for longer than 52 weeks for any one disability. Contracts that provide for payment of lifetime indemnity for total disability due to sickness usually maintain the distinction between confining and nonconfining disability, paying indemnity for the entire duration of the disability if the insured is confined indoors while limiting the payment of indemnity for nonconfining disability to a specified number of weeks or months. Formerly, it was the custom to provide indemnity for nonconfining disability at a rate lower than confining, usually 50 per cent less. T h e recent trend is for there to be no difference in the amount of the benefits payable, even when there is a distinction made between confining disability and nonconfining disability and when the length of time for which nonconfining benefits are paid is limited. In accident insurance, most commercial policies provide a benefit for partial disability. If an injury prevents the insured from performing one or more important duties pertaining to his occupation, benefit is paid in a smaller amount than for total disability. One company defines partial disability as the "ability to perform one or more but not all of the important daily duties pertaining to the insured's occupation." A M O U N T OF

BENEFIT

T h e total disability benefit provided under the accident and sickness insurance policy is a definite amount selected and pur-

INCOME

REPLACEMENT

29

chased by the applicant and agreed to by the company. Since accident and sickness insurance is often referred to as income replacement insurance, one might get the impression that the policy would be engineered to replace exactly the amount of income that the insured was earning at the time the loss was sustained. T h i s is not the case. Rather, an accident and sickness insurance policy resembles a "valued" fire insurance policy. T h e applicant in selecting, and the company in issuing, the amount of weekly or monthly indemnity, agree in advance of the loss upon the value to be placed on the insured's time. Except for the few instances in which a so-called "Average Earnings Clause" is used, found primarily in noncancellable guaranteed renewable policies, the amount of the benefit is not adjusted to the insured's current earning level at the time the loss is incurred. It is not our purpose to discuss underwriting procedures, but it does seem appropriate to mention that when accident and sickness benefits are issued in the lower amounts, companies are usually willing to insure the policyholder up to 80 per cent of his average earned monthly income at the time the policy is issued. W i t h larger lines of indemnity, the insurers are unwilling to issue for as much as 80 per cent of the applicant's average earned monthly income, feeling that a 20 per cent coinsurance is an inadequate safeguard against moral hazard when the amount of benefit payable exceeds the insured's minimal needs. A majority of companies will not issue in excess of $400 per month to any one risk or participate in lines that exceed $600 to $750 per month. T h e r e are, of course, exceptions to this general rule, but the vast bulk of the business is done with indemnities held under the $400 per month level. T h e r e has been a tendency recently for companies to liberalize their own limits of indemnity and to extend the lines in which they will participate in recognition of the lower purchasing power of the dollar. More conservative underwriters look askance at this trend because they remember the dearly bought lessons of the great depression with j u m b o risks.

DURATION

OF

BENEFITS

It is not unusual in commercial policies for accident disability benefits to be provided for the entire duration of disability, even

30

A C C I D E N T A N D SICKNESS I N S U R A N C E

u p to the lifetime of the insured. T h e commoner practice is to limit the d u r a t i o n of benefits to one, five or ten years. T h i s is especially true of the noncancellable guaranteed renewable policies which almost uniformly place a two-, five- or ten-year limit on such benefits. W i t h sickness insurance, the companies' practice is notably less liberal. It is true that there are good combination accident and sickness policies that provide lifetime benefits for sickness, always with the safeguard of a distinction between confining a n d nonconfining disability. For the most part, however, p a y m e n t of sickness indemnities is limited to one or two years with some policies providing benefits for five or ten years. Noncancellable guaranteed renewable contracts as currently issued usually set one of two possible limits to the extent of benefits. T h e older and less favorable practice is to limit d u r i n g the entire lifetime of the policy the aggregate a m o u n t of benefits that will be paid for all disability indemnified t h e r e u n d e r to a stated n u m b e r of dollars or a stated n u m b e r of weeks or months. T h e better practice and the one followed by nearly all of the aggressive noncancellable companies is to place a limit on the n u m b e r of m o n t h s of benefits that will be paid for any one disability, with n o restriction on the n u m b e r of disabilities that will be indemnified d u r i n g the lifetime of the contract. It is usual with this type of policy for the insured to be entitled to the full benefit provided by the contract in the event of recurrence of a condition previously indemnified, if he has been able to return to his work for a m i n i m u m of three 01 six months prior to the recurrence.

DEDUCTIBLE

FREQUENTLY

USED

T h e r e is an increasing tendency o n the part of companies to recognize the sound economics underlying the so-called deductible. T h i s is true not only of reimbursement for medical expense b u t applies equally to payment of benefits for disability. Coverage f r o m the first day of disability due to injury is extremely comm o n . Coverage from the first day of medical attention received for disability due to sickness occurs less frequently. Many companies will not issue sickness insurance unless at least a three or seven-day deductible or elimination period is incorporated in the policy. Inasmuch as minor illness is usual a n d expected rather

INCOME

REPLACEMENT

31

t h a n u n u s u a l o r a b n o r m a l , such a d e d u c t i b l e makes s o u n d u n d e r w r i t i n g sense. U n h a p p i l y too few a p p l i c a n t s a p p r e c i a t e t h a t firstd a y coverage in sickness i n s u r a n c e b o r d e r s o n b e i n g a dollars w a p p i n g p r o p o s i t i o n . W i t h a few days of disability every year a n t i c i p a t e d f o r everyone, first-day coverage is e x t r e m e l y e x p e n s i v e n o t only in t e r m s of t h e p u r e claim cost b u t t h e high expense of h a n d l i n g claims for trivial a m o u n t s . Most carriers advocate ded u c t i b l e s of seven, f o u r t e e n or t h i r t y days, p a r t i c u l a r l y f o r comm e r c i a l risks, w i t h some d e d u c t i b l e s of n i n e t y days b e i n g w r i t t e n . T h e a p p l i c a n t w h o is so s i t u a t e d financially as to be able to take c a r e of a s h o r t loss of w o r k i n g time, can stretch his i n s u r a n c e p r e m i u m d o l l a r i m m e a s u r a b l y by electing a r e a s o n a b l e d e d u c t ible. Benefits f o r disability u n d e r a c c i d e n t a n d sickness c o n t r a c t s a r e usually c o n t i n g e n t u p o n m e d i c a l care. Almost w i t h o u t exception sickness benefits d o n o t c o m m e n c e u n t i l t h e first p r o f e s s i o n a l care is received. F o r m e r l y , t h e c o m p a n i e s i n c o r p o r a t e d r a t h e r s t r i n g e n t r e q u i r e m e n t s specifying t h e f r e q u e n c y of medical care. C u r r e n t usage, however, simply calls for r e a s o n a b l e m e d i c a l care.

OTHER

BENEFIT

PROVISIONS

Benefits for p a r t i a l disability d u e to i n j u r y a r e usually p a i d a t 40 or 50 p e r cent of the r a t e p r o v i d e d for a c c i d e n t total disability. T h e p a y m e n t of p a r t i a l disability benefits is l i m i t e d to t h e d u r a t i o n of such disability with a m a x i m u m limit of t h r e e to six m o n t h s , o r occasionally o n e year. A l t h o u g h t h e p a y m e n t of i n d e m n i t y for time lost d u e to total disability, w h e t h e r f r o m illness or i n j u r y , is t h e p r i m a r y b e n e f i t d e s i g n e d to replace i n c o m e , nearly all accident polices i n c o r p o r a t e special benefits for a c c i d e n t a l d i s m e m b e r m e n t o r loss of sight. T h e s e benefits a r e s o m e t i m e s r e f e r r e d to as C a p i t a l Sums w i t h t h e policy s t i p u l a t i n g a d o l l a r a m o u n t to be p a i d in t h e e v e n t of t h e loss of sight of o n e or b o t h eyes, o n e or b o t h h a n d s , o n e o r b o t h feet, o r o n e h a n d a n d o n e foot. I n e a r l i e r polices, if t h e i n s u r e d suffered such d i s m e m b e r m e n t or loss of sight, h e h a d n o o p t i o n b u t to t a k e t h e specified C a p i t a l S u m in full s e t t l e m e n t of his claim. T o d a y it is c u s t o m a r y to relate t h e benefits for d i s m e m b e r m e n t or loss of sight to t h e weekly o r m o n t h l y i n d e m n i t y , w i t h 200 t i m e s t h e weekly i n d e m n i t y o r 50 times t h e m o n t h l y i n d e m -

32

A C C I D E N T AND SICKNESS INSURANCE

nity payable for the multiple dismemberments or the loss of sight of both eyes, and 100 times the weekly indemnity or 25 times the monthly indemnity for the loss of one hand or one foot, and with graded sums for other dismemberments. It is now customary to pay the insured the total disability indemnity from the onset of disability until the date of dismemberment or loss of sight, at which time the lump sum may be elected or the insured may choose to continue to draw the weekly or monthly indemnity for the duration of total disability. It has been argued that in some cases it is advantageous to the insured to be able to elect a lump sum settlement to facilitate rehabilitation from one of the major losses for which these benefits are provided. Somewhat similar in character is the schedule of optional indemnities found in many accident policies. Such a schedule permits the insured, within a reasonable number of days of date of accident, to elect a lump sum settlement in lieu of drawing the monthly or weekly indemnity. T h e benefits provided in the schedule are calculated to be the average amount which would be payable under the loss-of-time benefit for the injury from which the insured is suffering. Both the dismemberment benefits and the optional or elective schedule benefits are a projection of the income replacement idea but with the additional feature that the insured may elect a lump sum settlement rather than receiving his indemnity over the period of his disability. T h e accidental death benefit is another feature of most accident policies. In a sense it is an attempt to project the income or earning capacity of the insured, for the benefit of his beneficiary, for a limited period after his demise. Accidental death benefits are usually sold on the so-called level basis of $1,000 of accidental death benefit for each $5 per week of total disability indemnity. In unusual situations, this relationship is not maintained and sometimes the accidental death benefit is eliminated from the contract altogether. Some contracts contain a double indemnity provision which doubles all or part of the benefits otherwise provided if the disability results from injuries sustained under certain conditions. Generally these special conditions include injuries sustained while the insured is a passenger on a common carrier or elevator or if caused by a steam boiler explosion, hurricane, tornado,

INCOME

REPLACEMENT

33

lightning stroke, or collapse of building walls, or fire. Occasionally one finds a contract in which double indemnity is payable if the insured is injured in an automobile accident. T h e best that can be said for the double indemnity provisions is that they add a little sales glamour to the contract that may appeal to the speculative instinct of the applicant and induce him to buy the other coverage that is important to his personal security.

SIGNIFICANT

TRENDS

Any study of the replacement of income provisions found in the accident and sickness insurance contract today will reveal three trends: simplification, liberalization and rationalization. T h e tremendous growth of the disability insurance industry, reflecting as it does a very wide appreciation of insurance as the one sound way by which most people can safeguard themselves against the hazards that afflict the human life value, has placed upon the disability insurance business the obligation of making itself intelligible to broad masses of people. T h e industry realizes increasingly that it has a heavy responsibility. In keeping with that responsibility, contracts must be simplified so as to be thoroughly understandable to prospect and agent alike. Witness, thus, the trend toward simplification of the insuring clause and of the definitions of total disability. In keeping with this same social responsibility there is a realization that clean-cut protection that does an ever better j o b for the insuring public is good business for the carrier. W e have seen constant progress in providing larger benefits for longer periods of disability. Policies that were once common, providing indemnity for only a few weeks or months, are becoming a rarity. Today, lifetime benefits are not uncommon and coverage for two, three, or five years is the rule. In attempting to bring the coverage into a more rational relationship with the hazard that it is designed to insure, we see and will increasingly see a greater use of deductibles to reduce the premium outlay of the individual insured and better fit the insurance to the real hazard. T h e r e is a pronounced trend toward giving the contract a permanency and a solidity. While beyond the scope of a discussion of income replacement benefits, it is significant that today nearly all accident and sickness contracts

34

A C C I D E N T AND SICKNESS

INSURANCE

i n c o r p o r a t e clauses setting definite time limits on certain defenses, in effect c o n s t i t u t i n g a modified type of incontestable clause. W e see a growing use of the waiver of p r e m i u m benefit a n d the practical e l i m i n a t i o n of the company's l i g h t to cancel during the policy term. It is not too m u c h to suppose that these signific a n t trends toward simplification, liberalization a n d rationalization will c o n t i n u e to the u l t i m a t e benefit of b o t h the insuring p u b l i c and the carriers that protect against the very real hazard of loss of i n c o m e due to disability. Forty m i l l i o n Americans now have coverage against loss of i n c o m e due to disability, more t h a n three-fourths of them under individual and g r o u p insurance plans. T h e forward sweep of accident and sickness insurance cann o t stop until protection has been provided for every A m e r i c a n whose working time has value.

CHAPTER

III

REPLACEMENT OF INCOME-GROUP CONTRACTS By C. Manton Eddy* T o discuss adequately the replacement of income under group contracts, one needs, I think, to review briefly the general concept of group insurance, its origins and the place it has gained in our society. It is generally considered that group insurance had its start at the beginning of the decade marked by the year 1910. T h e Montgomery Ward and Company case is frequently referred to as the first group life policy. T h e contract was actually issued in 1912, although it had been under consideration for some two years. A policy protecting the employees of the Pantasote Leather Company of Passaic, New Jersey, was, in fact, issued June 1, 1911. These were contracts of benefits for employees arranged by the employer at his own cost. Since workmen's compensation legislation was then first being enacted by several states, it is conceivable that the discussion of social needs centering around disabilities on the job had its effect on the thinking of those who decided to extend protection more broadly into the area of a man's life and needs. It was shortly thereafter that an insurance spokesman stated, "A man may take it upon his conscience to do more for his employees and then find that what he thought philanthropy was only very good business." However, the concept of group insurance to be purchased by an employer for the sole benefit of his employees grew only slowly in the decade following its birth and the growth in group life insurance was more pronounced than that in group accident and sickness insurance. In the early twenties the concept was introduced that the employee who, of course, realized all the direct financial benefits of • Vice President and Secretary, Connecticut General Life Insurance Company. 35

36

A C C I D E N T AND SICKNESS

INSURANCE

the insurance could properly make a c o n t r i b u t i o n toward its cost. T h e r e a f t e r , f r o m the m i d d l e twenties, the growth of g r o u p insurance was m u c h greater on the contributory principle a n d until a few years a g o it w o u l d have been accurate to say that nearly all the g r o u p insurance in force in the country was u n d e r a p r o g r a m to which the employees contributed toward the cost. At the end of 1936 it was estimated that some seven a n d a half million p e o p l e were covered for g r o u p life insurance as against fewer than two a n d a half million for g r o u p accident a n d sickness benefits; a n d the a m o u n t of p r e m i u m involved under the life f o r m was a p p r o x i m a t e l y $115 million as against slightly less than $25 million under the disability form. It is also interesting to note that at just that time g r o u p hospitalization a n d surgical benefits were being underwritten for the first time, a n d the record indicates that there were fewer than 100 t h o u s a n d people insured by the e n d of 1936. It has been estimated that at the end of 1952 the n u m b e r of i n d i v i d u a l s covered for g r o u p life was over thirty-four million for nearly $728 million of p r e m i u m s ; for g r o u p accident a n d sickness, over seventeen million p e o p l e for $410 m i l l i o n of p r e m i u m s ; for g r o u p hospitalization a n d surgical coverage, some thirteen million employees and some sixteen million d e p e n d e n t s for p r e m i u m s of a p p r o x i m a t e l y $548 million. Y o u will note that hospitalization a n d surgical coverages, which are the most recent in origin, have grown to be second largest in p r e m i u m dollars. Y o u will note also that accident a n d sickness benefits, which l a g g e d far behind life insurance in the m i d d l e twenties, have m a d e great strides toward closing the g a p . Factors which have obviously contributed to this change have been the a d o p t i o n of compulsory disability p r o g r a m s by a few but important states a n d the inclusion of benefits by u n i o n s as a p a r t of their negotiations with managements. It is this last factor, which has been p r o n o u n c e d since W o r l d W a r II, that has led to the growth of g r o u p p r o g r a m s under which the entire cost is p a i d by the employer.

N A T U R E OF GROUP CONTRACT

At this point, it might be in order to define exactly what is a g r o u p contract. T h e origins of g r o u p insurance, of course, stem

INCOME

REPLACEMENT

37

f r o m the employer-employee relationship, a n d when it has seemed necessary to the lawmakers that there be a statutory definition, it is u n d e r s t a n d a b l e that the definition with passage of time might have b r o a d e n e d somewhat from the original concept. Some states, in fact, have n o definition of g r o u p accident a n d sickness insurance, or g r o u p accident and health as it is alternatively referred to, and in those which do, the definition is not u n i f o r m and can be brief or detailed. T h e statutes of New York State, as an instance of the latter type, provide in essence that any contract which insures against d e a t h or injury resulting f r o m accident or accid e n t a l means, a n d which also insures against disablement, disease, or sickness of the insured, and which covers m o r e than one person (except blanket accident and health insurance policies as defined), shall be deemed a g r o u p accident a n d health insurance contract. T h e law f u r t h e r provides that the persons insured must fall into o n e of two b r o a d classes: T h e first class covers employees of an employer; the second, members of an association of employees, which term includes a labor union. However, an association to q u a l i f y must be one which has a constitution and bylaws, has twenty-five or m o r e members, is organized a n d m a i n t a i n e d in good faith for purposes other than that of o b t a i n i n g insurance, a n d has been so organized and maintained for a period of not less t h a n two years prior to the issuance of such insurance. T o provide for the complexities of m o d e r n industrial a n d economic life, the law sets u p several categories specifying how a n d u n d e r what conditions the policy can be issued to a single employer, or to an association or union, or to the trustees of a f u n d established by one or more employers, one or more unions, or both. In every case the contract is between the insurance company on one h a n d a n d either the employer or the association or the u n i o n or the trustees; a n d each of the individuals insured receives a certificate which recites the essential features a n d conditions of the coverage. A l t h o u g h the certificate is not a contract a n d presumably does not have contractual force, it is usually written in somewhat legalistic language and frequently quotes the contract language itself. As a result, it is customary to have for employees an informal, easily read booklet which outlines benefits in everyday language so that there will be better comprehension of what it is that is provided.

38

ACCIDENT

AND

SICKNESS

INSURANCE

T h e g r o u p contract itself is i n t e n d e d to be as s i m p l e a docum e n t as possible with a m i n i m u m of exclusions a n d restrictions. T h e u n d e r w r i t i n g is directed toward the u n d e r w r i t i n g of the g r o u p a n d not of the individuals. It is necessary, of course, for t h e u n d e r w r i t e r to assure himself that the risk does n o t possess peculiar hazards, b u t if it does, to get an a p p r o p r i a t e e x t r a p r e m i u m for it.

CHARACTERISTICS OF A GOOD GROUP

Viewed f r o m an u n d e r w r i t i n g r a t h e r t h a n a legal s t a n d p o i n t , w h a t is the general p a t t e r n of a good g r o u p plan? Obviously, the g r o u p must be a cohesive u n i t whose m e m b e r s h i p is clearly defined a n d whose existence is based on some other m o t i v e t h a n t h a t of o b t a i n i n g insurance. W i t h i n that f r a m e w o r k , these factors are essential: 1. Benefits should be d e t e r m i n e d by a plan p r e c l u d i n g individu a l selection by the employees. Subject to that stricture, benefits c o u l d be d e t e r m i n e d by wage classes, by o c c u p a t i o n , or by some o t h e r u n i f o r m classification. 2. T h e employees eligible should also be d e t e r m i n e d by a p l a n p r e v e n t i n g i n d i v i d u a l selection. T h a t could m e a n all employees or it c o u l d m e a n all of the employees of various classes d e t e r m i n e d by c o n d i t i o n s p e r t a i n i n g to e m p l o y m e n t . 3. T h e r e s h o u l d be a definite a n d economical m e t h o d of securi n g a n d m a i n t a i n i n g a h i g h e n r o l l m e n t of employees in contribu t o r y cases. Seventy-five per cent is the s t a n d a r d u n d e r w r i t i n g criterion of the g r o u p business. 4. T h e r e should be a central administrative o r g a n i z a t i o n , able a n d willing to act for the insured g r o u p , a n d t h e r e s h o u l d be a simple m e t h o d of collecting employee c o n t r i b u t i o n s . T h i s is the very h e a r t of g r o u p success. T h e economical and underwriting advantages of group insurance all stem from these fundamentals. If we reflect on the last two points particularly, we can see why the employer plays such an important part in the satisfactory operation of gTOup insurance —in the enrollment, the administration, and the collection of employee contributions. T h e low cost of group insurance comes from the fact that it is term insurance, that it is designed on a

INCOME

R E P L A C E M E N T

39

mass basis r a t h e r than on an individual basis, that it has, to a great e x t e n t , standardization and uniformity, a n d that there is inevitably a subsidy or c o n t r i b u t i o n from a third party. T h a t subsidy may be solely the cost of efficient administration b u t more often it is a specific employer c o n t r i b u t i o n in addition to the cost of a d m i n i s t r a t i o n .

A C C I D E N T AND SICKNESS B E N E F I T S

It is usually arranged that benefits for sickness start after an initial w a i t i n g period of either three days or seven days. A c c i d e n t benefits may start immediately or after the same three- or sevenday w a i t i n g period. A l t h o u g h first-day accident benefits are feasible, underwriters learned long ago through m u c h sad e x p e r i e n c e that sickness benefits from the first day c a n n o t be underwritten with success by an insurance company. Benefit payments usually e x t e n d over a m a x i m u m period of either thirteen weeks or twentysix wreeks. T h e schedule of benefits is limited to a m a x i m u m a m o u n t of two-thirds of earnings, and usually to no more than $ 4 0 a week. T h e latter l i m i t a t i o n has been rather traditional, although in very recent years m a x i m u m a m o u n t s have occasionally gone to $ 6 0 , where earnings have been high enough to warrant that figure. F o r many years benefits were restricted to ages less than 70. In m o r e recent years the m a x i m u m age l i m i t a t i o n has been removed and, in fact, in some states the removal has been required by statute. In such cases underwriters are careful to note the percentage of people above age 6 0 in relation to the rest of the risk, and if it is disproportionate, to m a k e an e x t r a charge. It is also to be n o t e d that rates vary according to the per cent of benefits on f e m a l e lives, as it has been well established that m o r b i d i t y among w o m e n tends to a p p r o x i m a t e twice that for m e n of the same age.

CUSTOMARY LIMITATIONS

T h e l i m i t a t i o n s in the g r o u p contract are normally that if disability is caused by pregnancy, the indemnity is limited to a m a x imum of six weeks. If an employee has reached age 60, he is limited in any twelve-month period to total indemnity not in excess

40

A C C I D E N T AND SICKNESS

INSURANCE

of the maximum period of coverage, thirteen or twenty-six weeks, for example. So-called occupational accidents and sicknesses covered by workmen's compensation laws are excluded. T h e insurance does not cover periods of disability during which the employee is not regularly treated by a physician. Since insurance is for the protection of the weekly wage, it is usually provided that initially the coverage extends only to those actively at work and terminates automatically on termination of active employment, with a usual proviso that where an employee is temporarily laid off, the benefits may be continued to the end of the month following the month in which the layoff occurs.

O T H E R CONSIDERATIONS

If an employee becomes totally and continuously disabled by accidental bodily injury or by sickness and is thereby prevented from performing any and every duty of his occupation, he is deemed disabled and indemnity is payable under the terms of the contract. In group insurance the objective has been to make the definition of disability as simple as possible and tied into the loss of wages, and to extend benefits to as many employees of an employer as possible with a minimum of restriction. T h e r e is no intent to pick and choose between the various degrees of insurability among individuals by following selection standards normally used in individual underwriting. T h e one objective is to avoid undue selection by the poor risks against the insurer. T h e insurer is willing to accept the normal complement of poor risks that exist in a given cross section of the working population. In order to assure an average spread of risk, insurers for years required a minimum of twenty-five lives insured per contract. Recently there have been signs of lower limits. In addition to the importance of a waiting period for sickness benefits, a major requirement that underwriters long since learned to be most necessary is that the benefit amounts be so arranged as to preserve an element of what we might term "coinsurance." By that is meant that if the benefits provide replacement only of half or two-thirds of income, the individual becomes a coinsurer of the loss of income during a period of disability. W e r e benefits

INCOME

REPLACEMENT

41

to equal n o r m a l pay in full, the family income would not suffer if the wage earner were not at work. U n d e r such circumstances, the incentive to be ill for trivial or imagined causes can develop a n d the disposition to postpone return to work after a spell of bona fide illness can become pronounced. Disability income is not taxable income to an individual u n d e r income tax laws and a dollar of disability pay is accordingly a full dollar of take-home pay. A good rule of t h u m b is that a dollar of wage, after income tax, should be regarded as 80 cents of take-home pay. T h e r e f o r e , insurance which exceeds two-thirds of total pay is approaching dangerously close to a replacement in full of take-home pay with resulting dangers to claim rates. It is significant that all insurers d u r i n g the later years of W o r l d War II experienced m o u n t i n g loss rates in their accident a n d sickness coverages. Workers, of course, were u n d e r the great strain of working long hours, they were receiving high wages supplemented by bonuses for overtime work, there was competition among industrial plants for employees, and after earnings had piled u p over a period of time it became quite easy to take prolonged vacations at what a m o u n t e d to reduced pay at the expense of the insurance company. T h e border line between illness through nervous exhaustion or fatigue on the one h a n d and actual malingering on the other is difficult to define. T h e conditions were not corrected completely by increased p r e m i u m rates nor by claim controls, b u t were really overcome only when the underlying conditions peculiar to the war period returned to a more normal status. Loss rates in the past have been above average in a certain few industries. T h a t is, of course, not due directly to specific industrial hazards as coverage is for nonoccupational disabilities. Variations today n o t only occur by type of industry and by geographical location, but also by individual employers. Differences for the latter result from the composition of the work force between m e n and women a n d between young and old; from attitudes between management a n d worker, a n d between supervisor and worker; also from personnel policies and a variety of somewhat intangible conditions. All of us who have observed a n u m b e r of risks over the years are conscious of different loss rates in the same com-

42

A C C I D E N T A N D SICKNESS I N S U R A N C E

m u n i t y which are difficult to explain except on the basis of the intangibles that exist a n d can be described as worker attitudes towards an environment.

COMPULSORY

NONOCCUPATIONAL

DISABILITY

BENEFIT

PLANS

T h e subject of income replacement through g r o u p contracts would be far from complete without a survey of what has occurred to date in the field of compulsory disability benefits legislation. O u r Social Security laws enacted in 1935 i n a u g u r a t e d compensation for the unemployed whose loss of wage was brought about by lack of work. From that it has been argued that loss of wage b r o u g h t about by nonoccupational accident a n d illness should have similar protection u n d e r national Social Security legislation. A l t h o u g h all proposed legislation has failed at the national level, there are four states which have adopted compulsory programs, n o two of them being identical. First, the state of R h o d e Island in 1942 passed a compulsory disability benefits law. All benefits are handled u n d e r a state f u n d which is financed entirely by employee contributions of 1 per cent of the first $3,000 of a n n u a l wages. T h e passage of this law represented no increase in tax to employees, however, as they h a d been paying 11/2 P e r c e n t taxable wages in support of unemployment compensation. T h e result of the new law was merely to divert part of an existing employee tax to a new area to provide additional benefits. Disability benefits follow the u n e m p l o y m e n t compensation pattern and provide now a m a x i m u m payment of $25 weekly. M a x i m u m duration is twenty-six weeks with a waiting period of seven days in each benefit year. Maternity benefits are provided. Benefits for the disabled unemployed are paid f r o m the state f u n d the same as for those disabled d u r i n g employment. U n d e r the R h o d e Island pattern there is no room for private insurance and the state has replaced almost completely the private u n d e r w r i t i n g of group accident and sickness insurance. T h e second state to adopt compulsory disability benefits was California, in 1946. A state f u n d was established to provide for the payment of the disability benefits, financed entirely by employee contributions of 1 per cent of the first $3,000 of a n n u a l wages. Originally, employees in California had paid a 1 per

INCOME

REPLACEMENT

43

cent tax into the u n e m p l o y m e n t compensation f u n d ; this tax was now diverted to new benefits. Also, the Knowland a m e n d m e n t to the u n e m p l o y m e n t tax act which was passed by Congress in 1946 provided that states which had previously collected employee contributions for u n e m p l o y m e n t benefits could transfer such f u n d s f r o m u n e m p l o y m e n t trust f u n d s to disability trust funds. As a conscqucnce, there were moneys in excess of $100 million immediately available to buttress the program. Because of the history of adverse losses in R h o d e Island, California benefits were set on a more conservative scale and maternity benefits were excluded. It was estimated that the original benefits scale would cost less t h a n the yield of the 1 per cent tax. As time has passed, the benefits in California have been increased noticeably above the original level and now provide a m a x i m u m a m o u n t of $30 a week for twenty-six weeks. A limited hospital benefit has been added which provides $8 a day for the first twelve days of hospital confinement. Also the weekly indemnity benefits, which normally are payable after a seven-day waiting period, are payable from the first day of hospital confinement if confinement begins before the eighth day of disability. It is expected that the next session of the California legislature will still f u r t h e r liberalize benefits. A feature of the California law is that employers are alternatively permitted to arrange privately for benefits, provided the benefits are greater in some respect than those of the state f u n d a n d require no greater cost to the employee. Benefits for the disabled unemployed are paid out of the state f u n d and private insurance carriers are assessed for their prorata share of the cost of such benefits. T h e competition between the state f u n d and the private insurers is not fairly balanced—for example, the state f u n d pays no p r e m i u m tax as d o the insurance companies. T h e history of regularly increased statutory benefits foreshadows a day not too distant when the 1 per cent tax will be insufficient to meet current benefits. W i t h its substantial reserve funds, such a situation could be accepted by the state f u n d for a while b u t would be intolerable to the private carriers. T h e f u t u r e of private weekly indemnity coverage in California is indeed gloomy. In 1948 New Jersey enacted its total disability benefits law. Benefits followed the general u n e m p l o y m e n t compensation pat-

44

A C C I D E N T AND SICICNESS INSURANCE

tern, but for the first time an employer contribution was specified. T h e total tax originally of 1 per cent of the first $3,000 of wages was divided between an employer contribution of 14 of 1 per cent and an employee contribution of of 1 per cent. Subsequently the employee contribution has been reduced to i/2 of 1 per cent and the pattern of benefits changed from the unemployment compensation type to one dependent on recent wage history. It was provided that under merit rating the employer contribution to the state fund could rise as high as of 1 per cent and drop as low as 1/10 of 1 per cent. It was further provided that employers could as an alternative arrange privately for benefits under conditions of benefits and employee contributions equal to the state fund. New Jersey also was one of those states which had previously had an employee tax under unemployment compensation so that there was available $50 million for transfer from the unemployment fund to the disability fund. Benefits provide a maximum amount of $30 a week for a maximum duration of twenty-six weeks. Starting with 1953, the benefit, subject to the maximum, will be two-thirds of the individual's average weekly wage for the eight weeks prior to disability. There is a seven-day waiting period for each disability. Interest on the reserve fund established from previous employee contributions to unemployment compensation is used to provide benefits for the unemployed who become disabled. If the interest should prove insufficient, it is provided that prorata assessments be levied against the state fund and the private insurers. T h e last state which has adopted a disability benefits law is New York, benefits first becoming payable on July 1, 1950. Unlike its three predecessors, it departs from principles of unemployment compensation and follows principles of workmen's compensation. New York already had a state fund operating as a self-supporting insurer in competition with the private insurers of workmen's compensation benefits. Employers are required to provide benefits through insurance in the state fund, through private insurance, or through self-insurance. In California and New Jersey, insurance in the state fund is automatic unless specific arrangements are made to provide benefits otherwise. In New York there is no automatic arrangement and employers must take action as to what benefit channel is selected. Employers are permitted to withhold

INCOME

REPLACEMENT

45

contributions f r o m employees' wages e q u a l to i/2 1 P61" c e n t subject to a m a x i m u m of 30 cents a week. T h e y must pay the balance of the cost. T h e benefits currently are one-half of average weekly wages, subject to a m a x i m u m weekly a m o u n t of $30. T h e m a x i m u m period is thirteen weeks. T h e r e is a seven-day waiting period for each disability. Benefits for the disabled unemployed are financed u n d e r the su[>ervision of the chairman of the Workmen's Compensation Board o u t of a special f u n d which was originally created t h r o u g h a small special tax equally on employers and employees and is to be m a i n t a i n e d by assessments on all insurance carriers, including the self-insured employers a n d the state fund. It is i m p o r t a n t to note a f u n d a m e n t a l difference between the New York approach a n d that of California a n d New Jersey. In the latter two, the state f u n d s bear little resemblance to an insurance system a n d are basically devices for d i s t r i b u t i n g tax-supported benefits. T h e y operate automatically in the absence of positive action by the employer to select alternative means of meeting the requirements of the law. I n N e w York the state f u n d is, in fact, a state-operated b u t self-sufficient insurance company, paying premium taxes a n d otherwise competing u n d e r equal conditions with private insurers. T h i s a p p r o a c h would seem to offer the best means of preserving private enterprise that has yet been adopted by the few states which have enacted compulsory disability benefits legislation. Legislatures a n d commissions of many other states have considered the question of compulsory benefits, b u t n o n e has yet seen fit to take action except the state of W a s h i n g t o n where a proposed law was overwhelmingly defeated by the voters u n d e r a refere n d u m procedure. W h e t h e r other states will take action or not is a question for the f u t u r e . Certainly the c o n t i n u e d a n d substantial extension of benefits that has taken place on a voluntary basis speaks eloquently of the full o p p o r t u n i t y available for voluntary means to function. Further statutory action, if it comes, m i g h t follow existing patterns already developed or it might explore new means. In fact, freedom for experimentation is one of the strong arguments for a state by state approach to this problem, r a t h e r than for a federal system. A m o n g the suggestions that have been m a d e are an all-

46

A C C I D E N T A N D SICKNESS I N S U R A N C E

private system, which avoids a state f u n d , a n d an elective system which gives employer and employees substantial freedom of choice in what is to be done in the adoption of, or in the extent of, benefits.

PROBLEMS

OF C O M P U L S O R Y

HEALTH

INSURANCE

It is natural to turn from consideration of compulsory disability benefits to the broader subject of compulsory health insurance. T h e voluminous Beveridge Report and subsequent a d o p t i o n by England of a comprehensive national health service gave great impetus to the consideration of compulsory health insurance for this country. T h e staff of the Federal Security Agency has been studying for some years the matter of extension of Social Security into the field of disability benefits a n d health services. A variety of bills to this end have been introduced into the Congress over the last several years. T h e r e has resulted much heated controversy between the advocates of the compulsory approach to the national problem and those who have felt that voluntary methods are far superior. T h e sociological and economic aspects of the problem are not simple. It is far easier to generalize than to be specific. I think it is unquestionable that when the population or a segment thereof is given complete health services as a matter of right, the prior evaluation of costs, if they are made on the basis of past-known statistics, will prove to be totally inadequate. All experience to date proves that this is so. T h e original estimates in England were far below what actual costs proved to be a f t e r the system had been in operation for several years. In this country, hospitals which a few years ago set u p an all-inclusive daily r a t e all services plus bed and board—have f o u n d that the utilization of ancillary services increased greatly, sometimes manyfold. Insurance companies have had the experience of underwriting a liberal plan of benefits for hospital, surgical, and general medical costs with the result that where the program has paid the e n t i r e cost of all conceivable services, the utilization thereof has increased tremendously and has created a claims rate far in excess of normal premiums.

INCOME

REPLACEMENT

47

It is easy to see why this is so. T h e progress of medical science in the last generation has been tremendous. T h e doctor today has at his disposal powerful aids not only in treatment but more importantly in diagnosis. N o one can deny, for example, that complete X-rays of the gastro intestinal tract for people of m i d d l e age suffering certain aches a n d pains is sound procedure. T r a d i t i o n ally, however, the doctor lias weighed the probabilities of X-rays giving positive results against the costs to the patient. If the patient is paying the costs and the probabilities appear to be one in a thousand, n o doctor would immediately order X-rays—he would wait for f u r t h e r diagnostic indications to develop. If the patient is not bearing any of the cost, early X-rays can be a n d tend to be routine. I use this only as a simple illustration of the point that society has developed a certain balance in the past between utilization of services and the cost of services. If we drastically change that balance, if we give everyone access to such services as a m a t t e r of right, we will find that we have increased o u r costs decidedly and, it is quite conceivable, to the point of being a b u r d e n on the economy that is unsound and unwise. T h e medical fraternity is particularly jealous—and rightly so— of the physician-patient relationship, of the right of the individual to have the doctor of his own choice, and of the right of the doctor to set his fee, a fee which has varied q u i t e often for the same type of services according to the ability of the patient to pay. Advocates of compulsory health services have argued that the medical profession need fear no disturbance of such relationships a n d such traditions. It seems to me that the approaches to the debate "compulsory methods versus voluntary methods" needs clear thinking, objective thinking, and honest thinking. I cannot see how it is possible to have compulsory health service without having outside controls imposed on doctors' fees. I can think of n o commodity or service that the public is forced to buy by law where the vendor is not controlled as to the cost of what he is delivering. It is inconceivable to me that compulsory health service can ever go h a n d in h a n d with complete detachment from control of doctor a n d hospital charges. W h e n the a r g u m e n t is made that modern services have grown too complex a n d expensive for the average individual a n d there-

48

A C C I D E N T AND SICKNESS INSURANCE

fore the burden should be borne out of general tax funds, it seems to me to follow that even a healthy economy cannot stand a limitless burden of utilization and that therefore there must eventually be some control on total cost and use which rests in some supervisory body. In other words, my argument is that compulsory benefits end in regulation and supervision under a system quite different from the traditional system that has developed under voluntary methods. It may be that a compulsory approach to the problem is the right one. T h a t is a debate that will go on in the succeeding Congresses over the coming years but I believe that in debating the issues we should not be misled into pretending that a compulsory system is compatible with freedom of choice, freedom of charge, and freedom of utilization of services as have existed in the past. During the 1952 presidential campaign, Dwight D. Eisenhower made this significant statement: . . . incentives would disappear under government bureaucratic control, because promotion and increased compensation for most doctors would come more by seniority than by merit. But still more important is the effect of compulsory methods on the patients, whose confidence in the doctor may be seriously impaired. T h e patient may fear—and no doubt correctly in many cases—that he would receive regimented assembly-line treatment instead of care that is tailored to his individual needs. . . . T h e patient would find that he would be worse off as a taxpayer, too, because it would require a whole new army of Government clerks to handle the records that would be an essential part of a compulsory system. Any move toward socialized medicine is sure to have one result. Instead of the patient getting more and better medical care for less, he will get less and poorer medical care for more. Experience has shown that American Medicine outstripped the world on a voluntary basis and on that basis—plus voluntary insurance plans together with locally administered indigent medical care programs for those unable to participate— the needs of Americans will most adequately be met.

Advocates of the voluntary approach point with some pride to the vast strides made in the direction of budgeting in advance for the cost of medical and hospital care. T h e record, of course, is impressive. Obviously there is always the problem of the care of those who are termed the medically indigent, or are otherwise termed the non-wage and low-wage groups. Again, clear thinking

INCOME R E P L A C E M E N T

49

can make a proper evaluation of the problem. Certainly voluntary methods are traditional to this country and have played a great part in the independence and ingenuity of its people. If the issues are clearly thought out and carefully debated with restraint and with honesty, I think we can trust our people to make sound decisions.

C H A P T E R IV

MEETING HOSPITAL COSTS By Gilbert W . Fitzhugh* T h e problem of meeting hospital costs is only one part, although an i m p o r t a n t one, of the broader problem of just what is the n a t u r e and extent of hospital costs and how adequate hospital care can be economically provided for all Americans. Before discussing methods of meeting the costs, let me make at least passing reference to some of the other parts of the problem. W e can then view the primary subject in somewhat broader persjiective, and consider certain of the basic principles involved in this i m p o r t a n t field as well as some of the implications of different approaches to it. T w o aspects of the broader problem which should be mentioned first are: (1) the provision of adequate hospital facilities; a n d (2) the organization of hospital facilities, staffs, collateral services, methods and procedures, including the procedure for billing in an efficient and economical manner. Both of these items have an important bearing on what the cost of hospital care amounts to, and thus on the problem of meeting such costs. Everyone will agree that no method of prepayment or health insurance of any form, or any other method of paying hospital costs, can of itself provide adequate hospital care, alt h o u g h to the extent that the existence of such plans assists in the financing of the necessary facilities, they do have an i m p o r t a n t p a r t to play. And different methods of financing can have different effects, as will be seen. T h e first problem, therefore, is to see that a d e q u a t e facilities are available a n d geographically accessible to all. T h i s is a m a j o r problem by itself, and there is room for considerable disagreement as to the best solution, b u t as it is not the direct subject matter at hand, it can only be mentioned in passing. T h e organization of the hospital facilities is also a far-reaching p r o b l e m for which there is no ready simple answer that will find • Second Vice President. Group Insurance, Metropolitan Life Insurance Company. 50

51

M E E T I N G H O S P I T A L COSTS

widespread agreement. A few phases of the subject that have a direct bearing on costs are properly within the scope of o u r discussion here. Certain of them are somewhat akin to the problem in the general medical field of g r o u p practice versus individual fee for service. A l t h o u g h the debate on this subject is sometimes confined to the services of physicians, surgeons, and specialists, which portion of the problem is more within the scope of the next lecture in this series, it is broader than that. For example, there is presently a s h a r p difference of opinion on the question of whether anesthesiologists and roentgenologists should be salaried employees of a hospital or individual practitioners. T h i s is directly related to hospital costs, because the answer to the question determines to a large extent whether the costs of these services are or are not hospital costs. Again, closely allied to this subject is the question whether such costs, laboratory expenses, operating room charges a n d various "special hospital service" charges other than room a n d board should be charged on a fee-for-service basis or some flat rate basis, such as a graded additional charge per day. Accordingly, a closer look at just what hospital costs really are would seem to be an essential preliminary to an analysis of how to meet them.

THE

NATURE

AND E X T E N T OF H O S P I T A L

COSTS

T h e two principal items of hospital charges are (a) the hospital's basic daily charge for room and board, r o u t i n e floor n u r s i n g and other r o u t i n e hospital services, and (b) the charges for socalled "special hospital services" such as the operating room, laboratory services, X-rays, anesthesia, drugs a n d dressings, etc. These charges vary widely according to geographical location; type of accommodations, i.e., private room, semiprivate room, or ward; and the individual hospital. And like other costs, they have increased sharply in recent years. In addition to the factors leading to higher costs generally, hospital costs have been u n d e r upward pressures for reasons peculiar to them, e.g.: 1. New medical discoveries—the so-called "miracle drugs"—new surgical techniques, and new diagnostic tools have introduced substantial new costs to hospitals and have increased total per diem costs. T h e y have in many cases, of course, shortened t h e

52

A C C I D E N T A N D SICKNESS I N S U R A N C E

d u r a t i o n of hospital stay, resulting in savings to the patient not only in daily room a n d board charges, but in time lost from work or home, not to mention the life and health savings. However, the shortened period of convalescence has increased the p r o p o r t i o n of hospital days involving the more expensive types of care. 2. Payments by various levels of government for the various types of patients they pay for (mental, tubercular, crippled children, etc., plus welfare cases) have in many cases lagged b e h i n d increasing costs, thus adding to hospital deficits to be made u p by paying patients. 3. H i g h taxes a n d other influences have decreased the proportion of hospital expenses met by gifts, endowments a n d the interest income thereon. For example, in one hospital the income from e n d o w m e n t was once the equivalent of the cost of 3500 patientdays. N o w its income from that source pays for the cost of only 800 patient-days. 4. T h e earnings levels and working conditions of hospital nurses and other employees have in many cases been somewhat lower in the past than those of other employees, a n d this is now being corrected. Labor costs are a large portion of total hospital expenses. 5. T h e expenses incurred by hospitals in their nurses' training programs have substantially increased. In one hospital, this presently a m o u n t s to about $2,400 per nurse. 6. Many patients are expecting more expensive services, either in type of accommodations, meal service, or in other ways. 7. T h e existence of prepayment plans has u n d o u b t e d l y resulted in increased use of hospital facilities, and probably even in the creation of new facilities, and thus in increased total hospital costs. Of course, these plans have at the same time reduced the volume of uncollected accounts, and should help to reduce the cost per patient-day because of the larger percentage of occupancy by paying patients. C h a r t 1 gives a quick picture of the range of semiprivate daily room and board charges in various cities of the U n i t e d States, in 1948 a n d as of the present. T h e range for any one time and place reflects not only different charges by different hospitals, but different charges by the same hospital for differences within its semiprivate classification—e.g., 2-bed rooms, 4-bed rooms, and multi-

MEETING

HOSPITAL

53

COSTS

CHART I RANGE OF DAILY HOSPITAL CHARGES Semi-Private Peoria, III.

$4

it, r u

Accommodations

$8

$10

$20

L

Pittsburgh, Pa. Indianapolls, Ind. Tulsa, Okla. Baltimore, Md. Houston, Tex. Kansas City, Mo. St. Louis, Mo. Atlanta, 6a. Chicago, III. Philadelphia, Pa. Buffalo, N. Y. Los Angeles, Cal. Newark, N. J. Columbus, Ohio Detroit, Mich. Boston, Mass.

nnm

New York, N. Y.

• 31

Cleveland, Ohio San Francisco, Cal.

mm

II. HJ&^&WW«} »52

is

-mmm-

54

A C C I D E N T AND SICKNESS INSURANCE

bed rooms. (Reference to this range within the general class of "semiprivate" will be made later.) T h e ranges shown are not intended to be all-inclusive, as it is usually possible to find in most cities a few rooms in a few hospitals either well below or well above the general range of the community. T h u s the chart shows the range of generally available rooms, and omits the extremes at both ends. Even so, it can be seen that in some communities there is a rather wide range. It is also obvious that the daily room and board cost of semiprivate accommodations varies widely according to geographical location. T h e highest costs shown are for San Francisco, Cleveland, and Boston; the lowest for Peoria, Pittsburgh, and Indianapolis. Rates in the South, not charted, are also generally somewhat lower. Even though the variation in daily room and board charge may be affected by differing practices of different hospitals as to allocating their costs between room and board charges and special service charges, the chart does give a fairly accurate picture of trends by date and location. T h e next item to consider in connection with the costs of hospital care is the duration of hospital confinement. Chart 2 shows the distribution of hospital confinements by duration. It is evident that the very great majority of hospital confinements, by number of cases, are for only a relatively short stay. T h i s in turn raises a question as to what is the major problem in the subject of financing the costs of hospital care. Most of the hospital confinements are for one, two, or three days, and many of these, not accompanied by substantial charges for special hospital services, do not involve a financial catastrophe for many patients. On the other hand, the relatively few cases that last for a number of weeks can result in financial catastrophe, particularly if it is the wage earner who is hospitalized, so that he has not only his hospital expenses to meet but a simultaneous loss of at least part of his earnings. Most existing plans of prepaying the costs of hospital c a r e either Blue Cross or insurance—put considerable emphasis on the payments for the early durations of hospitalization. Consideration might well be given as to whether this is where most of the emphasis should be placed. In other words, should all the costs of hospital care be met by some form of prepayment plan, regardless of how much that cost is, or if some part of the cost is to be left

M E E T I N G

HOSPITAL

COSTS

55

uncovered, how can the most effective use be made of the moneys to be spent for coverage? T h i s is one phase of the general unsettled question of whether the primary purpose of any kind of health insurance plan is to cover catastrophic financial losses essentially or, on the other hand, to encourage early diagnosis and care, and by such preventive C H A R T II DISTRIBUTION O F H O S P I T A L C O N F I N E M E N T BY D U R A T I O N

Both Personal and Dependent

Coverage

T h e figures graphed are the percentage of the total number of claims for which the period of hospital confinement lasted for the indicated period O R LESS. %

AND OVER Based on actual experience under several groups of employees insured in the Metropolitan Life Insurance Company for Hospital Expense benefits for themselves and their dependents.

56

ACCIDENT

AND

SICKNESS

INSURANCE

measures reduce the ultimate volume of sickness and its attendant costs. Many people believe that individuals should make provision in their regular budgets for what might be termed "normal" medical expenses—e.g., expenses for minor hospitalization. They hold that insurance is designed to cover only major unpredictable expenses, and that the exclusion of small payments from the insurance coverage would either reduce the cost of the coverage or make possible more adequate coverage for the more "catastrophic" CHART

III

DISTRIBUTION OF CHARGES FOR SPECIAL HOSPITAL SERVICES

Both Personal and Dependent

Coverage

T h e figures graphed are t h e percentage of the total n u m b e r of claims for which the employee was charged the indicated amount O R LESS for special hospital services. %

Based on actual experience under several groups of employees insured in t h e Metropolitan Life Insurance Company for Hospital Expense benefits for themselves and their dependents.

MEETING

HOSPITAL

COSTS

57

cases. T h e y suggest the inclusion of a " d e d u c t i b l e " feature, as in a u t o m o b i l e collision insurance. D i f f e r e n t individuals a n d groups can well have—and in fact do have—different answers to this question, as will be discussed later. T h i s brings us to the third item in the costs of hospital care, namely, the so-called " s p e c i a l hospital services." Passing over the q u e s t i o n of whether some of these special hospital services a r e properly considered hospital costs r a t h e r t h a n medical costs, C h a r t 3 shows a d i s t r i b u t i o n of claims u n d e r insured hospital policies by total a m o u n t s actually charged for all types of these "special hospital services." It can be seen that there is a wide variation in these charges b u t that in each of 97 per cent of the claims the total cost is less t h a n $ 2 0 0 . H e r e again, in devising a p r e p a y m e n t plan, a decision must be m a d e as to whether to pay all such costs, or, if not, some b a l a n c e must be drawn between paying all or most of the cost for a large n u m b e r of small claims as against paying all or most of the cost for the relatively few very substantial claims. A closer look at a few of the cases involving substantial a m o u n t s of special hospital services can be instructive. C h a r t 4 gives a detailed breakdown of the items e n t e r i n g i n t o the charges for four such cases.

METHODS

OF

MEETING

HOSPITAL

COSTS

W i t h this bird's-eye p i c t u r e of the scope and n a t u r e of hospital costs as a background, let us now consider various ways that these costs can be met. U n t i l the thirties, they were met almost entirely by the hospital billing each p a t i e n t f o r the service rendered that patient, a n d the patient m e e t i n g that bill as best he could. W h e r e the p a t i e n t was u n a b l e to pay for the services, it b e c a m e a m a t t e r of p u b l i c or private charity, or of " s u b s i d y " by the hospital, the latter e n t a i l i n g an increase in charges to paying patients. T h i s leads directly to the q u e s t i o n o f w h a t is m e a n t by a person's inability to pay for hospital or o t h e r m e d i c a l costs—such a person

b e i n g sometimes

referred

to as " m e d i c a l l y

indigent."

T h e r e is an a b u n d a n c e of c o n f u s i o n o n this p o i n t , largely arising from a failure to distinguish b e t w e e n inability

to pay a n d

unwill-

ingness t o pay. Also, " i n a b i l i t y to p a y " can m e a n q u i t e a different

58

A C C I D E N T

A N D

SICKNESS

I N S U R A N C E

thing if it refers to inability to pay at the time service is rendered as contrasted with inability to pay in advance under some prepayment plan for spreading the risk. CHART

IV

ILLUSTRATIONS OF A C T U A L CASES INVOLVING SUBSTANTIAL H O S P I T A L SERVICE

SPECIAL

CHARGES

CASE I

Oxygen Oper. room Anesthesia (staff anesthetist) Laboratory Medicines Total

$10 00 12.00 5.00 17.00 242.80 $286.80

CASE 2

Oper. room Laboratory X-ray Blood Drugs Anesthetist (not on staff) Total

$60.00 25.75 12.50 29.00 50.25 40.00 $217.50

CASE 3

Laboratory X-ray Drugs Oper. room Aureomycin Pathology Therapy Oxygen Penicillin

$113.50 77.50 23.75 71.00 24.10 10.00 1.50 30.00 179.40

Total

$530.75 CASE 4

Oper. room Anesthesia (staff anesthetist) Laboratory X-ray Drugs Blood Total

$10.00 35.00 138.00 30.00 108.55 360.00 $681.55

Methods of paying bills in installments after actual confinement have also been found helpful. This raises an interesting question of priorities. Why is it that many families will so much more

M E E T I N G H O S P I T A L COSTS

59

willingly spend money on other items than they will on maintaining their health? W h y is it so m u c h worse to go into debt to meet a medical bill, or to pay it on the installment plan, t h a n it is to meet the cost of an a u t o m o b i l e or a television set—in fact, so m u c h so that we are told the government must step in and provide the means for f u r n i s h i n g health services and for financing them? P e r h a p s one great need is a continuing educational campaign to p u t the cost of medical care in a preferred position on the priority list of more of our citizens. In order to do this effectively it is very h e l p f u l to provide for some way of avoiding the large variations in the incidence of sickness a n d accident and thus in the costs of medical care a m o n g families. T h e tremendous range in the incidence a n d unexpectedness of medical costs is, of course, one very i m p o r t a n t difference between such costs and more or less elective costs, such as those for automobiles and television sets. Fortunately, mechanisms for sharing such costs, and paying for them before they h a p p e n , are available, and the educational process has already m a d e t r e m e n d o u s strides, as the remarkable growth of " p r e p a y m e n t " plans testifies. Individual insurance policies which include benefits for hospital expenses have been available for many years, but a tremendous impetus to the growth of prepayment hospital expense protection was provided by the introduction of this type of coverage u n d e r g r o u p insurance plans in the thirties, and the i n a u g u r a t i o n of Blue Cross hospital service plans about the same time. Blue Cross plans were developed primarily by the hospitals themselves in order to encourage greater use of their (at that time) not fully utilized facilities a n d also to reduce their uncollected bill problems. T h e Blue Cross developed on a so-called "service" basis u n d e r which the insuring organization or service corporation undertakes to provide the insured or subscriber with certain hospital service benefits. A l t h o u g h there are now many different Blue Cross plans, with widely differing benefits and costs, when such plans were first developed, they generally placed no particular dollar limitation on the a m o u n t of the services, but the benefits provided were defined by type a n d d u r a t i o n of service. I n other words, any service of the type included was provided the members with no direct charge to them. T h e Blue Cross paid the hospital costs to the hospital, not to the insured.

60

A C C I D E N T A N D SICKNESS I N S U R A N C E

T h e plans issued by insurance companies, largely life insurance companies at the start, a n d mostly on a g r o u p policy basis, have on the other h a n d generally followed the so-called " i n d e m n i t y " approach. In other words, the insurance company undertakes to pay certain specified cash benefits to the insured in the event he becomes hospitalized. T h e insured is billed by the hospital in the usual way a n d then is reimbursed by the insurance company within the terms of the policy. (Arrangements for payments to be m a d e directly to the hospital are available—as will be explained later.) Even though this method usually involves specified maxim u m payments, it does not limit the payments to specified types of expenses, as is the general practice with the so-called "service" type of plan. In other words, u n d e r a so-called "full service" type of plan, there may be no dollar limits on the services covered, b u t there are certain types of services not covered, such as the fees of anesthesiologists not on the staff of the hospital, the cost of blood a n d blood plasma, all services after diagnosis of mental disease or tuberculosis, the costs of private room accommodations in excess of a specified allowance for such costs, etc. O n the other hand, u n d e r the cash-indemnity approach, although there are usually some dollar limitations on the amounts payable, there are usually n o similar limits on the types of services for which payments will be made. T h e r e has been considerable discussion as to the relative merits of the Blue Cross approach as compared with the insurance company approach. Actually, the two approaches have the same basic objective, and there are several f u n d a m e n t a l areas where the two approaches are in substantial agreement—for example, the risksharing principle, the prepayment principle, a n d the existence of some limitations (even though of different forms) on the benefits provided. Furthermore, as will be seen, the two approaches are gradually getting closer to each other. T h e two types of plans have both shown great popularity and tremendous growth, so each plan must have features that are attractive to millions of people. It may be of interest therefore to present a brief resume of some of the points of difference between the original concepts of the two approaches, a n d some of the ways in which these differences are becoming less i m p o r t a n t .

M E E T I N G H O S P I T A L COSTS THE

SERVICE A P P R O A C H

AND THE

INDEMNITY

61 APPROACH

O n e of the principal differences is the service versus the indemnity a p p r o a c h , to which reference has already been made. Let us assume for the m o m e n t that by the service approach we mean a full service a p p r o a c h with n o limitations, and that by the indemnity a p p r o a c h is m e a n t a cash benefit plan adequate to pay most, b u t not all, of the hospital costs. (It might be mentioned in passing that considerable confusion is often caused by comparing a service plan with a cash indemnity plan providing benefits well below the cost of semiprivate services. As indicated, this discussion assumes that the cash indemnity plan provides benefits geared reasonably close to the level of such costs.) Actually, in practice there is n o such t h i n g as a service plan paying all the costs in all cases, a n d some indemnity plans come closer to doing so than some service plans. However, let us first consider the difference in principle between the theory of the two approaches, and then review the operation of each of these theoretical approaches as they are f o u n d in actual practice. T h e r e are several i m p o r t a n t factors to be considered in determining the differences between these two general approaches: 1. Is it advisable to make a contractual u n d e r t a k i n g to provide an employee a n d his d e p e n d e n t s with all the hospital services he uses with n o limitations? In other words, is full service more advisable t h a n a plan providing for some coinsurance? By "coinsurance" is m e a n t the principle of the insured bearing some portion of the loss at the time of loss, rather than having the insurer assume all the costs. In any field involving so many subjective elements as the cost of medical care, it is obvious that there is n o hard a n d fast dividing line between what is necessary and what is unnecessary, what is right a n d what is wrong. T w o doctors analyzing a certain case can q u i t e honestly come to entirely different answers, not only as to the diagnosis, but as to the method and extent of t r e a t m e n t necessary a n d the proper duration of hospital confinement, or even as to the necessity for hospital confinement at all. It seems incredible that the existence of a plan covering all expenses with n o limitations could fail to have some effect on the

62

ACCIDENT AND SICKNESS INSURANCE

amount of service rendered. If a doctor knows that his patient has to pay for extra laboratory tests, for example, he might be a little more circumspect in the extent of tests that he orders. Similarly, if an employee has to make some payment towards the costs of his hospital confinement, it may affect his decision as to when he or his dependent should leave the hospital. Remembering that the average duration of hospital confinement is eight days, it can be seen that if patients choose to stay only one extra day on the average. it would increase the room and board cost of hospitalization (and the hospital's patient-day load) by 12i/0 per ccnt. T h i s is a significant item of cost. T h e existence and the importance of the problem of over-use or abuse of hospital services is recognized bv many friends and staunch supporters of the Blue Cross movement, some of whom have pointed out that it is a serious threat to the soundness of these plans. For example, Dr. Kenneth B. Babcock, Director of the Grace Hospital in Detroit, in an article entitled " T h e Excessive Use of Blue Cross Benefits," said: In the p a s t several years, p a r t i c u l a r l y s i n c e B l u e C r o s s b e g a n e x p a n d i n g at a r a p i d rate, it h a s b e c o m e e n d a n g e r e d by a b u s e s w h i c h h a v e c a u s e d excess u t i l i z a t i o n of its benefits. Specifically, such f a c t o r s as u n n e c e s s a r y a d m i s s i o n s , u n n e c e s s a r y u s e of d i a g n o s t i c a n d t r e a t m e n t a i d s a n d unnecessarily l o n g l e n g t h of stay, h a v e b r o u g h t this a b o u t until t o d a y the d a n g e r is very r e a l a n d w i d e s p r e a d . A n d as a d d i t i o n a l h o s p i t a l s are c o m p l e t e d a n d m o r e h o s p i t a l b e d s a r e m a d e a v a i l a b l e , the p r o b l e m of excess u t i l i z a t i o n c a n b e c o m e of e v e n g r e a t e r c o n c e r n . I n a n a l y z i n g the s i t u a t i o n , we find t h a t a b u s e s of B l u e C r o s s s t e m f r o m f o u r m a j o r s o u r c e s : Physicians, h o s p i t a l s , p a t i e n t s t h e m s e l v e s a n d B l u e C r o s s itself. I n m a n y instances, t h e r e is o v e r l a p p i n g , f o r the e x i s t e n c e of a n y a b u s e i m p l i e s that at least two of t h e p a r t i e s m e n t i o n e d a r e g u i l t y . 1

T o quote one more source, Dr. Paul R. Hawley, Chairman of Health Service, Inc., a national enrollment agency for the Blue Cross plans, warned doctors that they are cutting their own throats in sanctioning abuses. H e pointed out that some hospital staffs order "every conceivable laboratory test and X-ray from scalp to toes" in groping for a clue rather than rely on the art of sound physical diagnosis. "When a patient carries no insurance and must pay out of his pocket for unnecessary examinations," he i Hospitals,

July 1952.

M E E T I N G H O S P I T A L COSTS

63

adds, "some degree of caution is usually exercised, but the Blue Cross patient is fair game." 2 T h e experience of over-use of certain services u n d e r the National H e a l t h Insurance scheme in England is quite pertinent here. It was f o u n d necessary to introduce an element of coinsurance to try to keep the costs of some of the services within reasonable bounds. Of course, indemnity plans can be subjected to over-use also, b u t the principle of coinsurance can be more effectively applied u n d e r such plans than u n d e r a full service type of plan. T h e r e is obviously room for substantial difference of opinion as to whether the financial incentive of coinsurance is good or bad in the long run. Many people maintain vigorously that it is just this financial barrier that they are trying to eliminate. In other words, they feel that so long as there is any financial cost for these various services, and patients or doctors allow this financial barrier to influence the a m o u n t of service rendered, to that extent the best service will not be rendered and preventive medicine cannot be as effective. On the other hand, there are those who maintain just as vigorously that some such financial incentive must be present in order to prevent over-use or even abuse of available services. People holding this view maintain that overuse or abuse of such services not only increases the cost for all, but, particularly in view of the shortage of doctors and hospitals in many areas, dilutes their effectiveness in rendering necessary service to those who really need it. Perhaps another way of stating the alternatives would be that if the fee-for-service m e t h o d of payment is to be practical, some coinsurance is necessary. Without coinsurance, some other method of paying for the services seems to be required. W i t h o u t professing to give an answer to this question, one point that does seem clear to me is that the advocates of coinsurance have an important educational job on their hands. T h e " f u l l service" approach has a more obvious popular appeal, a n d if the coinsurance approach is to be generally accepted, its advantages must be brought h o m e to the millions of persons desiring as m u c h protection against hospital costs as they can afford. 2 Chicago Daily News, November 28, 1950.

64

A C C I D E N T AND SICKNESS INSURANCE

2. Another problem inherent in the service versus indemnity approach is created by rising hospital costs. Under an insurance approach, providing specified payments of, say, $10 a day during hospital confinement, plus specified payments for "special hospital services," it is easier to determine a premium (to provide these benefits) that can remain relatively stable over a period of years than is possible under a plan which undertakes to provide semiprivate hospital accommodations. Under the latter plan, as hospital costs go up, the carrier (usually a Blue Cross plan) has no alternative but to increase its premiums to provide for the higher amounts which must be paid to the hospitals for such services. Under an indemnity type plan, if the costs of hospitalization go up, they do not have so direct an effect on the $10 maximum daily benefit payable under the plan, and thus do not so obviously require an increase in premium. T h e net result is merely that the insured patient has a larger share of the hospital bill to pay in cash, thus increasing the element of coinsurance. In other words, the service type of approach requires the person paying the premiums to underwrite the variations in hospital costs due to inflation or otherwise through the premium account, whereas the indemnity type of approach puts the underwriting of such variations in cost on the patients at the time of hospitalization. If the employees are paying the whole costs of the insurance either way, this means that the underwriting of cost variations in both cases is done by the employees as a group. T h e difference is in the timing and incidence. On the other hand, if an employer is paying all or part of the premiums for his employee's prepayment hospital plan, then the employer is the underwriter when the service type of plan is used, at least to the extent of his participation in the costs. Thus, an important consideration in some cases may be the question of whether or not there is a substantial contribution to the cost by the employer. Naturally, if the costs of hospitalization increase considerably, it becomes necessary to increase the amounts of benefits and accordingly the premium in order for an indemnity type of plan to achieve its basic objective of "breaking the back" of hospital bills. However, this is not an automatic increase as it is under the service type of plan, so the policyholder has it within his control to determine how much of the increased costs should be paid in ad-

M E E T I N G H O S P I T A L COSTS

65

vance through the premium account and how much should be paid by the patients at the time of use. This is not merely an advantage to an employer since there is a community of interest between employers and employees in both the benefits and costs of a group hospital expense plan to which both contribute. It is another phase of the problem of the priorities that wage earners assign to the various demands on their income (whether the income be in the form of wages or so-called "fringe benefits"), to which reference has already been made. T h e important point is that under the service type of plan the policyholder completely loses control of this factor of how the costs should be allocated. What the situation would be in a period of falling prices can only be a matter for speculation, as prices have been generally rising all through the period of the rapid growth of these plans. How a depression would affect hospital costs, premium rates, and reserves remains to be seen. This is particularly the case with the Blue Cross plans which have not yet had the misfortune to experience adverse economic conditions on a substantial scale. 3. A problem important to the whole field of hospitalization construction and utilization is the relative use of private room accommodations, semiprivate accommodations, and ward service in multi-bed rooms. T h e widespread adoption of prepayment plans has had a material effect on this distribution, the impact of the service and indemnity approaches being somewhat different. Perhaps the most important effect of prepayment plans generally has been a very great reduction in the demand for ward service, with a correspondingly increased demand for semiprivate service. As a result, the semiprivate facilities of hospitals have been sorely taxed. This is particularly the case under the Blue Cross or service type of plan. Persons having a contract guaranteeing semiprivate care are generally not going to be satisfied with ward care. However, there can be a considerable range in the cost of different semiprivate facilities in the same hospital, due to a varying number of patients in each room, or other factors. Accommodations in any of such rooms qualify as semiprivate under Blue Cross contracts. On the other hand, persons with indemnity type plans have more freedom to choose among the different types of accommodations available. If they want to keep their out-of-

66

A C C I D E N T A N D SICKNESS I N S U R A N C E

pocket expenses to a m i n i m u m , they can secure one of the less expensive semiprivate rooms with a larger n u m b e r of beds. O n the other h a n d , they d o have the option of selecting one of the smaller semiprivate rooms at a reasonable extra cost, or even a private room, if desired. U n d e r the service type plan it is often q u i t e disadvantageous financially to occupy a private room, even if it is necessary for medical reasons. T h i s is because u n d e r some such plans the credit allowed against private room costs is less than the value of semiprivate services. It is more likely therefore that people insured u n d e r an indemnity type plan will elect private room accommodations than will those with a service type plan. 4. U n d e r the service type of plan there must be some contract between the insuring agency (the Blue Cross) a n d the providers of the services—the hospitals. In order to obtain the promised services, the employee must go to one of the hospitals that has agreed to enter into the necessary contract with the insurer of the services—the Blue Cross. Although in most communities practically all hospitals are currently included in these plans, the fact remains that a third party has entered into the hospital-patient relationship. U n d e r cash indemnity plans, there is, of course, complete freedom of choice of hospital by the patient and no third-party intervention in the hospital-patient relationship. I n h e r e n t in this situation is the problem of how the hospitals control and determine their costs and how they bill the patients— particularly any differences in billing methods as between individual cash-paying patients, patients covered by Blue Cross service plans, and patients covered by insured cash-indemnity plans. For example, many hospitals show a loss in their operating expenses as a result of charges for room and board being less than the costs thereof, and make u p all or part of this loss in their charges for "special services." T h u s they stand to gain financially f r o m the use of these special services by patients billed on the "fee-for-service" basis—i.e., individual cash-paying patients and patients with cash-indemnity insurance. Conversely, there is no financial gain to them from the use of such services by patients billed on a " g r o u p practice" basis—i.e., the per diem charge basis f o u n d in contracts between the hospitals and the Blue Cross. On the other h a n d , from the point of view of the patient, a n d to some

MEETING HOSPITAL

COSTS

67

extent the doctor, the group practice method of billing encourages the maximum use—or possibly abuse—of such facilities. On the fee-for-service basis, the patient's willingness (as well as his ability) to pay helps to keep some control on over-use of the services and on the amount charged for the services. On the group practice basis there may be less deterrent to over-use by the patient, as already mentioned. T h i s is another phase of the question already referred to regarding the relative merits of fee-forservice and group practice. As applied particularly to the method of billing Blue Cross patients, the lack of deterrent to over-use raises the question of whether a charge to the Blue Cross of the average per diem cost of all patients—Blue Cross and others—results in an undercharge to the Blue Cross by not charging it directly for the over-use of the services inherent in the per diem basis of charging. T h e problems of properly allocating a hospital's losses from welfare or charity patients or patients for whom the government pays inadequate amounts, and of properly allocating the expenses incidental to a hospital's training and research program are also important in determining the relative charges to each class of patients. T h e foregoing discussion illustrates quite clearly the point made earlier, that the provision of adequate hospital facilities on an economical basis is of first importance. Any difference between a service and indemnity type of plan, or between a plan introducing a third party into the hospital-patient relationship and one that does not do so, should accordingly be given very careful attention as to their impact on the incentive of hospitals to improve the quality of their care, to improve their efficiency, and to control their costs.

MODIFICATIONS

IN

PRACTICE

So far we have considered the differences between a theoretical full service plan and a limited cash indemnity plan. Now let us consider the plans actually available in most cases. In the first place, all Blue Cross plans are something less than full service plans to a degree that varies from plan to plan. All have limits on the type of accommodation for which full service is provided and on the duration of hospitalization for which full service is ex-

68

A C C I D E N T A N D SICKNESS I N S U R A N C E

tended. Most have severe limitations on benefits available for mental, tubercular a n d contagious disease cases, maternity cases, veterans hospital cases, a n d cases hospitalized primarily for diagnostic purposes. Furthermore, as only hospital charges are provided for, most plans exclude costs arising from anesthesiologist a n d roentgenologist fees submitted by doctors who are not staff employees of the hospital. T h e y also exclude costs of blood and blood plasma. Many have limits on the costs of X-ray and r a d i u m treatments, special drugs, etc. Some even require a cash p a y m e n t by the patient toward the daily room and board charges, and others place a m a x i m u m on the a m o u n t of daily room and b o a r d charges covered. All these features introduce some element of coinsurance a n d bring the so-called service plans nearer the indemnity type of plan. T h e r e has been an increasing trend in this direction, stimulated by the rising costs of hospital care a n d the desire of the Blue Cross to keep its membership subscription rates down to practicable levels. T h e cash-indemnity type plans, on the other hand, generally rely on their dollar limitations for the desired element of coinsurance, a n d within these limits pay for all types of hospital costs for all diagnosis (except for limitations on maternity cases)— including fees for "outside" anesthesiologists and roentgenologists. A review of the four actual cases summarized on C h a r t 4 with these various points in m i n d will indicate that in the first a n d third cases, a typical Blue Cross plan would have covered a larger share of the total cost t h a n a typical cash-indemnity plan, whereas for the second a n d f o u r t h cases the reverse would have been true. T o keep the coinsurance element from becoming too great as hospital costs have risen, the tendency of cash indemnity plans has been to increase benefits. A new feature in the special service field that is spreading is a provision for paying the first, say, $100 of special services in full, and three-quarters of any additional charges u p to some large m a x i m u m , such as $2,000 of additional charges. T h i s covers the bulk of such charges but still keeps an automatic element of coinsurance. As the benefits have increased, the premiums have naturally increased correspondingly. Accord-

M E E T I N G H O S P I T A L COSTS

69

ingly, some cash-indemnity plans now pay larger total benefits than some Blue Cross plans. In other cases the reverse is true. This emphasizes the point that the term "Blue Cross Plan" means quite different things in different parts of the country, depending on the benefit provisions in the local Blue Cross plan. There is considerable variation both in benefits provided and in costs, as there naturally is also in insured cash-indemnity plans. However, within any one area, the Blue Cross plan is generally fixed, whereas the cash-indemnity plan can be varied to suit individual or group circumstances or preferences. It is apparent that the effect of these opposite trends has been to bring the so-called service type plans and the cash-indemnity type plans closer together than they would have been had each remained static. Incidentally, there is an important advantage in having both of these types of plans available, with considerable local variation within each type as well as between types. T h e competition stimulated by this experimentation at the local level has produced much greater benefits for the public than could possibly have been expected from a uniform monopolistic plan, whether operated by Blue Cross, insurance companies, or the government. It also seems apparent that if any one uniform plan did achieve a monopoly, it would certainly invite governmental intervention, if not absorption.

EXPERIENCE

RATING

Another important difference between Blue Cross and group insurance plans is that Blue Cross plans generally operate on the theory that they are community enterprises and should spread the risk of hospitalization costs equally among all members of the community. Group insurance plans, on the other hand, usually operate on an "experience-rating" basis with each employer's claim costs having an important effect on the costs of his insurance. This is accomplished by setting initial premium charges on the basis of the anticipated claim rate, and adjusting the advance premiums at the end of each year to reflect the actual claim rate, if lower. These adjustments may be made either by dividends or retroactive rate reductions. Again there is no right or wrong to the question. There may be

70

A C C I D E N T AND SICKNESS

INSURANCE

more reason for experience rating if an employer is paying all or part of the cost than if the employees are paying it all. Some B l u e Cross plans are beginning to introduce experience rating into their plans, which is another way the two approaches are drawing closer together.

RETIREMENT

AND T E R M I N A T I O N

OF

EMPLOYMENT

Still another difference between Blue Cross plans and group insurance plans, speaking generally, is with respect to continuance of coverage on employees terminating employment. In such circumstances most Blue Cross plans provide that the terminating employee can continue his Blue Cross coverage on a direct payment basis whereas most group insurance plans have no such feature. Very often benefits under the direct payment Blue Cross plan are not as liberal as under the employee's previous Blue Cross group plan, and his subscription costs are invariably somewhat higher. However, the employee does have the privilege of continuing, subject to the right of termination of the arrangement at any time by either himself or the Blue Cross. If the employee goes to work for another employer with another kind of hospital plan, the Blue Cross in many cases exercises its right to discontinue the individual coverage. T h u s , as far as employees transferring from one employer to another, each having some kind of hospital coverage, there is little difference between the two practices. However, in the case of an employee leaving an employer having such coverage and going to an employer without such coverage, or leaving the labor market, most Blue Cross plans provide more continuity of coverage than do most insured indemnity plans, although here again the practices differ from plan to plan. T h e reason for this is not hard to ascertain. Insurance companies issuing the insured indemnity type plan have had considerable experience with the so-called conversion privilege under policies of group life insurance. Under this privilege an employee terminating employment with an employer having group life insurance coverage has the right to apply to the life insurance company for an individual policy of life insurance at a premium applicable to his attained age, without medical examination. T h i s privilege protects the employee whose

MEETING HOSPITAL

COSTS

71

insurability might have become impaired while he had group life insurance with his employer. T h e experience has indicated clearly what would be expected from general reasoning, that the employees exercising this privilege are generally less satisfactory underwriting risks than the average. In other words, employees having most reason to believe that they need life insurance protection are the most likely to use the privilege and are the very ones who need it because they cannot obtain the insurance in the ordinary way. Accordingly, so as not to charge the extra mortality losses arising from this source to the insurance companies' individual policyholders who have been medically selected, it is the general practice to charge such excess mortality losses—on an average basis—to the group policy under which the employee was insured and which gave rise to the privilege of conversion. T h e s e excess charges are substantial, amounting to as much as $50 to $80 per $1,000 of life insurance converted. W i t h such experience to guide them, insurance companies generally feel that adverse selection might be even worse under hospital insurance, as the employee might be in a better position to know that he or one of his dependents would shortly be in need of hospital benefits than he would be to know of his own impaired standing as a life insurance risk. Officials of Blue Cross plans apparently believe that this extra risk can and should be absorbed in their normal charges for all customers. As respects employees who retire, the difference in practice is similar. T h e Blue Cross plans in general permit the retired employee to continue his Blue Cross coverage on the same individual contract and individual payment basis as a person leaving employment for other reasons. Insurance companies, recognizing the fact that the cost of hospitalization for retired employees (under either insured or Blue Cross plans) is three or four times the cost for active employees, generally provide either for discontinuance of the coverage on retired employees or for substantial limitations on the coverage, and additional premium rates. In the absence of such limitations, hospital insurance for retired employees could well be the means for providing payment for the costs of residence in rest homes or other similar establishments for older people. Here again, aside from the desirability of extending such coverage, there is a serious question as to the best method of making such

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INSURANCE

provision, and as to how and by whom the relatively large costs should be met. HOSPITAL

ADMISSION

PROCEDURES

One further difference between Blue Cross and insurance company plans is with regard to the procedures for establishing credit and arranging for a patient's entry into a hospital, and for paying the hospital's charges. T h e practices of most Blue Cross service type plans are different in detail from those of the insured cash indemnity plans, but the results to the insured employee are substantially the same. Blue Cross plans have contracts with hospitals to provide the services they have promised. Accordingly, when an employee with Blue Cross coverage enters the hospital, he presents his Blue Cross subscriber's card and no cash deposit is necessary. W h e n the patient leaves the hospital, he gets a bill only for any portion of the charges not covered by the Blue Cross coverage. T h e charges covered by Blue Cross are billed by the hospital directly to the Blue Cross. T h i s produces the maximum of convenience to the insured employee and his dependents. As the insurance companies do not have similar contracts with the hospitals, the procedure is somewhat different under the insured cash indemnity type of plan. In the early days it was necessary for the insured to make his own arrangements for admission to the hospital, pay the bill, and subsequently get reimbursed by his insurance company. However, the insurance companies, through an organization known as the Health Insurance Council, have been working closely with hospital administrators to facilitate the entrance into the hospitals of employees and their dependents who are insured under cash indemnity type plans. T w o different types of arrangements have been worked out under which, by cooperation between the employee's employer, the hospitals, and the insurance companies, the value of the insurance benefits payable is applied against the cash advance normally required—which means that in most cases the patient is admitted without any cash advance. T h e employee further authorizes the insurance company to pay his benefits directly to the hospital, so that when he leaves he has to pay the hospital only any unpaid balance of the costs. T h i s is similar to the Blue Cross practice.

73

MEETING HOSPITAL COSTS

Hence, on this point, as on several others already noted, the two types of plans have come closer together, but there is still much to be done in some areas by all interested groups in further improving these procedures.

INTEGRATION

WITH

OTHER

EMPLOYEE

BENEFIT

PLANS

Mention should be made of the fact that insured hospital plans can be made an integral part of a complete program of employee benefits—including life insurance, weekly sickness and accident benefits, hospital expense coverage, surgical expense coverage, annuities, and other benefits, all underwritten by one carrier. T h i s has distinct advantages in economy, consistency, and ease of administration, and in other financial costs if all coverages are on a combined experience-rating basis. Blue Cross organizations can underwrite only hospital coverage. By arrangements with Blue Shield organizations they can sometimes act as the enrollment and collection agency for both hospital and surgical coverages, but they are by no means completely integrated. And for coverages other than hospital and surgical, completely separate arrangements must be made.

INDIVIDUAL

POLICIES

T h e discussion thus far has been concerned primarily with the provision of coverage on a group basis. B u t as previously indicated, the coverage is also available to individual subscribers under some Blue Cross and insurance company plans. However, the variations available to individuals under the cash indemnity plans are even wider than in the case of group insurance. Some cash indemnity plans are available only as part of a broader policy of weekly benefits in the event of sickness or accident and others can be obtained on the basis of hospital and surgical coverage alone. T h e Blue Cross service type benefits available to individuals are much closer to the Blue Cross benefits available to groups, although there are usually some additional restrictions on the individual coverage, principally in connection with maternity benefits.

74

ACCIDENT

AND

SICKNESS

E X T E N T OF

INSURANCE

COVERAGE

Now that we have considered several of the ways in which a Blue Cross service type plan differs from the insured cash indemnity type of plan, the question naturally arises as to what is the net result in terms of extent of coverage under each type. T h e fact is that many millions of people have expressed their preference for one type and many other millions have expressed preference for the other type. If any proof were needed that it is not a simple choice, this should give the answer. In other words, people thinking over such points as have already been discussed or others which are pertinent to the situation, come to different conclusions as to which type of plan is best suited to their own particular circumstances. T h i s is as it should be. T h e following table summarizes the figures as to the number of people covered under each type of plan on either an individual or a group basis. T h e figures include not only persons covered under one of the two basic types of plans included in this discussion, but also those people having hospital coverage under some other type of plan, such as a welfare fund of the United Mine Workers Welfare Fund type, mutual benefit associations organized by employees of an employer, etc. H O S P I T A L E X P E N S E COVERAGE—END OF

1952

(PERSONAL AND DEPENDENT) Number Plan Insured Cash Indemnity (Group and Individual) Blue Cross Other Types

of Ptople Protected

51,709,000 43,475,000 5,364,000

Grand T o u t Deduction for Estimated Duplication

100>48,000 8,881,000

Net T o t a l

91,667,000

FUTURE

PROBLEMS

Despite the fact that about 92 million people in the United States are covered by one or another of these various types of coverage, it should not be assumed that the problem is solved.

M E E T I N G H O S P I T A L COSTS

75

There are still many millions of people without this coverage. It is available to a large number of them but they have elected not to have it. This, of course, is their privilege. However, there are other millions of people who would find it difficult to obtain such coverage if they wished it. Many farmers, many aged people, indigents, etc., are in this class. Others, such as the self-employed and those working for small employers, do not have the advantage of obtaining the coverage on a group basis. Furthermore, there is the broader question of how to provide more hospital facilities where they are most needed, how to provide such facilities at the most economical cost, and other similar problems to which reference has already been made. How the responsibility for further progress should be divided between government and private enterprise, and at which level of government, is another very broad question deserving careful study. Giving all due recognition to the unsolved problems, I would like to close with a personal conviction that the present voluntary approach through the various existing mechanisms, and other new ones that may be devised, has been and still is making a substantial contribution to keeping America the healthiest nation in the world. Things are not in quite the parlous state that some people would have us believe. We have come a long way already. All efforts should be directed toward improving still further both the services available and the methods of meeting the costs of such services. I am personally confident that this typical American way of approaching the problems is the most effective one now and will continue to be most effective for the future.

CHAPTER V

MEETING SURGICAL AND MEDICAL EXPENSE By J . Henry Smith* A l t h o u g h in some degree all accident and sickness insurance may serve to meet medical expenses, historical development a n d general usage limit our caption to those insurance plans which are specifically designed to meet health costs, excluding, however, hospitalization insurance which has been previously discussed in this volume. Even as so limited, this chapter must deal with a complex sector of accident a n d sickness insurance because there are n u m e r o u s subdivisions of the risk. T h e m a j o r subdivisions are: Surgical insurance, general medical insurance, reimbursement for diagnostic laboratory a n d X-ray costs, polio a n d other limited coverage, a n d the latest, "catastrophe," or m a j o r medical expense insurance. T h e s e are combined in their several forms in a n u m b e r of ways, sometimes with rarer ideas, such as benefits for home nursing, thrown in for good measure. T h i s variety is considerably complicated, of course, by the different approaches of the several types of insurers engaged in the field. In addition to Blue Cross, which sometimes provides certain of the benefits described herein, we have 80-odd (or 100o d d , d e p e n d i n g on how one counts) Blue Shield organizations, perhaps 500 insurance companies, some with both individual a n d g r o u p insurance, and 250 so-called " i n d e p e n d e n t " plans of several kinds. Fortunately we can here omit analysis of workmen's compensation, various kinds of liability insurance, industrial medicine with its plant dispensaries, medicine for servicemen a n d veterans, a n d the doctrine of seamen's care a n d cure! First let us note, however, that this multiformity, confusing as it often seems, is not without justification. T h e piecemeal benefit • Vice President and Associate Actuary, T h e Equitable Life Assurance Society of the United States.

76

SURGICAL

AND

MEDICAL

77

approach has grown out of the ever-changing questions of what areas in the cost of health care are important enough to insure and are theoretically and practically insurable. In a very short span of time medical practices have undergone immense changes; economic conditions have moved quickly and have sharply shifted health costs; the psychological climate for health insurance has altered with bewildering rapidity; and our successive experiments in parts of the health insurance field have quickly uncovered both new answers and new problems. Also, while it is not necessary to repeat here the statistics on growth of health insurance, it is necessary to bear in mind in any analysis of the field that the growth has been staggering. For example, the number of people covered for surgical expense insurance has increased fivefold in less than seven yearsl Frail as we humans are we probably could have undertaken these immense, rapidly changing problems only in a piecemeal fashion. What is more, it is a happy condition that we have had so many different kinds of insurance mechanisms testing various approaches and experiments. There have been too many ideas and too many demands for one type of agency or method alone to handle all of them. T h e competitive influences of the several techniques have added impetus to the whole movement and have motivated many advances.

GENERAL DESCRIPTION

OF

BENEFITS

At this point it appears desirable to define the situation somewhat by reviewing briefly the benefits typically provided under group insurance, individual insurance and Blue Shield plans. In spite of the variety, it is possible to outline general characteristics under a few main headings. However, comments as to the plans used by certain of the "independent" or miscellaneous organizations will be reserved for a separate section. As a general rule, most of the benefits described are provided for dependents as well as for the employed person or policyholder. Usually, dependents are defined to be the spouse and unmarried children under some fixed age, such as 19. In some cases the age limit for children has been extended to 22 or 23, so long as the child is in school.

78

A C C I D E N T A N D SICKNESS I N S U R A N C E

Surgical Expense

Insurance

Surgical expense insurance is the most common form within the scope of this paper. T h e policy contains a schedule listing various surgical operations and specifying the m a x i m u m reimbursement for each procedure. Many basic schedules are used, differing in the relationship of the amounts for the several operations as well as in the general level of benefits provided. Currently the most frequently used basic schedule sets the maximum reimbursement for the most difficult operations at $200, although in high cost areas or for people in the higher cost brackets, that schedule is often increased proportionately, sometimes to a maxim u m as high as $500. T h e following illustrates the allowances for several operations under a representative schedule with a $200 top maximum, taken from a group insurance policy. Appendectomy Gall b l a d d e r r e m o v a l R e m o v a l of l u n g or k i d n e y Tonsillectomy T r e a t m e n t of s i m p l e f r a c t u r e -- t h i g h -forearm Hysterectomy Herniotomy—single —double Delivery of child C a e s a r e a n section Hemorrhoidectomy—external —internal

$100 150 200 30 75 25 150 100 125 50 100 25 50

Although an allowance for delivery of a child is listed above, not all policies contain such a provision. Some policies exclude maternity benefits, others provide them without limitation, and still others provide such benefits after a defined period, as for example, nine months of insurance. Also, some plans make specific allowance for charges by anesthetists or surgical assistants, or for other special purposes. Insurance companies usually issue surgical insurance in conjunction with hospitalization insurance, although it may be bought separately, at least under group policies. Generally speaking, surgical insurance is the primary coverage under Blue Shield plans. However, many of the latter plans are coordinated with Blue Cross plans for marketing and administration.

SURGICAL AND

General

Medical

MEDICAL

79

Insurance

General medical insurance is a relatively new form and is still somewhat experimental. It provides reimbursement for doctors' services where there is no surgery under several varieties of provisions which may be broadly grouped into three general types. T h e most comprehensive type provides specified payments for treatment by doctors regardless of whether the individual is actually disabled. Often there is a limit on the number of home or office calls that will be recognized in a given period of time, say a year, or there is an aggregate m a x i m u m payment limitation for each cause of illness or for each person covered; and sometimes the first few calls for an accident or sickness are excluded. Even periodic health examinations and well-baby care are recognized under some plans of this type. A second type provides indemnity for doctors' services only while the individual is u n a b l e to work because of disability. Again, there may be an exclusion of the first two or three visits during disability, and there may be a limit on the number of visits recognized, or on the total a m o u n t payable, for a disability. T h i s type may be questionable for coverage of family members because of difficulty in clearly defining and identifying disabling illness in the case of housewives and children. A third plan provides benefits for doctors' visits only while the individual is in a hospital for reasons other than surgery. It usually pays a stated a m o u n t per visit, or provides a m a x i m u m reimbursement for total doctors' charges according to the length of hospital stay. T h e last of these plans is the most popular, and, since it deals mostly with serious conditions while avoiding the cost of many trivial home and office visits, it is the least expensive and is often considered the most sensible type of plan. Many B l u e Shield units limit their medical plans to this so-called in hospital benefit. Experiments with the broader types have not always been entirely satisfactory because the cost can run high and the factor of utilization is difficult to control. In the early days of general medical insurance, and even today in low cost areas, the amounts of benefit were often set at $2 for

80

A C C I D E N T AND SICKNESS INSURANCE

a hospital or office visit and $3 for a home visit. Many plans, however, now use higher amounts such as $3 and $5; and some plans make extra allowances for the first day of hospitalization or for specialists' consultation. Diagnostic Expense

Insurance

Any of the general medical insurance plans may be supplemented by benefits for diagnostic X-ray and laboratory costs not covered by hospital expense insurance. These usually are in the form of reimbursement for charges incurred under doctors' orders, subject to a maximum which may be either specified in a schedule for each procedure, or may be an aggregate amount payable for one person in a given period of time (such as $50 in a year), or a combination. Where a schedule is used, it contains allowances which may be illustrated as follows: X-ray of—Abdomen (intestines, colon, rectum, kidney, etc.) — Arm or leg —Gall bladder, dye method —Gastro intestinal tract—barium meal Basal metabolism test Electrocardiogram Malaria smear

$10.00 5.00 15.00 25.00 5.00 7.50 2.00

Miscellaneous and Special Benefits Although it is not necessary to exhaust the many special features that could be described under this heading, reference to a few makes a good background for the discussion of so-called "catastrophe" insurance to follow. One of the most significant special features is the "blanket accident" provision often found in individual accident policies. This provision, which has been in use for many years, is a forerunner of the more comprehensive forms now under experiment. Limited to accident, it provides reimbursement for charges for hospital care, doctors, nurses, medicines, etc., without any special limits as to each type of charge but with some over-all limit such as $3,000 per accident. A small brother of this benefit has sometimes appeared as a supplement in group hospital or surgical policies, the benefit picking up costs not covered by the basic plan, but with the limit held to some low figure such as $300. Another specialty item is polio insurance,

sold by the insurance

S U R G I C A L AND M E D I C A L

81

companies both on an individual and group basis. T h i s coverage, although limited to the one cause of illness, is otherwise comprehensive as to its scope, for it encompasses without special limitation all costs for doctors, hospitals, nurses, treatment, appliances and even transportation, subject only to a maximum total limit of reimbursement, such as $2,500 or $5,000, and to a maximum period such as two years from the date of onset of the disease. Similar plans have been tried out both by the insurance companies and by some Blue Shield groups for the somewhat broader field of the several so-called "dread diseases," such as typhoid, smallpox, meningitis, etc. One Blue Shield organization is said to be experimenting with the twenty-five "reportable diseases" and at least one company has extended its list to some of the more comon illnesses such as cancer and tuberculosis. T h e varieties of provisions and conditions in all of these plans are too numerous to describe here. Major Medical ("Catastrophe")

Insurance

Some of the special benefits described above are sometimes given more emphasis than they really deserve. T a k e for example polio insurance. Polio is a spectacular, costly disease and a horrible calamity to those who suffer it. Therefore a lot of people are ready to buy polio insurance. But, from an insurance point of view, why polio insurance? Should we also have cancer insurance, rheumatic heart disease insurance, etc.? In spite of such questions, however, these special forms have constituted valuable experiments in dealing with all manner of costs arising in certain illnesses, and there is much to be learned from them. T h e next move is to apply what we have so learned to the long felt need for a comprehensive form of insurance for the more costly illnesses, regardless of cause, which are not adequately covered by the usual types of plan. Relatively, there are few accidents or illnesses that may properly be deemed "catastrophic" in their financial impact, but the possibility that one of them will inflict a serious strain on family finances is a matter of concern to many people. An insurance plan with dimensions adequate to provide substantial protection against the costs of all the most serious health troubles is widely needed on nearly all income levels.

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Insurance companies have put much thought and research into this subject, with the result that some of them are now offering broad plans on an experimental basis. It is known also that Blue Shield people are giving the idea some thought; one plan is actually offering a comprehensive policy. Undoubtedly, this type of insurance will get much attention in the next few years. However, the problems in designing and pricing this type of protection are so troublesome that it is not yet certain that the current experiments will hold up, as may be seen from a short review. In order for insurance of this kind to be adequate, it must be comprehensive as to health services included. For example, since nursing care is an essential and costly element in many severe illnesses, it must be covered; yet because nursing is a luxury item in many instances, it is an element that could produce considerable difficulty where the insured is reimbursed for its cost. Again, the a m o u n t of charges a patient may encounter varies widely, depending on his economic status and the services prescribed, so that a schedule of limits or benefits for the various procedures would interfere with satisfactory functioning of the insurance; yet the absence of a schedule makes it exceedingly difficult to predict and control the cost of the insurance. And then there is the question of what inflation and changing medical practices may do to costs under a "blanket" benefit plan with a high aggregate limit. T h e experiments designed to cope with the basic need for comprehensive insurance as well as with these uncertainties may be briefly described as follows: 1. In order to limit the protection to serious cases, it is provided that no benefit is payable until expenses have reached a certain m i n i m u m "deductible," such as $300. It may be, of course, that expenses excluded by this limit are covered by other forms of insurance. In g r o u p insurance, where plans are written in supplement to the older forms (hospital, surgical and medical expense insurance) as a base, the deductible may be a fixed sum or the basic benefits, whichever is greater, or it may be a fixed sum in addition to costs reimbursed by the base plans. 2. As a means of assuring that use of services and amounts of charges will be held to reasonable levels, it is provided in most instances that the whole bill will not be paid through insurance

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b u t rather that a portion of it, such as 25 per cent, will remain for the insured to carry. T h i s form of "coinsurance" is the principal device used to meet the inherent control p r o b l e m outlined above. It may be noted, however, that some plans are being tried w i t h o u t this protective clause. 3. All types of health costs (except dentistry a n d eye refractions a n d fittings) are recognized, including charges by hospitals, doctors and nurses, and charges for drugs, a m b u l a n c e , appliances, X-rays, and physiotherapy. T h e a m o u n t payable is not subject to a separate limit for any item, although it is stipulated that only supplies a n d services prescribed by the a t t e n d i n g physician are covered a n d that only normal or customary a m o u n t s of charges will be recognized. 4. T h e r e is generally a limit on the aggregate a m o u n t t h a t will be paid for any one cause of illness or any one person, b u t it is usually a high figure, such as $5,000. 5. In some instances protection is limited to cases of illness requiring hospitalization (with benefits often c o n t i n u i n g for some m o n t h s thereafter), in order to assure that only i m p o r t a n t cases of illness will be covered a n d that there may be a clear definition of the cause of illness, of the commencement of claim, a n d of covered expenses. In other plans hospital confinement may not be required, in which case the computation of benefits depends u p o n the physicians' diagnoses and statements to d e t e r m i n e when illness began and what charges were incurred in its treatment. In still other plans the total medical costs of the family for each m o n t h or for some other period of time are the basis of claim regardless of cause, with the full "deductible," or some p a r t of it, repeated for each period or for each new illness. Most of the insurance of this type written so far is provided under g r o u p insurance policies, although a few companies are also trying it out u n d e r individual a n d family policies. T h e r e are many variations a n d combinations of provisions in the plans now being offered and in the u n d e r w r i t i n g rules s u r r o u n d i n g their issue. It will probably be some time before experience shows the way toward standardization. It may well be that as these experiments develop, insurance of this character will tend to s u p p l a n t the older forms. In i m p o r t a n t respects it is a more logical k i n d of protection; it deals in a comprehensive way with the costs of ill-

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ness, and through the operation of a properly determined "deductible" it can be limited to medical situations having an important financial impact. But first we must determine whether comprehensive insurance can be soundly constructed and whether the public will be satisfied with a "deductible" policy and a "coinsurance" feature instead of having all bills paid in full. Finally, it should be noted that in this new form of insurance there are special cost features and an unusual number of variables that must be taken into account in premiums. In addition to those usually watched, we now know that age is quite important— perhaps the "catastrophe" morbidity incidence by age is greater than that of mortality; geographical variations in costs are important; the economic status of the insured is quite significant; and changes in medical practice and inflation may seriously affect premium adequacy.

"INDEPENDENT"

(MISCELLANEOUS)

INSURERS

With this short view of the benefits commonly provided by Blue Shield and insurance companies, let us now shift the focus to certain other types of insuring mechanisms loosely grouped under the caption "independent" plans, for lack of a better designation. T h e term "independent" is a misnomer because it falsely implies that the rest of us are not independent. It is used, however, primarily because in general the plans are not associated with insurance companies in the usual sense, nor have they been affiliated with a coordinating body or central statistical agency. A better term might be "miscellaneous" plans. These plans have been extensively studied and reported in a booklet released last year by the Social Security Administration. 1 Therein are tabulated some 251 of them, a rather motley collection including industrial units sponsored separately or jointly by employers, employee associations and unions, and plans developed by such diverse organizations as consumer cooperatives, various community agencies, medical societies and private group medical practice clinics. This group does not constitute a major category of insurers from the standpoint of volume (in 1950 it encompassed 1 A S u r v e y of I n d e p e n d e n t States.

Medical C a r e P r e p a y m e n t Plans in t h e U n i t e d

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somewhat over three million people for surgical and medical benefits) and many of the plans are quite limited in scope and purpose. Yet some of the organizations are of special interest because of their unusual nature and approach to medical care. It is not necessary to review the benefits under these plans in detail. Many of them follow the more or less standardized approach of the insurance companies or Blue Shield and Blue Cross. However, two characteristics are especially notable in certain of them. One is that some provide prepaid medical service, rather than indemnity for the cost of service. T h e y do so in a variety of ways, some by hiring doctors on a salary or on a per capita basis, others by making contracts with clinics, and still others (the private group practice units) by incorporating the insurance into the medical system. T h e other notable characteristic is that some of these miscellaneous plans, especially the private group practice units, attempt to render a comprehensive, unlimited medical service, without "deductibles" or "coinsurance," and a few even include preventive medicine, home nursing, optical services and dentistry. Some are allied with Blue Cross for hospital care, some have their own hospitals. Outstanding examples of the comprehensive service plans are the Health Insurance Plan of New York and Permanente in California. T h i s provision of medical service, rather than limited indemnity, and the comprehensive scope of some of the plans, are feasible because in some instances the insurance is administered by committees or others closely identified with the insured group (as distinct from the often distant and misunderstood insurance company), or, as is the case in such groups as Health Insurance Plan and Permanente, the doctors themselves are really the underwriters of the plan because they are paid on a salary or capitation basis regardless of the amount of service rendered. T h u s , in these unusual plans the insurer is in a position to control utilization and cost factors to a significant degree.

ADEQUACY

AND

COMPREHENSIVENESS

T h e s e references to the provision of medical service, rather than indemnity, and to the scope of plans, open a discussion so important, broad and controversial that we can here only touch

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on a few of the ideas in it. Conceivably in this matter may lie the key to the future of health insurance. Should a prepayment mechanism provide medical service as such? Should all expenses be covered no matter how trivial, and should preventive medicine, dentistry, etc., be included? If the answer is "yes," as many contend, some of us will have to make extensive alterations in our ideas and methods or give way to another kind of operation. Of course, many Blue Cross plans are, in effect, providing hospital service (in that they guarantee full reimbursement, with limitations) and a number of Blue Shield plans similarly provide surgical (even some general medical) service, at least for those below certain income levels. Also, the insurance companies have tried out some plans, particularly under group policies, that guarantee full reimbursement for certain items such as hospitalization or surgery; and the insurance companies are often willing to sell indemnity plans with high enough amount limits to reach well up toward full reimbursement if they are kept up to date. B u t the Blue Cross and Blue Shield plans are limited in their scope and therefore do not provide comprehensive service; and the insurance companies, although they can offer broad coverage, probably cannot do so on a service basis because they cannot alone cope with the possibility of over-utilization or abuse under fully comprehensive plans without "coinsurance" features. It is sometimes said by those blessed with visions of an ideal that the prepayment plan should take on the function of controlling or policing the quality of medical care and the function of providing funds or facilities for medical research and training. It is doubtful that the Blue Cross, the Blue Shield or the insurance companies could be very effective in either field even if it were generally agreed that they should undertake such functions. In the light of these thoughts it has been held that the group practice clinic type of operation, such as Health Insurance Plan and Permanente, seems the most likely vehicle for the future voluntary medical prepayment system. In that type the doctors at once provide the service and underwrite the prepayment plan. Also, the group practice unit, if it is to remain popular, must be particularly careful of the quality of its medicine, and conceivably

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it could make some provision for research and education of young physicians and technicians. O n the other hand, there is a serious question as to how widely group medical practice can be successfully instituted. T h e problem of the small communities is an obvious and a serious one; how can efficient medical groups be set up for them? And there is the somewhat more esoteric stumbling block in the form of opposition to group practice and "panel" doctors from the medical profession and others, a matter of controversy in New York a n d California at the moment. O n e of the issues is that there is a limited choice of physicians available where the insurance is fully effective only as to those doctors making up the medical group, whereas it is asserted that the public wants and is entitled to completely free choice. Furthermore, the cost of prepayment of complete medical service is rather dear, especially since it covers a multitude of minor ailments, and there is as yet no assurance that the public wants to pay for it. T h e insurance companies have trouble enough selling adequate quantities of their wares to raise serious conjecture as to how widely a bountiful plan will sell. For a number of reasons the future of prepaid group practice is uncertain; even Dr. Baehr, Health Insurance Plan's vocal and enthusiastic missionary, agrees that development will be so slow that there will be room and need for the rest of us for a long time. 2 Some say, therefore, that there is not much hope that voluntary insurance can do the job, so let us turn it over to the government. T h e political philosophy of this proposition is its most important aspect and the issue of national health insurance probably will be resolved largely on that aspect. It is not the purpose of this paper to argue political philosophy, but a few words are in order as to the questions of whether the prepayment plan should provide medical service as such, whether it should extend to all ailments and all costs, and whether it should control quality of medicine and funds for research and training. Mr. Fitzhugh has effectively argued the first two of these subjects in the chapter preceding this one and that part of his thoughtful paper should be read with special care. Certainly the questions are far from 2 T h e Report of the President's Commission on Health Needs of the Nation, Vol. 4, p. 64.

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settled, and it will take much experimentation and thought before they can be settled, if at all. For the present, however, there are numerous reasons for asserting that it is not necessary to alter the structure of medicine so drastically as to make medical service a function of the prepayment plan or to put control of its quality under the plan. Such a subjugation might be as unsatisfactory as that which the doctors fear under compulsory health insurance. There is also serious doubt whether research and education should look to the prepayment plan for their funds, for that would make those extremely important functions unduly beholden to, and ultimately put them under the control of, a financial operation designed primarily for another purpose. Neither does it seem necessary to take the cost of medical care completely out of our hitherto normal pattern of economics under which there is individual responsibility to the maximum extent for the cost of service rendered to the individual. Likewise, it does not appear to be efficient or even desirable to insure trivial ailments. If we take all the financial burden of all illness off the individual, we may not only deny our own basic philosophy and turn ourselves into hypochondriacs to an undesirable degree, but we may introduce uneconomic procedures. For example, in connection with the matter of trying to insure complete diagnostic and preventive medicine, there is often a good deal of fuzzy thinking as to the real potential of insurance. Let us take the oft advised annual medical examination; if we were to "insure" it, even in its rather cursory, office-visit form, we would be setting up a strictly voluntary, budgetary item and subjecting it to the overhead of insurance. If everyone took advantage of it, there would be no gain whatever in routing it through the insurance plan, but rather there would be a loss because of the insurance overhead. If only part of those who are insured should take advantage of it, we would merely be permitting them to charge a part of their voluntary expenses to the rest of the insured group. Moreover, a really adequate preventative, periodic examination would be so expensive as to make its voluntary use a serious cost problem for the insurance plan. These basic issues constitute too large a subject for this type of paper. Suffice it to say that in the long run it probably will prove better to have the prepayment mechanism remain independent

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of medical service, although cooperating with it in the best interests of all, and to have the insurance concern itself primarily with the more substantial costs in a manner that will make them feasible for the individual to handle. In any case, it is obvious that for a long time to come there is going to be enough uncertainty about the ultimate pattern to give all of the various agencies opportunity and good reason to press their cases and to do their best to make their various experiments and systems operate as efficiently as possible.

COVERAGE

PROBLEMS

In the really short time that insurance has been grappling with health costs, its potential has not yet been fully realized for all classes. T h e major types of insurers realize that the neglected segments of the population must now be given concentrated attention. Let us briefly see what progress is being made in this respect. T h e facility with which the group insurance method operates has permitted its rapid spread among employed groups of substantial size. On the other hand, the insuring of individuals not connected with groups, and their families, one by one, is a much slower process. T h e r e is, therefore, still rather sparse coverage among the self-employed, people in rural areas and others not in sizable natural groups. These are primarily the province of individual insurance and of individual enrollment under the Blue Cross and Blue Shield. T h e y present certain underwriting problems to be discussed later, and it takes a substantially more expensive marketing procedure to bring them under the umbrella of protection. Nevertheless, great strides are being made. T h e insurance companies' agency forces, in increasing degree, are being furnished with attractive and appropriate contracts and are being mobilized to solicit the millions of people who have not yet taken advantage of health insurance. T h e entry of some of the large life companies, with their powerful and extensive sales organizations, into the individual accident and sickness business is having an important impact in this effort. At the same time, a number of Blue Cross and Blue Shield organizations are pushing individual enrollment through advertising, through community drives and

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t h r o u g h experimental u n d e r w r i t i n g procedures. O n e Blue Cross recently enrolled 45 per cent of all the people in a rural county in Kentucky through a spectacular drive by voluntary solicitors. A n u m b e r of insurance companies have tried similar experiments with varying success. T h e g r o u p insurance method has also extended itself in several directions in order to reduce the "gap." It is not very long ago t h a t many insurance companies d r o p p e d their m i n i m u m size g r o u p from 50 employees to 25 and, in recent months, several companies have extended their m i n i m u m down to 10, some even farther. At the same time, largely due to collective bargaining motivation, many small employment units have banded together u n d e r various trade association a n d bargaining instrumentalities for the purchase of g r o u p insurance policies on an industry- or area-wide basis. Also, there have been a n u m b e r of contracts, some on the borderline between g r o u p a n d individual insurance, covering individuals and groups voluntarily allied with trade associations or other agencies, and, in some rather experimental situations, covering individuals who are members of professional bodies. It is possible that we have by no means reached the limit of ingenuity in a d a p t i n g the group insurance method to the h a n d l i n g of large collections of people. Given time and opportunity, the voluntary method can yet work wonders in extending o u r scope to all of those able a n d willing to buy. Confidence in this ability to extend protection exists also as to those in the higher age groups, even t h o u g h at the m i n u t e Mr. Falk is able to show that only about 16 per cent of those over age 65 have some form of insurance protection. 3 Here again, great strides are already started. In g r o u p insurance, it is becoming increasingly common for the employer to have his policy a m e n d e d to provide protection after retirement, often at his full expense. Some of these extensions are tentative because we yet lack adeq u a t e cost data as to use, or at least potential use, of medical facilities by the aged, and some of the plans provide only limited a m o u n t s of protection. But it now seems clear that g r o u p insurance will have a large part in taking care of the aged's health costs. It is also possible u n d e r many Blue Cross and Blue Shield plans for the individual to continue his protection after he retires. All 3 Social Security

Bulletin,

N o v e m b e r 1952.

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sorts of a r r a n g e m e n t s are being tried out for this purpose. Likewise, individual i n s u r a n c e is now rapidly b e c o m i n g available f o r c o n t i n u a n c e into the u p p e r ages and even for purchase by those who have already a t t a i n e d advanced age, provided they are in good h e a l t h and have the resources to buy. T o q u o t e J o h n H . M i l l e r , Vice President a n d Actuary of the M o n a r c h L i f e I n s u r a n c e C o m p a n y , in his testimony before the President's C o m m i s s i o n : H e a l t h insurance for the aged is b e c o m i n g increasingly available. T h e u l t i m a t e problem is not its availability but the a d e q u a c y of personal inc o m e at the older ages to m e e t the cost of this insurance as well as o t h e r essential requirements. Individuals, in p l a n n i n g their o l d age r e t i r e m e n t programs, a n d employers, in developing pension plans a n d in their prer e t i r e m e n t counseling of employees a p p r o a c h i n g r e t i r e m e n t age, should give d u e consideration to t h e increased costs of medical c a r e at the older ages which are necessarily reflected in higher p r e m i u m s for health insura n c e . A d e q u a t e r e t i r e m e n t financing includes provision for this e x p e n s e as well as for the o t h e r necessities of life. 4

Governmental

employees are a n o t h e r substantial g r o u p

for

which it ought to be possible to enlarge o u r degree of p r o t e c t i o n q u i t e rapidly. T h e r e are p r o b a b l y several million people working for the federal, state, and local governments who have n o t had the o p p o r t u n i t y to o b t a i n g r o u p insurance. It is likely that the m a n y voices calling for legislation to permit payroll d e d u c t i o n s

and

possibly participation by government in the p r e m i u m cost, will get early results in many quarters. If so, the protection of a substantial—from a n o t h e r p o i n t of view, too substantial—block

of

people will be greatly facilitated. A m u c h more t r o u b l e s o m e matter, and o n e with c o n s i d e r a b l e philosophic and political implications, is that of the i n d i g e n t , and m o r e particularly an ill-defined group called the medically indigent. W e are often tempted to t h i n k of the h e a l t h care problem of the indigent in a c o m p a r t m e n t separate and distinct f r o m that of other phases of indigency. T h i s tendency c o u l d lead us to unsound action in that very i m p o r t a n t area, a n d it is to be h o p e d that some of o u r most able and practical p l a n n e r s will spend a good deal of time on the question. T h e basic need of the indigents is money for many purposes, of which h e a l t h care is * T h e Report of the President's Commission on the Health Needs of the Nation, Vol. 4, p. 59.

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only one, and we should not let our preoccupation with health care and health insurance obscure that fact. Presumably, the indigents are to be cared for by the state, using that term in its broad sense. Theoretically, it is possible for the state to purchase health insurance for the indigent from the insurance companies, Blue Cross, etc. T h e r e are, however, some serious administrative knots in that sort of arrangement, such as how to define the indigent and especially the medically indigent, and how to identify them at the time of premium payment and later at the time of sickness. Beyond that, there are some serious financial points involved. T h e fact is that a prepayment device necessarily involves some administrative costs which could be avoided if the state were merely to pay for or provide the medical service directly. Perhaps a more serious problem is that there is not enough state money available today, nor likely to be provided in the near future, to pay premiums necessary to support proper and complete medical care for the indigent, much of which is now being provided on a free basis. It seems to be all too easy to fall into the assumption that an insurance policy adds some magic to medical economics by which it is possible to accomplish medical care for less money than without the insurance. Just the reverse may be true, and that fact complicates the puzzle as to insurance for the indigents. T h e insurance business wants to play its full part as to the indigents but we do not want to rush headlong and thoughtlessly into an impractical, inefficient solution. As this is being written, the Report of the President's Commission 5 is just becoming available. Its implications are not yet fully understood, but its treatment of the indigent seems to leave for the future a great deal of discussion and planning, both in ihe matter of philosophy and in the matter of practicality.

UNDERWRITING

PROBLEMS

Let us now take a brief look at a few of the day-to-day underwriting problems that come across our desks in this branch of health insurance. 5 T h e R e p o r t of the President's Commission on the Health Needs of the Nation.

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93

T h e group insurance method avoids many of the underwriting problems normally found in insurance dealing with individual lives. In acquiring an average cross section of risk in the form of an employed group, we take on the small proportions who are in poor health and in the upper age range without unduly burdening the entire operation. Furthermore, the continuance of the group is not usually jeopardized by increasing age or development of poor health, because the in-flow of new employees brings vitality. Hence, many of the underwriting problems in group insurance are not so much concerned with the health of the individuals, but are more in the administrative realm. As we reach out beyond the regular, sizable, employed group into the very small groups or into the groups which some call "synthetic," we encounter such questions as whether the insurance can be satisfactorily administered at a consistent cost level. T h e routine accounting for the flux of lives and the necessity for seeing to it that new people are brought into the group when eligible, etc., require responsible and efficient administrative machinery. T o be more specific, take as an example the case of a policy to be issued to an association of automobile dealers of a certain state or county, covering all the employees of the dealers. Is the association powerful enough and staffed well enough to see to it that the insurance operates properly in all employment units and to arrange payment of premiums by all of the units in due time? This is a type of question the group insurance underwriter must often face in his daily work. Individual insurance, on the other hand, whether underwritten by the insurance companies or by other types of organizations, involves serious questions of anti-selection. These have been discussed in this volume in connection with weekly indemnity insurance, but they tend to become exaggerated when we get into the multiforms of health insurance and coverage of families. W e therefore have to resort to careful personal underwriting, to the exclusion of pre-existing conditions, to "ridering out" certain impairments and to the application of delay-in-coverage clauses. Also, the companies are studying the possibility of using a substandard premium structure in the hope of finding ways to take some greater measure of the impaired risks at a proper price. Renewal underwriting and provisions for cancellation of poli-

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cies by the insurer in individual medical insurance are also parallel to the corresponding provisions for individual loss of time insurance. T h e r e is possibly more misunderstanding a b o u t this matter of cancellable insurance than any other phase of the accident and health business, a n d it is regrettable that the n a t u r e of the business (and of h u m a n beings) seems to require the use of cancellation clauses in many circumstances in order to protect the financial soundness of the operation. It is encouraging to note, however, that there is a growing feeling of responsibility a m o n g insurers as to the necessity of employing the cancellation clause judiciously and tactfully so as to merit public good will. As insurance becomes more nearly universal, it is believed that relatively fewer cancellations will be required and that alternatives to cancellation will be found in most instances. One of the promising developments in this direction is that some of the companies recently entering the individual field have decided that, although their policies will remain technically cancellable, at least on anniversaries, it will be the practice to cancel no policies and, in effect, to guarantee renewal unless some sort of deception or abuse is evident, with the provision, however, that should p r e m i u m rates (chosen with the increasing incidence of morbidity in mind) prove inadequate for the entire operation, the company will have the right to increase them at any time on renewal of the policies. It may be noted that this problem is not limited to the insurance companies. All other insurers h a n d l i n g individuals separately are, or eventually will be, faced with the same issues. A m o n g the underwriting problems common to both group a n d individual forms is the persistent one of what level of benefits should be provided in the various phases of the benefit structure. T h i s gets into the old familiar m a t t e r of overinsurance and the question discussed earlier on somewhat philosophic grounds of whether all costs should be lifted f r o m the insured. In this connection there is a growing concern as to duplication of insurance. It appears that a considerable n u m b e r of people are acquiring various forms of health insurance from more than one agency, p u t t i n g themselves in position to profit from illness in some instances. Considering the troubles we have elsewhere experienced

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because of overinsurance a n d how wary we are of it in other f o r m s of insurance, we have been proceeding with surprising lack of concern about d u p l i c a t i o n in medical insurance. Perhaps we h a v e reasoned that people d o n ' t want to go to doctors and hospitals even for a profit. Nevertheless, some recent revelations of t h e effect of duplication in a few groups are creating a good deal of t h o u g h t , among the insurance companies at least, as to what measures will be needed in the f u t u r e . It may prove a troublesome u n d e r w r i t i n g issue. T h e r e is, of course, a whole range of common problems in the a d m i n i s t r a t i o n of claims, which, by the nature of things, must necessitate a kind of tight-rope walking in order to avoid abuse a n d over-utilization and, at the same time, in order to pay just claims with a m a x i m u m of good will. T h i s is a specialized, enormous field, beyond the scope of this paper and its author. It does seem in order, however, to call attention to one aspect of health insurance which is proving to be a matter of considerable frustration to claims m e n a n d underwriters alike. Do what they can, they end u p with significant and puzzling differences in the financial results of insurance of similar groups of people. Of course, doctors and hospitals are known to charge more in some areas t h a n in others, a n d the scale of cost goes u p with income, b u t we are now finding f u r t h e r i m p o r t a n t cost differences arising o u t of differences in medical practice. It appears that doctors in some areas send more of their patients to hospitals than in other areas, a n d they may use more laboratory examinations, therapeutic aids, a n d may even perform more surgery. It is not at all clear why these i m p o r t a n t differences occur, a n d one large question is, how m u c h effect does the presence of insurance have in influencing medical practice? In considerable part the answer, unmeasurable though the facts may be, seems to be that the presence of insurance does have a marked influence on medical practice unless the doctors a n d hospital administrators u n d e r s t a n d a n d are in sympathy with the purposes, limitations, a n d value of insurance. It is easy for a doctor to fall into the h a b i t of ordering a full measure, p e r h a p s an excess, of services a n d comforts for those he knows to be well protected by insurance. In fact, there have been cases of doctors

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INSURANCE

making a "good thing" out of insurance by performing unnecessary operations, by reporting unperformed services, or by charging an amount equal to the insurance benefit plus the usual fee. Moreover, it is sometimes a little obvious that some hard pressed hospital administrators have found ways to rearrange their charges to get the most out of the benefit provisions of an insurance plan. These practices happily are not widespread, and unquestionably the hospitals and the medical profession are anxious to stamp out abuses of insurance. Nevertheless, there is much to be done to bring about a full awareness among the doctors as to their key position in health insurance and as to the wisdom of harmonizing their practices with the principles of the insurance plans. T h e companies are growing increasingly aware of the urgency of this educational need and the Blue Cross and Blue Shield organizations are working at it as well. Finally, there is the common problem, which has run through a number of these observations, that costs in the health field have been increasing quite rapidly, thus bringing pressure to bear to increase benefits on the one hand and, on the other, to produce a growing inadequacy of premium rates. T h e Blue Cross organizations have felt this to a very important degree and have been forced to raise their charges again and again. Insurance companies, even though they have attempted to keep their plans on a fixed indemnity basis in the main, have also found their rates gradually becoming inadequate. Lately there has been a general move to strengthen premium rates for the group insurance business, although some of us fear we have not yet reached an adequate level.

CONCLUSION

T h i s paper has dwelt at considerable length on many of the questions and problems in health insurance because it seemed that most of the readers would be well versed in fundamentals and would prefer to spend more time considering the challenges in the field. It is only fair to end on a sweeter note, however, for it would give a false view to stress our troubles more than our joys. Still in its infancy, health insurance has much of the dis-

S U R G I C A L AND

MEDICAL

97

organization and inadequacies of infancy, but it has a healthy child's promise of growth and fulfillment of purpose, and it brings a fine sense of gratification to those who are trying to nurture and guide its growth. It is a great cause for which to labor, a cause that increasingly inspires one as he devotes himself to it.

CHAPTER

VI

STANDARD PROVISIONS-PERSONAL CONTRACTS By H. Lewis Rietz* Many important provisions of personal accident and sickness insurance contracts have been covered in previous chapters or will be covered in others. Hence, the present discussion will be confined primarily to what are known as the Standard Provisions and the newer Uniform Policy Provisions. 1 Broadly speaking, the Standard Provisions pertain to matters that are administrative in nature—they fix procedure for notice and proof of claim, for frequency and manner of claim payment and other administrative matters which concern the rights, duties and obligations of policyholders and the company. Unlike the insuring clause, the benefit provisions, and most other portions of the policy, the text of the Standard Provisions has been prescribed by statute or insurance department regulation in many states. Historically, statutory requirements pertaining to them originated as a result of recommendations by the National Association of Insurance Commissioners more than forty years ago. Prior to that time, requirements for submission of notice of claim, filing of proofs of loss, and other similar matters varied from company to company and in some cases varied between different policy forms of the same company. Although the provisions used by many companies were fairly written and fairly administered, others were apparently severely written and strictly administered. As the standards prescribed by the policy are generally conditions precedent to recovery of benefits, policyholders, claimants and agents were sometimes confused, often disappointed and frequently dissatisfied with such practices. It is my opinion that the original Standard Provisions, fixing as they did a uniform standard deemed fair to both policyholders • Vice President, T h e L i n c o l n N a t i o n a l L i f e I n s u r a n c e C o m p a n y , i See Appendices A and B .

98

STANDARD

PROVISIONS

99

a n d companies by the supervisory officials, benefited the business. However, they did prescribe the exact language to be used, froze the business in the pattern of the then existing concepts of fairness a n d left the companies no leeway to afford policyholders more favorable standards as a matter of contractual right. Over the years new coverages evolved for which some of the Standard Provisions were not ideally suited, statutes were recodified a n d insurance d e p a r t m e n t rulings adopted which resulted in m i n o r but annoying and, from a compliance standpoint, expensive variations in punctuation, text and type requirements lor the p r i n t i n g of the required provisions. Approval of a u n i f o r m policy for use in all states became increasingly difficult, although in no case did the required variations afford additional protection of substance to policyholders. Recognizing these factors, the National Association of Insurance Commissioners, almost ten years ago, undertook to develop and endorse a U n i f o r m Official Guide 2 for the use of all states in the approval of individual accident and sickness policies. T h e companies gave wholehearted support to this effort for greater uniformity in policy approvals. Although three successive editions of the Official G u i d e were endorsed by the Commissioners, the study of these accident and sickness policy approval standards made it a p p a r e n t that a more modern law was necessary to accomplish any substantial improvement in policy d r a f t i n g a n d approval. T H E N E W UNIFORM LAW

Study by a special committee of the need for revision of the statutory Standard Provisions resulted in preparation of a new model law which was endorsed by the National Association of Insurance Commissioners in 1950. T h i s new model law has been designated the U n i f o r m Individual Accident and Sickness Policy Provisions Law, a n d within the business is commonly referred to as the U n i f o r m Law. T h e new U n i f o r m Law, now permissible for use in thirty-eight states by statute or d e p a r t m e n t regulation, departs from the Standard Provision Law in that it does not freeze the business to today's concepts a n d practices by requiring provisions to be verbatim and in the order of the statute. U n d e r the new law 2 Sec Appendix F.

100

A C C I D E N T AND SICKNESS

INSURANCE

companies are free to adapt policy provisions to new forms of coverage and to use provisions more favorable to policyholders where they desire. T h i s "in substance" approach as contrasted to the "in the words and in the order" requirement of the old law has been applicable to life insurance and group accident and sickness insurance. In those fields it has permitted individual companies to experiment with policy liberalizations with resultant evolution favorable to the insuring public's interests. Such competitive development will now be possible in the individual accident and sickness field if insurance supervision adopts a sufficiently enlightened approach and discards tradition for the opportunity of progress in the real interest of the insuring public. T w o additional advantageous changes in basic approach made by the Uniform Law are that (1) it permits arrangement of the various provisions in a manner logical for the coverages afforded by the particular policy, and (2) it provides flexibility in policy drafting to fit varying types of benefits while maintaining adequate protection to policyholders and claimants. T h e s e changes in approach from the old Standard Provisions can be extremely significant in the future development of an important phase of personal insurance protection if administered soundly and as originally intended. However, the more immediate benefits of the new Uniform Law are in the form of specific changes providing more liberal treatment and substantial additional protection to policyholders and claimants.

O L D AND N E W M A N D A T O R Y PROVISIONS C O M P A R E D

Using the order of the old Standard Provisions as a matter of convenience, I will undertake to outline the basic requirements of each and to comment on the changes incorporated in the individual provisions by the new Uniform Law. Standard Provisions Occupation

1 and 2—Entire

Contract

and Change

in

T h e old law has provided alternative forms for Standard Provision 1, the first form being designed for use in policies which do not contemplate a reduction in benefits in event of change to a more hazardous occupation between the date of issue and the

S T A N D A R D PROVISIONS

101

date a claim is incurred. T h e second alternative form does contemplate reduction in benefits in such circumstances and provides that if injury is sustained while the insured is engaging in a more hazardous occupation than that in which he was insured, the benefits will be reduced to the amount which the premium paid would have purchased at the premium rates and within the limits fixed by the insurer for acceptance of risks in such more hazardous occupation. Policyholders are protected to the extent that this reduction or "prorating" provision is not applicable to injuries sustained while the insured is engaging in ordinary duties about his residence, or in recreation. Both forms of Standard Provision 1 provide that the policy includes the endorsements and attached papers, if any, and contains the entire contract of insurance. T h e new Uniform Law logically treats the entire contract portion of Standard Provision 1 with the substance of Standard Provision 2 which provides that no agent has authority to change the policy or waive its provisions, a change not being valid unless approved by an executive officer of the company and endorsed on the policy. T h e new law does not incorporate any change in the substance of this provision as contrasted with the old law. T h e Change in Occupation portion of Standard Provision 1 is made an optional provision to be included only where the company provides for reduction of benefits on change to a more hazardous occupation. T h e old Standard Provision, in permitting reductions if the "insured is injured," fitted the pattern of predominantly accident benefits being sold in the 1910-12 era. Since then sickness benefits have gained great prominence. Experience with sickness benefits adequately substantiates the fact that for many types of sickness, the more hazardous the occupation the longer the necessary period of convalescence and hence of disability before the individual can safely return to work. This, of course, means a higher over-all claim cost for sickness benefits in the more hazardous occupations and the new Uniform Law properly permits reduction in benefits for disability due to "sickness contracted" as well as "injury sustained" after change to a more hazardous occupation. T h e new law affords increased protection to policyholders by requiring that the doing of anything pertaining to a more hazardous occupation must be done for compensation in order for the

102

A C C I D E N T A N D SICKNESS I N S U R A N C E

reduction provision to be operative. In addition, this new optional provision incorporates in liberalized form the substance of old Standard Provision 12, which provided that on change to a less hazardous occupation the insurer, u p o n written request of the insured and surrender of the policy, would cancel the policy a n d r e t u r n the u n e a r n e d p r e m i u m . T h e new U n i f o r m Law liberalizes this standard to provide that on change to a less hazardous occupation the insurer, u p o n receipt of proof of such change, will reduce the premium accordingly and will return the excess prorata unearned p r e m i u m from the date of change of occupation or from the policy anniversary immediately preceding receipt of such proof, whichever is the more recent. T h i s provision also specifies that adjustments for changes in occupation will be m a d e on the basis of the classification m a n u a l and p r e m i u m rates last filed with the Insurance D e p a r t m e n t prior to occurrence of loss or date of proof of change in occupation. T h e s e changes provide advantageous liberalization to policyholders a n d claimants, a n d the bringing together of the Change in Occupation portion of Standard Provision 1 and Standard Provision 12, with the Entire Contract and Effect of Change portion of Standard Provisions 1 and 2, into two new provisions permits a more logical arrangement and greater clarity of text t h a n was previously possible. Standard Provision

3—Reinstatement

T h i s provision stipulates that after default in payment of prem i u m the subsequent acceptance of a p r e m i u m by the insurer or an authorized agent shall reinstate the policy but only to cover accidental injury thereafter sustained or sickness beginning more t h a n ten days after the date of acceptance of the p r e m i u m in default. T h e new U n i f o r m Law reinstatement provision provides that acceptance of a p r e m i u m in default by the insurer or an authorized agent shall reinstate the policy unless an application for reinstatement is required. In the latter case the company has the right to review the underwriting information in the reinstatement application, a n d such other information as it may have available, a n d to approve or decline reinstatement as warranted by the facts even though the p r e m i u m in default was tendered with the rein-

STANDARD

PROVISIONS

103

statement appplication. Hence, this addition is, from an insurer's standpoint, direct recognition of sound reinstatement principles a n d practices and is particularly i m p o r t a n t with the increased importance of sickness benefits. W h e r e a reinstatement application is required the reinstatement is effective on approval by the insurer, or lacking approval on the forty-fifth day following date of the conditional receipt, if insurer has not notified the insured in writing of its declination. T h e new provision also states that p r e m i u m s accepted on reinstatement cannot apply to any period more than sixty days prior to reinstatement, with an a p p r o p r i a t e exception for noncancellable a n d g u a r a n t e e d renewable policies where reserve requirements may require collection of an a m o u n t larger than sixty days' p r e m i u m s to s u p p o r t the reserve account. T h u s , this provision recognizes m o d e r n standards and affords increased protection to policyholders. Standard Provision

4—Notice

of Claim

T h i s provision requires written notice of i n j u r y or sickness on which claim may be based to be given insurer within twenty days of an accident causing injury or ten days of commencement of disability due to sickness. I m m e d i a t e notice of accidental death is required with respect to any accidental d e a t h benefits. Disability, whether due to accident or sickness, is a relative thing, not an easily determinable absolute t h i n g as is the case with death u n d e r a life insurance policy. Hence, it is essential to sound administration of the business that insurers are given p r o m p t notice of claims to afford them the o p p o r t u n i t y for a d e q u a t e investigation of the actual existence and extent of disability while the disability exists. Standard Provision 5—Sufficiency of Notice T h i s provision states that notice of claim to the insurer at a specified address or to any authorized agent with particulars sufficient to identify the insured, shall be deemed notice to the insurer. In addition, it specifies that failure to give notice within the time required will not invalidate a claim if it shall be shown n o t to have been reasonably possible to give such notice a n d t h a t notice was given as soon as was reasonably possible. T h e new U n i f o r m Law logically combines the substance of Standard Provisions 4 and 5 into one provision. I n addition, it

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A C C I D E N T A N D SICKNESS I N S U R A N C E

liberalizes the requirements by providing for notice within twenty days for both accident and sickness claims. It also adds a new optional provision which may be used in policies providing at least two years' loss-of-time benefits that requires the insured to give the insurer, at least once every six months, notice of continuance of disability, except in event of legal incapacity. T h e period of six months following filing of proof of claim, or of payment of benefits or denial of liability by insurer shall be excluded in applying this six months' notice requirement. Furthermore, it is provided that delay in giving such periodic notice shall not impair the insured's right to any indemnity which would accrue during a period of six months preceding the date that such periodic notice was actually given. Where a policy involves a waiting period of seven, fourteen or more days, as is quite common in weekly or monthly indemnity coverages, an insurer frequently receives notices of injury or sickness for what appear to be minor causes and nothing f u r t h e r is heard from the insured. In almost all such cases recovery has occurred before the expiration of the waiting period and there is no necessity for filing proofs of loss. Since under the law the insured is not required to submit proof of loss until ninety days after termination of disability or the expiration of the period for which the insurer may be liable, this six months' notice requirement puts the insurer on notice of a lengthy claim and enables investigation into the circumstances of the insured's disability while it exists where the insured has given notice but not filed periodic proofs of loss. Such requirement is not burdensome to honest claimants who generally file periodic proofs of loss and receive periodic payments of benefits, but it does afford a degree of protection against malingering and false claims. Standard Provision 6—Furnishing

Claim Forms

T h i s clause provides that upon receiving notice of claim the insurer will furnish such forms as are usually supplied for filing proof of loss but on failure to furnish such forms within fifteen days after receipt of notice of claim, the claimant shall be deemed to have complied with proof of loss requirements by filing within the time limit specified in the policy written proof of occurrence, character and extent of loss for which claim is made.

S T A N D A R D PROVISIONS

105

T h e substance of this provision is continued in the new Uniform Law. Standard Provision 7—Time Limit on Proof of Loss This provision stipulates that affirmative proof of loss must be furnished the insurer within ninety days after termination of the period for which the insurer is liable on loss-of-time claims, or within ninety days of the date of loss on all other claims. T h e new Uniform Law continues these requirements and adds further protection to policyholders and claimants by providing that failure to furnish proof within the time required shall not invalidate or reduce any claim if it was not reasonably possible to give proof within such time, provided such proof is furnished as soon as reasonably possible and in no event, except in the absence of legal capacity, later than one year from the time proof is otherwise required. Standard Provision 8—Right of Examination and Autopsy This clause grants insurer the right to examine the insured as often as reasonably required during the pendency of a claim hereunder, and to make an autopsy in case of death where it is not forbidden by law. T h e new Uniform Law specifically states that examinations under this provision shall be at the expense of the insurer, a practice long followed by the majority of companies in the field. Standard Benefits

Provision

9—Payment

of Other

Than

Loss-of-Time

This provision is in alternate form, depending on whether or not the policy provides loss-of-time benefits, and may be omitted in its entirety from any policy providing only loss-of-time benefits. It provides that all indemnities other than for loss of time will be paid within a specified time, not to exceed sixty days after receipt by the company of due proof of loss. Standard Provision 10—Periodic

Payment of Disability

Benefits

This provides that upon request of the insured and submission of due proof of loss, all or a portion of the accrued indemnity for loss of time will be paid at specified intervals during disability,

106

A C C I D E N T A N D SICKNESS I N S U R A N C E

the balance remaining on termination of disability being payable immediately on receipt of due proofs. By departmental regulation at least one-half of the accrued indemnity must be paid periodically and the interval at which such payments must be made cannot exceed sixty days in most states, with a m a x i m u m limit of thirty days in at least one state. T h e new U n i f o r m Law combines Standard Provisions 9 and 10 and permits a company to provide for periodic payment of other than Ioss-of-time benefits, a wholly logical change with the development of hospital, surgical, medical care, nursing and other newer forms of benefits. It requires payment immediately u p o n receipt of d u e proof of loss for other indemnities for which the policy does not provide periodic payments. In case of indemnities for which the policy provides periodic payments, the payments will be made, subject to due proof of loss, at specified intervals which may not be less frequent than monthly. Standard Provision

11—To Whom Benefits Are

Payable

Alternate forms have been permitted for use under the old law depending on whether or not the policy contains accidental death benefits. T h e y require that indemnity for loss of life be payable to the beneficiary if surviving, otherwise to the estate of the insured, and that all other indemnities be payable to the insured. T h e new U n i f o r m Law adds a specific provision that any accrued indemnities u n p a i d at the insured's death may, at the option of the insurer, be paid either to the beneficiary or to the estate of the insured. T h i s additional provision is designed to make hospital, surgical, medical and loss-of-time benefits unpaid at the insured's death promptly available for the purposes for which they were intended. In addition, the new U n i f o r m Law permits an insurer to add to this provision one or both of two optional paragraphs designed to make benefits readily available to proper claimants and to save expense of administration of an estate which would not otherwise require administration. T h e first optional provision provides that any indemnity payable to the estate of the insured, or to an insured or beneficiary who is a minor or is not competent to give a valid release, may, within the a m o u n t specified in the policy but not to exceed $1,000, be paid to any relative by blood or connec-

S T A N D A R D PROVISIONS

107

tion by marriage of the insured, or to a beneficiary who is deemed equitably entitled thereto by the insurer. T h e second optional portion of this provision provides that on written direction of the insured, in the application or otherwise, all or any portion of benefits for hospital, nursing, medical or surgical services may, at the insurer's option, be paid directly to the hospital or person rendering such services.

Standard Provision 12—Change to Less Hazardous

Occupation

This was discussed with Standard Provision 1. Standard Provision 13—Rights of Beneficiary T h i s provides that the consent of the beneficiary shall not be required to surrender or assign the policy, to change the beneficiary, or to effect any other changes in the policy. T h e effect of this provision was, of course, to prevent irrevocable beneficiary designations. T h e new Uniform Law specifically permits the insured to make an irrevocable designation of beneficiary, in the absence of which the substance of the oki Standard Provision 13 is applicable. T h e change removes a previous and little justified restriction against irrevocable beneficiary designations. Standard Proxnsion 14—Time Limit on Legal Actions This stipulates that no action at law or in equity shall be brought prior to sixty days after the filing of proof of loss nor later than two years after expiration of the time limit for filing proof of loss. T h e new Uniform Law changes the two-year limitation to three years, which is obviously more favorable to policyholders. Standard Provision If—Amendment to Law of State of Issue

of Time Limits to Conform

This provides that if any time limitation specified in the policy for notice of claim or filing of proof is less than that required by the law of the state in which the insured resides at the date of issue, such limitation is extended to agree with the minimum required period. This was intended to eliminate the expense of special policy forms in a few states that had statutes requiring

108

A C C I D E N T AND SICKNESS

INSURANCE

longer time periods for notice and proof of claim than did the Standard Provisions Law. T h e new Uniform Law extends this principle to other matters than time limitations for notice and proof of claim by inclusion of an optional provision stating that any provision of the policy which, on its effective date, is in conflict with the statutes of the state in which the insured resides on such date is hereby amended to conform to the minimum requirements of such statutes. T h e s e 15 provisions are mandatory under the Standard Provi sions Law. As mentioned above, the provisions respecting change in occupation and conformity with state statutes are optional rather than mandatory provisions under the new Uniform Law.

NEW

MANDATORY

PROVISIONS

T h e new Uniform Law does, however, add two new mandatory provisions which grant policyholders and claimants substantial additional protection. T h e first of these is entitled " T i m e L i m i t on Certain Defenses." For policies that are not guaranteed renewable it limits to three years from date of issue the period during which misstatements in the application can be used to void the policy or deny claim for a loss incurred or disability commencing after the expiration of such three-year period. I n noncancellable, guaranteed renewable policies the required language is that after the policy has been in force for three years during the lifetime of the insured, excluding any period during which the insured is disabled, it shall become incontestable as to statements contained in the application. T h e difference in treatment of guaranteed renewable and other forms of policies in this respect is recognition that legal concepts of incontestability as they have evolved in life insurance law are incompatible with the concepts of cancellation or nonrenewal inherent in most accident and sickness policies. A second highly significant portion of this new provision is that no claim for loss incurred or disability commencing after three years from date of issue shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage, by specific description, had existed prior to the effective date of

STANDARD

PROVISIONS

109

the policy. T h i s of course rules out prior origin defenses after three years. T h e second new provision required by the new Uniform Law is a grace period of not less than seven days for weekly premium policies, ten days for monthly premium policies and thirty-one days for other policies for payment of any premium after the first, during which grace period the policy shall continue in force. A grace period is so standard and has proven of such value in life insurance that this addition to the companion personal accident and sickness insurance coverage is only logical. OLD

AND N E W

OPTIONAL

PROVISIONS

COMPARED

Let us return now to the optional provisions (as contrasted with the mandatory) of the old Standard Provisions statutes and note the changes wrought by the Uniform Law. Standard Provision 16—Cancellation

by the

Insured

T h i s provides that the insurer can cancel the policy at any time by written notice to the insured, together with cash or a check for the unearned portion of the premium paid by the insured, such cancellation to be without prejudice to any claim originating prior thereto. T h e new Uniform Law affords additional protection to the insured by requiring the cancellation notice to specify an effective date not less than five days after the notice is mailed and provides that the insured may also cancel by written notice to the insurer effective on receipt of notice or such later date as is specified therein. On cancellation by the insured the earned premium shall be computed on the short rate table filed with the Insurance Department. Although a large proportion of the accident and sickness business is not guaranteed renewable, there is a strong tendency away from use of the above provision which permits cancellation between premium due dates. Standard Provision 17—Prorating Other Companies

for Insurance

in

T h i s provides that the insurer may prorate the indemnity pay-

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A C C I D E N T A N D SICKNESS I N S U R A N C E

able if the insured has purchased insurance elsewhere covering the same loss without giving written notice thereof to the insurer. Most accident a n d sickness benefits are replacement of earned income or reimbursement for expenses incurred. T h e record clearly indicates that overinsurance of such losses produces adverse experience and this provision is designed to prevent overinsurance without the insurer's knowledge. O n written notice of the purchase of other insurance, the insurer has the opportunity to cancel or refuse renewal of the earlier policy; a n d unless such action is taken, any subsequent claim must be paid in full irrespective of the existence of the other insurance concerning which notice was given. T h e new U n i f o r m Law provides two optional provisions maint a i n i n g the principle of prorating for insurance in other insurers for which written notice has not been furnished to the original insurer. T h e first pertains to policies providing benefits 011 a service basis or an expense-incurred basis, a n d has the effect of limiting total payments u n d e r all policies to the actual expense incurred. T h e second provision relates to benefits on other than a service basis or expense-incurred basis and maintains the prop o r t i o n a t e payment principle of the old Standard Provisions Law. Standard Provision 18—Deduction from Claim Payment

of Unpaid

Premiums

T h i s provision states that on payment of a claim any p r e m i u m then d u e a n d u n p a i d , or covered by note or written order, may be deducted from the claim payment. T h e new U n i f o r m Law continues the same optional provision. American people do not as a general rule read their insurance policies. Usually when they do, it is to determine their rights in connection with a claim. Hence, where this optional provision is used, it best serves its purpose from the policyholder's standpoint if it is included as a part of the provision regarding payment of claims, to which subject it is of course related. T h i s was impossible u n d e r the old "in the words and in the o r d e r " Standard Provisions b u t should be permitted u n d e r the new U n i f o r m Law so long as the combined provision is properly captioned.

STANDARD Standard

Provision

PROVISIONS

19—Maximum

Benefits in Same

111 Insurer

T h i s provision limits to fixed dollar amounts the m a x i m u m benefits that will be payable for any loss u n d e r all policies in force in the individual company. Again it is directed at the problem of overinsurance. T h e new U n i f o r m Law continues the substance of this limitation as an o p t i o n a l provision. Standard

Provision

20—Age

Limits

T h i s states that the insurance u n d e r the policy shall not cover any person u n d e r or over the specified ages set forth in the provision. Some states have regarded this as an exception from coverage a n d have r e q u i r e d that the statutory provision be printed in bold face type, a result obviously never intended when the Standard Provision statute was being prepared as a model law. T h e r e is n o counterpart of this provision in the new U n i f o r m Law, age limits of coverage being properly handled through the insuring clause a n d benefit provisions of the policy. T h e new U n i f o r m Law incorporates standards for another optional provision to provide adjustment for misstatement of age on the basis of the a m o u n t of benefit which the p r e m i u m paid would have purchased at the correct age of the insured. In some states standards are also set for the exclusion of liability in the event the loss is caused as a result of the insured engaging in an illegal occupation, or while the insured is u n d e r the influence of intoxicants or narcotics. T h e new U n i f o r m Law specifically permits the use of a "Relation of Earnings to Insurance" provision in guaranteed renewable policies with respect to loss-of-time benefits. Such benefits are soundly u n d e r w r i t t e n only when issued in proper relationship to earned income which they are intended to replace in the event the insured becomes disabled. Long experience demonstrates that some insureds whose earning capacity is reduced substantially may undertake to prove disability on the basis of m i n o r impairments which would not otherwise be disabling if their accident a n d sickness benefits were not unreasonably high in relation to their then current e a r n i n g capacity. In such circumstances, when the busi-

112

ACCIDENT AND SICKNESS INSURANCE

ness is cancellable or not guaranteed renewable, the company can, through re-underwriting existing cases, control to a reasonable degree the extension of disability benefits into what is, in fact, a form of unemployment benefit. Such control through renewal underwriting is impossible for guaranteed renewable business. T h e "Relation of Earnings to Insurance" clause permits reduction of benefits where, at the date disability commences, the benefits exceed the insured's current earned income or his average monthly income for the previous two years, whichever is greater, but further stipulates that in no case shall the monthly disability benefits be reduced below $200 per month through the application of this clause. Thus, it permits maintenance of loss-of-time benefits at a reasonable relationship to current earnings. It does not deprive the insured of a fair benefit in times of low earnings but does permit offering somewhat larger and hence more adequate benefits in good times. I personally feel strongly that the use of this optional provision is essential to the long-term sound underwriting of guaranteed renewable business for the amounts being offered today.

EXCEPTIONS AND

REDUCTIONS

Another important portion of an accident and sickness policy, for which neither the Standard Provision Law nor the new Uniform Law prescribes language, relates to the "Exceptions" and "Reductions." An exception is a provision in a policy whereby coverage for the specifically named hazard is entirely eliminated. In other words, it is a statement of risks not assumed. A reduction is a provision in a policy which takes away a portion but not all of the coverage of the policy under certain specified conditions. T h e number of exceptions and reductions and their nature will depend upon the type of benefits afforded by the particular policy. T h e most frequently found exceptions are for losses as the result of war or any act of war, for travel or flight in any species of aircraft other than as a fare-paying passenger, and for suicide or intentionally self-inflicted injury. Under combination accident and sickness policies, the provision that loss which is caused or contributed to by sickness or disease, or by medical or surgical treatment therefor, or by hernia, or by bacterial or other infection

STANDARD

PROVISIONS

113

will be indemnified under the sickness benefit provision, is considered a reduction. Under the Standard Provisions Law, exceptions were to be printed with the same prominence as the benefits to which they applied, whereas reductions were required to be printed in bold face type and with greater prominence than any other portion of the text of the policy. In actual practice, exceptions were required to be printed in bold face type of the same size as the text of the policy unless they were printed as a part of the benefit provision to which they were applicable. Reductions were required to be printed in bold face type of larger size unless they are printed as a part of the benefit provision to which they apply, in which case they could be printed in bold face type of the same size as the text of the policy. Under the new Uniform Law, exceptions and reductions are to be printed in the same type size and style as the other text of the policy. Under policy forms drafted to comply with the older Standard Provisions, companies frequently included additional provisions for the protection of policyholders. T h o s e often related to such matters as the details necessary for change of beneficiary, to the adjustment necessary in event of misstatement of age, or to limitations on the use of misstatements in the application in defense of claims. A limited number of companies have issued accident and sickness insurance on a participating basis and have included a provision for annually ascertaining and apportioning any divisible surplus that might accrue on the policy.

STANDARD

PROVISIONS

STILL

SIGNIFICANT

Policies issued to conform to the old Standard Provisions will continue to represent the majority of the accident and sickness policies in force for some years to come and, hence, these provisions will retain their importance to policyholders, claimants and companies for a considerable period of time. By January 1, 1957, most if not all newly issued policies will follow the pattern of the new Uniform Law. In fact, many companies are presently using the new forms in states where such are now permitted.

CHAPTER

VII

CONTRACT PROVISIONS OF GROUP ACCIDENT AND SICKNESS INSURANCE By

WENDF.LL

MILLIMAN*

B o t h g r o u p a n d personal accident and sickness insurance contracts are designed for the same u l t i m a t e purpose, namely, paying to individuals who have b e c o m e disabled certain benefits for the purpose of replacing income lost because of, o r m e e t i n g medical care expense caused by, disability. Despite their identical purposes, g r o u p and personal accident and sickness insurance contracts have substantial differences. T h e s e arise both from different traditions and from f u n d a m e n t a l differences in the underwriting a n d administration of the two forms of insurance. It may therefore help us to understand the n a t u r e of these contracts and the purposes of the various provisions if we first e x a m i n e the differences between personal and g r o u p accident a n d sickness insurance.

D I F F E R E N C E S B E T W E E N P E R S O N A L AND G R O U P I N S U R A N C E

I n s u r a n c e is a device for b a n d i n g together a group of individuals so that the losses resulting from the risk insured against, instead of b e i n g b o r n e alone by the u n f o r t u n a t e few, can be spread over the entire group. Since people are n a t u r a l bargain hunters, any sound plan of insurance must be based on a system which will prevent those who know that their chances of collecting the benefits of the insurance plan are greater than the average f r o m taking u n d u e advantage of it. W e know the process which the insurer uses to protect itself as selection. It is in the selection process that g r o u p insurance differs most markedly from personal insurance. T h e occasional inclusion of an individual who is an impaired risk, for physical reasons of which he is unaware, is not a serious • Vice P r e s i d e n t , G r o u p I n s u r a n c e . New York L i f e I n s u r a n c e C o m p a n y . 114

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115

m a t t e r and will not a p p r e c i a b l y affect the over-all e x p e r i e n c e of t h e i n s u r a n c e c o m p a n y . However, the a p p l i c a n t for personal ins u r a n c e usually knows if he has some physical c o n d i t i o n that m i g h t m a t e r i a l l y affect the risk which he is asking the insurance c o m p a n y to assume. In order to guard against impaired risks tipp i n g the scales, the insurer must ask many questions a b o u t the h e a l t h history of the a p p l i c a n t . F u r t h e r m o r e it must have protect i o n against the a p p l i c a n t who misrepresents or conceals facts in a n s w e r i n g these questions. If the a p p l i c a n t has m a d e a material misrepresentation in his a p p l i c a t i o n , t h e insurer may later wish to deny his claim. T h e i n s u r e r may take advantage of this defense only if a copy of the a p p l i c a t i o n is m a d e a part of the insurance contract. Conseq u e n t l y , the a p p l i c a t i o n for personal accident and sickness insura n c e becomes an integral a n d i m p o r t a n t part of the contract. T h i s necessity of g u a r d i n g against bargain h u n t i n g is also reflected in the provisions of the personal accident a n d sickness insurance c o n t r a c t which guard against claims resulting from pre-existing conditions, a n d in the use of i m p a i r m e n t riders. I n contrast, g r o u p insurance is usually issued without any r e q u i r e m e n t of evidence of insurability from the individuals to be insured. E v i d e n c e of insurability can be waived because the individuals who are eligible for the insurance are b o u n d together as a g r o u p by some strong interest o t h e r than that of o b t a i n i n g the insurance. As o n e would e x p e c t from general considerations, exp e r i e n c e has shown that the natural interest of the employer in selecting efficient employees acts as a m e t h o d of selection of lives so that the insured g r o u p will usually have n o r m a l , and predictable, m o r b i d i t y . As a result the group contract is not c o n c e r n e d with the exclusion of pre-existing conditions, i m p a i r m e n t riders are not used, the inclusion of a copy of the a p p l i c a t i o n as a p a r t of the c o n t r a c t is little m o r e than a formality, a n d there is n o c o n c e r n with the possibility of material misrepresentations by the i n d i v i d u a l employee. 1 l In o r d e r to c o m p l y with statutory r e q u i r e m e n t s , group contracts n o r m a l l y c o n t a i n provisions to the effect t h a t " a l l statements c o n t a i n e d in t h e a p p l i c a tion shall be d e e m e d representations and not w a r r a n t i e s , " a n d that " n o statement m a d e by t h e a p p l i c a n t shall avoid t h e i n s u r a n c e o r reduce benefits unless c o n t a i n e d in a w r i t t e n a p p l i c a t i o n signed by t h e a p p l i c a n t . " T h e s e s t a t u t o r y r e q u i r e m e n t s are no m o r e than vestigial r e m n a n t s in t h e evolution o f g r o u p insurance from individual insurance.

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Many of the other differences between g r o u p and personal contracts are due to the obvious fact that a g r o u p contract protects several individuals whereas the personal contract protects only a single individual (or an individual and members of his family). Among these differences are: First, the group contract must be m a d e for the benefit of persons who are not parties to the contract. It is a contract between an insurer and a corporation, association, or the trustees of a f u n d in which the insured individuals are third-party beneficiaries u n d e r the contract. Second, as contrasted with the coverage of a specified individual under a personal accident and sickness contract, a g r o u p contract covers a constantly changing g r o u p of individuals. Provision must be made for adding new insured individuals as they qualify for coverage and for the termination of individuals as they leave the eligible group. T h i r d , as a result of the sizable exposure u n d e r a g r o u p contract a n d its continuing nature, the cost of the insurance u n d e r the contract can be, a n d usually is, adjusted to reflect the experience u n d e r it. T h i s is done both through retroactive p r e m i u m refunds, or dividends, and by a d j u s t m e n t of p r e m i u m rates u p o n renewal. It is, perhaps, pertinent to point out that group insurance policies are much more persistent than are personal accident and sickness insurance policies. An employer purchases a group contract in order to make the conditions of employment in his plant more attractive. It becomes one of the conditions of employment and as such is apt to be continued indefinitely. As a result, the rate of termination of g r o u p contracts is much lower than the rate of termination of personal accident and sickness contracts. In general these factors lead to fewer limitations in g r o u p contracts and a greater liberality in their administration.

ANNOUNCEMENTS

AND

CERTIFICATES

T h e fact that those who stand to collect u n d e r a group contract are not parties to that contract necessitates the preparation of other documents to inform them of their rights under it. T w o types of documents are used.

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117

First we have the a n n o u n c e m e n t booklet. T h i s is a descriptive booklet which tells a b o u t the benefits of the policy, what they will cost the individual employee and how he can get them. In m a n y instances these a n n o u n c e m e n t booklets are required because the insurance coverage is contributory. U n d e r such a policy each individual employee must sign u p for the plan of insurance a n d authorize his employer to deduct the appropriate contributions from his pay. T o make the plan effective a substantial proportion of all eligible employees, usually 75 per cent, must sign u p . These a n n o u n c e m e n t booklets must, therefore, be prepared as sales documents. T h e y must make the plan of benefits appear attractive to the eligible employees, a n d motivate them to sign u p for the insurance. T h e y are written in simple language, frequently are illustrated, a n d in general are designed to capture the attention of the average American who reads as he runs. Although the a n n o u n c e m e n t booklet is not a part of the contract, it is designed to express the intent of the contract and is frequently referred to by b o t h the policyholder and the insurance company in administering the plan. In addition to the a n n o u n c e m e n t booklet, a certificate of insurance is issued to each insured individual. Such certificates are required by the laws of most states. T h e provision of the New York Insurance Law, which may be considered typical of this type of requirement, is that there shall be issued "for delivery to each m e m b e r of the insured group, an individual certificate setting forth in summary form a statement of the essential features of the insurance coverage for such employee or such member, to whom the benefits t h e r e u n d e r are payable," and in substance certain additional provisions which the law requires to be included in group accident a n d sickness insurance policies. These individual certificates must, if they are to serve the purpose for which they are prepared, be both concise and easily understood. At the same time they must f a i t h f u l l y reflect the pertinent provisions of the contract. T h i s is one of several factors which puts pressure on the insurance companies to p r e p a r e their g r o u p insurance contracts in simple a n d u n d e r s t a n d a b l e form. It may seem that there is unnecessary duplication in the preparation of both a n n o u n c e m e n t booklets a n d certificates, since both are designed to explain the benefits of the g r o u p policy to the

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eligible employee. T h e two documents are, however, subject to somewhat different requirements. It is difficult to provide a precise and complete statement in the announcement booklet of the provisions which must be included in the certificate and still maintain the easily read text which is so necessary in such a booklet. Despite the difficulties of using one document for both purposes, some experiments along this line are being made. As a matter of fact, this result has already been accomplished in providing U C D benefits in California where the "Statement of Coverage" booklet is used both as an announcement booklet and as a certificate of insurance.

THE

STRUCTURE

OF T H E

CONTRACT

Let us turn now to a consideration of the structure of the group contract. All insurance contracts, whether group or individual, must contain provisions dealing with the following points: T h e parties to the contract. T h e period of the insurance, when and how it becomes effective and when and how it terminates. T h e consideration for the contract. T h e manner in which claims are to be submitted and benefits are to be paid. T h e conditions under which benefits are due and the amount of these benefits. W e can use these points as a framework for discussing the various features of group accident and sickness insurance contracts. 1. The Parties

to the

Contract

T h e r e are the usual direct parties to a group insurance contract, namely, the policyholder and the insurer. In addition there are the individuals (for example, the insured employees) who are entitled to insurance benefits under the contract. These individuals occupy a third-party beneficiary status. T h e Policyholder. T h e r e are several classes of policyholders to which group policies may be issued. T h e New York Insurance Law recognizes the following classes: T h e employer. T h e trustees of a fund established by an employer.

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119

T h e trustees of a f u n d established by the employer members of a trade association. An association of employees (incorporated or unincorporated). A labor union. T h e trustees of a f u n d established by two or more employers in the same industry, or by one or more labor unions, or both. T h e most common form of group policy is one issued to a single employer. T h e main effect u p o n the contract of substituting one of the other classes of policyholders for a single employer is in the definition of the classes of individuals eligible for coverage u n d e r t h e contract and the definition of the period of their protection. T h e type of policyholder involved may also have some effect u p o n t h e administrative provisions included in the g r o u p contract. T h e Insured Individuals. T h e contract must define the classes of individuals who are eligible for insurance u n d e r the contract. T h e usual statutory definition of g r o u p accident and sickness insurance defines such a policy as one "covering . . . all employees o r all of any class or classes thereof determined by conditions pert a i n i n g to the employment." Similar provisions apply to policies issued to other types of policyholders. Such a r e q u i r e m e n t is good u n d e r w r i t i n g practice a n d a matter of good employer-employee relations, and consequently would probably be observed even in the absence of any statutory requirement. W h e n the policy excludes one or more classes f r o m eligibility, the exclusion is usually based u p o n period of service, location of p l a n t , or earnings. If the policy is noncontributory, i.e. the policyholder pays the entire cost of the insurance, all eligible employees are insured. If, however, the insured individuals contribute to the cost of the insurance, only those individuals are included w h o have agreed to contributions, a n d where required, have f u r n i s h e d satisfactory evidence of insurability. All states now permit the inclusion of certain classes of dependents (such as spouse a n d children) of a n eligible employee, or member, for hospital, surgical or medical expense insurance. Coverage of dependents is usually provided only if the employee is also insured. T h e usual contract definition of eligible dependents restricts the coverage of children to u n m a r r i e d children between the ages of 14 days and 19 years.

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2. Period of the

INSURANCE

Insurance

Effective Date of Contract. T h e insurer requires that at least 75 per cent of the eligible employees shall have applied for the insurance under a contributory contract before it will put such insurance into effect. Since usually the contract is not issued until after the coverage becomes effective, this condition is normally omitted from the contract. Termination of the Policy. A group accident and sickness insurance policy may as a rule be terminated by either party to the contract. Subject to the grace period provision, the policy will terminate upon failure of the policyholder to pay the required premium and, of course, may be terminated by the policyholder upon notice. T h e insurer generally reserves the right to refuse to renew a group accident and sickness insurance policy on any policy anniversary. (In addition, the insurer reserves the right to change the premium rate periodically, usually at the renewal date.) Effective Date of an Employee's Insurance. It is customary to provide that the effective date of an individual's insurance shall be postponed if he is not actively at work on the date that his insurance would otherwise become effective. In such a situation his insurance would become effective on his return to full time work. Subject to this condition an individual's insurance under a noncontributory contract becomes effective as soon as he becomes eligible. Under a contributory contract, however, the effective date of an individual's insurance will also be affected by the date when he applies for the insurance, and if his application is not made within a prescribed period after becoming eligible, by the date when he submits satisfactory evidence of insurability. Exceptions are made to the actively at work requirement under certain circumstances. In order to comply with the terms of a contract which has been bargained between management and labor, it is sometimes required that any employee who has the necessary amount of employment, or earnings, in a specified period shall be insured on the effective date regardless of whether or not he is then actively at work. Furthermore, when a policy is issued in replacement of another policy, it is customary to modify

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121

this requirement in order to make sure that no individual is deprived of coverage by virtue of the change in carriers. Termination of an Employee's Insurance. An employee's insurance under a group policy will normally terminate upon: Termination of employment. Termination of the employee's contributions if the policy is contributory; or Termination of the master policy. T h e r e are several conditions, however, where insurance protection will be continued on a limited basis beyond the date of termination of full coverage. In the first place, termination of insurance for any of the foregoing conditions should not operate to deprive an insured individual of benefits which would otherwise be payable under the contract as a result of a disability existing at the time of such termination. T h e termination of an employee's insurance does not serve to terminate benefits for a period of disability, or hospital confinement, existing at the time of termination of insurance. However, a disability which is in existence at the time of termination of an employee's insurance, and which may even have given rise to that termination, may result in hospital or surgical expenses some time after the termination of insurance. In order to prevent an individual from being deprived of his insurance protection at a time when he is in particular need of that protection and under circumstances over which he has no control, a three months' continuation of insurance is frequently included in hospital and surgical expense insurance contracts with respect to disabilities existing at the date of termination of insurance. T h e provision of one company reads as follows: Employee's Insurance and Dependent's Insurance under these Accident and Sickness Insurance provisions will continue with respect to an employee or an insured dependent after cessation of premium payments thereon, (a) if, in the case of an employee, he was totally disabled so as to be unable to perform his regular work on the day of such cessation, or (b) if, in the case of an insured dependent, he was totally disabled on the day of such cessation, and (c) if as a direct result of the uninterrupted existence of such disability the employee or insured dependent incurred an expense which would have entitled him to benefits prior to such cessation. If insurance is continued under this Three Months Benefit, benefits will be paid subject to the applicable maximum

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a m o u n t s and applicable Accident and Sickness Insurance provisions as follows: 1. Hospital Benefits for an u n i n t e r r u p t e d c o n f i n e m e n t which comm e n c e d within three m o n t h s after such cessation; and 2. Surgical Benefits for an o p e r a t i o n u n d e r g o n e within three m o n t h s after such cessation.

An even longer continuance of benefits is provided with respect to hospital and obstetrical expense benefits resulting from preg nancy. T h e contract provisions with respect to pregnancy benefits are usually drawn so as to provide benefits with respect to pregnancies having their inception d u r i n g the period the individual is insured u n d e r the contract. Normally, therefore, maternity and obstetrical benefits are not provided d i n i n g , substantially, the first nine months d u r i n g which the individual is insured. T o correspond with this deferment of benefits d u r i n g the early months of coverage, insurance is continued with respect to deliveries for nine months after termination of insurance (or until the termination of any pregnancy which was in existence at the date of termination of the employee's or dependent's insurance). 3. The Consideration—Premiums,

Dividends

and

Contributions

As contrasted with the personal accident and sickness policy where the application is an i m p o r t a n t part of the consideration, the insurer seldom relies u p o n representations made in the application for a g r o u p insurance policy in deciding whether or not to issue the policy applied for. Consequently the consideration for a g r o u p policy is usually entirely a monetary one. T h e consideration for the contract is, therefore, simply the timely payment of the premiums required by the policy. A grace period of thirty-one days for payment of premiums is usually granted by the contract. However, in contrast with individual insurance, this is seldom a period of free coverage, and the policyholder may be held liable for payment of the premium for the grace period unless he has given prior notice of termination of the policy. T h e initial p r e m i u m rates are usually guaranteed for a twelvem o n t h period. U p o n renewal the cost of the insurance may be adjusted either prospectively, or retrospectively (but usually only if the cost is being reduced), or both. In this process there is

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123

little practical difference between participating and nonparticipating policies. In the more substantial group cases the policyholder expects that the ultimate cost of his insurance will reflect very closely the actual claims experience under his policy. If the claim rate is high the p r e m i u m rate will undoubtedly be increased u p o n renewal. If the claim rate is low the policyholder will expect a dividend or a p r e m i u m r e f u n d . In addition, depending u p o n the size of the group, the level of the claim rate, and the practices of the insurer, he may receive a reduction in the p r e m i u m rate for the next policy year. It should be pointed out that the making of a contribution towards the cost of the insurance by an individual insured under a contributory group policy does not constitute the payment of a p r e m i u m u n d e r the policy. These contributions arise out of a relationship between the policyholder and the insured individuals. T h e entire p r e m i u m for the contract is payable by the policyholder, even though p a r t or all of the f u n d s with which he pays the p r e m i u m is derived f r o m such contributions. 4. Notice, Proof and Payment

of Claims

T h e majority of the Standard Provisions required in personal accident a n d sickness policies are for the purpose of protecting the policyholder when he has occasion to submit a claim for benefits. A l t h o u g h the protection afforded by most of these provisions is also required in g r o u p policies, the general use of the "more favorable to the insured" provisions of the statutes has made their influence on g r o u p policies hardly noticeable. More favorable provisions are feasible for several reasons. In the first place the policyholder has a continuing close relationship with the insured individuals. As a result, he frequently knows of the likelihood of a claim before notice is given to the insurer, and hence he can facilitate presentation of notice and proof, and can help develop the facts in the case of d o u b t f u l claims. Furthermore, due to the effect of the actual claims experience on the cost of the insurance, the policyholder's interest in watching claims and avoiding abuses is substantially the same as the insurer's. Finally, the a m o u n t of benefits is usually relatively small, and the period over which benefits may accrue is limited. Hence, the incentive to d e f r a u d the insurer is relatively small.

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T h e provisions for reduction of benefits in the event of change in occupation, misstatement of age, or possession of other insurance, are usually omitted completely. T h e time limit on legal actions is frequently omitted, a n d the periods for notice a n d proof of claim are liberal. For the most part benefits are payable immediately u p o n presentation of satisfactory proof of claim. Consequently, the provisions d e a l i n g with the m a n n e r of m a k i n g claims a n d paying benefits may be reduced to a few simple paragraphs. T h i s may be illustrated by the following pertinent provisions of one company's contract form: CLAIMS. Written notice of the occurrence of any event which m a y lead to a claim u n d e r these Accident a n d Sickness I n s u r a n c e provisions must b e given to I n s u r a n c e C o m p a n y within ninety days after such event. Written proof of claim must b e given to Insurance C o m p a n y within ninety days a f t e r s u b m i s s i o n of notice, covering the occurrence, character a n d extent of the loss for which claim is m a d e . However, if an e m p l o y e e fails to f u r n i s h notice or p r o o f within the t i m e p r o v i d e d , his claim will not be i n v a l i d a t e d nor r e d u c e d if it be shown that it was not r e a s o n a b l y possible for him to furnish the notice or proof on time, a n d that it was f u r n i s h e d as soon as was reasonably possible. I n s u r a n c e C o m p a n y shall have the right to have a physician it designates e x a m i n e the person of the claimant whenever it may r e a s o n a b l y r e q u i r e d u r i n g the p e r i o d for which he claims Accident a n d Sickness I n s u r a n c e Benefits. PAYMENT OF BENEFITS. U p o n c o m p l i a n c e with the C l a i m s provision, benefits will be p a i d biweekly d u r i n g the p e r i o d of disability, a n d any b a l a n c e thereof will be p a i d at the t e r m i n a t i o n of the p e r i o d for which they a r e payable.

5. Benefit

Provisions

T h u s far we have dealt with provisions c o m m o n to all g r o u p accident a n d sickness insurance contracts regardless of form of coverage. Let us review briefly now the various forms of coverage provided by g r o u p accident and sickness insurance policies. In a b r o a d sense there are three types of contingencies which are the subject of accident a n d sickness insurance, namely, (1) loss of income, d u e to disability, (2) expenses required for medical care, a n d (3) accidental death. (In g r o u p insurance accidental death benefits are usually issued only as an a d j u n c t to g r o u p life insurance, a n d consequently will not be dealt with further in this paper.)

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125

Loss of T i m e Benefits. Let us first deal with insurance providing replacement of income in the event of loss of time due to disability. We find in group contracts that the insuring clause for this type of benefit is substantially more liberal than that found in personal accident and sickness insurance contracts. This is, in part, due to the shorter periods of benefit which are involved and also to the control which may be exercised by the policyholder over the claimant. T h e group contract never requires that the individual be so disabled that he is unable to follow any occupation. T h e typical clause requires that the insured shall "become wholly and continuously disabled so as to be unable to perform any and every duty pertaining to his occupation." Due in part to the influence of the compulsory cash sickness benefit laws which have been passed in several states, there is a tendency to remove the provision that the insured must be so disabled as to be unable to perform "any and every duty pertaining to his occupation." One of the more liberal clauses reads "an insured employee will be entitled to weekly indemnity benefits if, while insured, he becomes wholly and continuously disabled so as to be unable to perform his regular work." Benefits are payable only for the portion of a period of disability following a prescribed waiting period and during continuation of that disability for a limited period such as 13, 26, or 52 weeks. Benefits for a period of disability due to pregnancy are usually limited to a shorter period such as six weeks. An employee is required to be under the care of a physician in order to collect benefits. Coverage is usually limited to disabilities due to nonoccupational causes. Hospital Expense Benefits. There are usually two parts to the benefit provisions of a hospital expense insurance policy. First, there is a benefit to apply against the charges for room and board. This may be either in the nature of a fixed benefit, such as $10, for each day of hospital confinement regardless of the actual charges, or it may be in the form of reimbursement up to some specified limit for each day of hospital care. Second, there is usually provision for reimbursement of other charges by the hospital (excluding special nursing charges and other professional charges) and for charges by a physician or professional anesthetist

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for t h e cost a n d a d m i n i s t r a t i o n of anesthetics. Usually t h e e n t i r e a m o u n t of such charges is r e i m b u r s e d so long as they do n o t exceed some specified a m o u n t . T h e m a x i m u m a m o u n t of reimb u r s e m e n t for such charges is u s u a l l y d e t e r m i n e d by t a k i n g a m u l t i p l e , such as 10, 15 or 20 t i m e s t h e daily r o o m a n d b o a r d benefit. Because of the g r o w i n g i m p o r t a n c e of this aspect of hospital e x p e n s e i n s u r a n c e a n d t h e d a n g e r of abuse w h e n t h e p a t i e n t has n o financial concern w i t h t h e cost of such e x t r a services, t h e r e is c u r r e n t l y a t r e n d t o w a r d s i n c l u d i n g a c o i n s u r a n c e provision with respect to these e x t r a charges w h e n t h e aggregate a m o u n t of such e x t r a charges exceeds some specified level, such as 25 times t h e daily r a t e of r o o m a n d b o a r d benefit. T h e i n s u r i n g clause n o r m a l l y p r o v i d e s t h a t the i n s u r e d indiv i d u a l will be e n t i t l e d to benefits if (I) t h e hospital in which he is confined is a "legally c o n s t i t u t e d h o s p i t a l , " (2) the c o n f i n e m e n t is a p p r o v e d by a legally licensed p h y s i c i a n , a n d (3) t h e confinem e n t is not d u e to a n o c c u p a t i o n a l a c c i d e n t or illness. Some comp a n i e s also i n c l u d e t h e r e q u i r e m e n t of a m i n i m u m n u m b e r of h o u r s of c o n f i n e m e n t in the h o s p i t a l unless the c o n f i n e m e n t is for emergency t r e a t m e n t of an a c c i d e n t or f o r surgery. Benefits are p r o v i d e d for a l i m i t e d p e r i o d of h o s p i t a l i z a t i o n (usually thirty-one days or seventy days) for each p e r i o d of disability. R e i m b u r s e m e n t of expenses r e s u l t i n g f r o m a c o n f i n e m e n t d u e to p r e g n a n c y is usually f o r a l i m i t e d a m o u n t , such as 10 times the daily r o o m a n d b o a r d benefit, a n d is sometimes exc l u d e d entirely. Surgical Expense Benefits. T h e i n s u r i n g clause for surgical expense benefits p r o v i d e s for r e i m b u r s e m e n t of a c t u a l charges for an o p e r a t i o n u p to t h e a m o u n t specified for t h a t o p e r a t i o n in a schedule of allowances c o n t a i n e d in t h e policy p r o v i d e d the o p e r a t i o n is p e r f o r m e d by a licensed physician. T h e coverage is usually l i m i t e d to o p e r a t i o n s w h i c h are " n o n o c c u p a t i o n a l " a n d t h e benefit p a y a b l e in t h e event of a n obstetrical p r o c e d u r e may be limited o r e x c l u d e d entirely. A wide variety of surgical s c h e d u l e s are i n c o r p o r a t e d in various g r o u p i n s u r a n c e contracts. H o w e v e r , most of these schedules can be traced to two or t h r e e sources. T h e s e " l e a d " schedules were designed to represent, at t h e t i m e they were developed, t h e prevailing level of charges for i n d u s t r i a l employees in n o n - m e t r o p o l i -

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tan c o m m u n i t i e s . M u c h of the variation in these schedules has been i n t r o d u c e d to try to k e e p pace with inflation and to correct for a p p a r e n t inequities or inconsistencies in the original schedules. It should be p o i n t e d out that in the absence of an express agreement on the p a r t of the doctors in a c o m m u n i t y , no surgical schedule in a g r o u p insurance policy can properly be represented as a schedule of surgical fees. It is simply a contract definition of the m a x i m u m a m o u n t which the insurance c o m p a n y will reimburse for each type of o p e r a t i o n . M e d i c a l E x p e n s e Benefits. T h e insurance of the expenses of medical care takes on a variety of forms. T h e most familiar and most p o p u l a r forms are those insuring against the expenses of hospitalization and surgery. T h e r e are several forms of insurance covering other medical expenses. T h e policy may limit reimbursement for the expense of doctors' calls to those made while the insured is confined to a hospital, or it may provide coverage for doctors' calls regardless of where the visits may occur. U n d e r one variation of this latter coverage the charges for doctors' visits are reimbursed only if m a d e d u r i n g a period when the individual is so disabled that he is u n a b l e to work; whereas in a n o t h e r variation these expenses are r e i m b u r s e d regardless of whether the illness is disabling or n o n d i s a b l i n g . Several forms of medical care coverage have been developed to cover q u i t e specialized or limited conditions, such as a form of coverage providing for r e i m b u r s e m e n t for the expenses of diagnostic X-rays and laboratory services when performed outside of a hospital. Most of these limited coverages are designed to supplement the basic hospital and surgical coverages. M a j o r M e d i c a l E x p e n s e Benefits. M a j o r medical expense insurance is of recent o r i g i n . It is designed to give substantial relief from large medical bills rather t h a n to pay a large n u m b e r of smaller medical bills. It provides for r e i m b u r s e m e n t of a p o r t i o n of substantially all medical expenses incurred in connection w i t h an illness in excess of a d e d u c t i b l e a m o u n t . A percentage, such as 75 or 8 0 per cent of the excess of actual medical expenses over ihe d e d u c t i b l e a m o u n t , is r e i m b u r s e d but the insured is e x p e c t e d IO meet the balance of such expenses out of pocket. By means of a d e d u c t i b l e a m o u n t , medical expenses which would not be a substantial financial burden on the insured, a n d

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which could be provided more economically if paid directly by the insured, are excluded. T h e r e are many variations in the form of the deductible a m o u n t . T h e simplest is a flat a m o u n t such as $300 or $500 for each illness or accident. Variations in the form of the deductible a m o u n t have been developed for various purposes. Among these variations may be mentioned: A deductible a m o u n t which varies according to the size of the insured's income, A deductible a m o u n t which is integrated with underlying hospital, surgical a n d medical expense insurance, and A family deductible which recognizes the possibility of two or more serious illnesses occurring at one time in the same family. Except for a m a x i m u m on the daily rate of hospital room charges which will be reimbursed (in order to avoid paying for luxury accommodations), the policy does not place specific a m o u n t limits on the various kinds of medical services. It is usually pro vided, however, that the policy will cover only reasonable charges for necessary services ordered by a licensed physician. T h e charges which would be counted toward the deductible a m o u n t must be accumulated within a limited period such as six months. A maxim u m is placed u p o n the a m o u n t of reimbursement for each illness or, under some contracts, for all illnesses of an individual. A time limit such as one, two or three years is usually placed on the period d u r i n g which reimbursement of charges for the same illness or accident would be provided. T h i s coverage is in the early stages of its development, and consequently many variations in the details of the benefit provisions will undoubtedly be tried before any particular pattern will be generally accepted as the standard form of this coverage.

CHAPTER

VIII

UNDERWRITING, REINSURANCE AND CLAIM ADJUSTMENT-PERSONAL COMMERCIAL CONTRACTS By Armand Sommer* UNDERWRITING

AND

RE-UNDERWRITING

Underwriting is the selection of risk. In the birth of an accident and sickness policy, there are two major steps. T h e first, of course, is the sale to the prospect or applicant, and the second, the acceptance by the insurance company. An insurance company knows that it cannot restrict its risks to the best of applicants but must so conduct its underwriting that a cross section of business closely resembles the average person in health, moral caliber and financial responsibility. You may wonder why it is not possible to attempt to take only the very best of applicants. An agent must live and prosper and if any insurance company attempted to write only those prospects who are "nigh on to perfect" in all of the underwriting requirements, an agent would soon be very unhappy, financially and mentally, as there is nothing more discouraging to an agent than to have a high ratio of rejections. In addition, accident and sickness insurance in general has an obligation in the economic life of the nation to conduct its business so that with comparatively few exceptions everyone may share in its security. T h e underwriter must be a very versatile person. He must be a combination of a physician, to know the effect of the various illnesses that he might encounter in an application; a salesman, as his daily contact with the agent can be an important factor in the success or failure of the company's relationship with the • Vice President, Accident Company.

and

Health 129

Department,

Continental

Casualty

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INSURANCE

a g e n t ; a n d a psychologist in t h e d e v e l o p m e n t of his sixth sense in b e i n g a b l e to see facts a n d say "yes" or " n o , " sometimes on a h a i r b r e a d t h decision. H e m u s t also be s o m e w h a t of an e n g i n e e r in his analysis of t h e v a r i o u s o c c u p a t i o n a l classifications. A n d lie even occasionally gets i n t o t h e r e a l m of semantics in p r o p e r l y i n t e r p r e t i n g such l a n g u a g e as t h a t in t h e f o l l o w i n g letter f r o m a n I t a l i a n f r u i t m e r c h a n t : " E n c l o s e d is my policy—please let it decay." I n s u m m a r y , t h e r e f o r e , we could a m p l i f y o u r d e f i n i t i o n of u n d e r w r i t i n g to " u n d e r w r i t i n g is t h e selection of risk a n d should be c o n d u c t e d w i t h t h e m a i n o b j e c t i v e of salvaging as m a n y borderl i n e a p p l i c a n t s as possible." I n t h e c o m m e r c i a l a c c i d e n t a n d sickness line, the c o n t r a c t gives t h e c o m p a n y t h e r i g h t t o r e - u n d e r w r i t e each policyholder on r e n e w a l o n t h e s a m e basis as a n e w risk. Also, if S t a n d a r d Provision 16 o n t h e c a n c e l l a t i o n clause is i n c l u d e d , t h e c o m p a n y has t h e r i g h t to r e - u n d e r w r i t e at a n y time. W h e r e a s all of t h e factors, rules, a n d practices of u n d e r w r i t i n g a p p l y to p o l i c y h o l d e r s n o w on t h e books, it is a corollary to good business p r a c t i c e t h a t m u c h m o r e liberality be given to policyh o l d e r s t h a n to n e w a p p l i c a n t s . If a p o l i c y h o l d e r has been on t h e books f o r a l o n g p e r i o d of time, even g r e a t e r leeway m u s t be given to a p p l y i n g u n d e r w r i t i n g a c t i o n in c o n n e c t i o n with t h e renewal of t h e policy. A n y c o m p a n y t h a t w o u l d n o t t e m p e r its decisions o n r e - u n d e r w r i t i n g so t h a t very few policies are r o u t i n e l y reu n d e r w r i t t e n w o u l d soon lose its agency force. A s t u d y of u n d e r w r i t i n g is very s i m p l e a n d a n y o n e w h o a d o p t s a c o m m o n sense a p p r a i s a l of a n a p p l i c a t i o n w o u l d p r o b a b l y find t h e r i g h t a n s w e r e v e n t h o u g h his e x p e r i e n c e were very limited. I n a s t u d y of u n d e r w r i t i n g , we m i g h t follow an o u t l i n e of: 1. A n analysis of those factors w h i c h m a k e a p o l i c y h o l d e r a n u n s a t i s f a c t o r y risk. 2. T h e m e t h o d of i n v e s t i g a t i n g a n d d e t e c t i n g these various factors. 3. T h e m e a n s of c o m b a t i n g a n d t e m p e r i n g these factors w i t h t h e o b j e c t i v e in m i n d of t r y i n g to issue some coverage to t h e applicants. 4. A n a p p r a i s a l of t h e p a r t i c u l a r e c o n o m i c status at t h e present t i m e , a n d a n a t t e m p t e d p r o p h e c y of t h e f u t u r e business t r e n d , so

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that as little correction as possible need be m a d e to re-underwrite existing business in the future. Factors Affecting

Risk

Physical Condition. First in order, n o t necessarily of importance but of u n d e r w r i t i n g thought, is the physical condition of the applicant. It is very a p p a r e n t t h a t anyone who is in constitutionally bad health is not eligible for sickness insurance. It is less a p p a r e n t , but perhaps even more necessary, that the risk who is in decidedly bad health be ineligible for accident insurance. Sickness insurance is protection against the financial ravages of ill health and if the applicant is already in poor health, we are in one sense issuing fire insurance on a b u r n i n g building. Accident insurance, however, is insurance against financial loss d u e to an accidental and unexpected h a p p e n i n g a n d many agents a n d applicants cannot understand why it should be denied merely for poor health. It is true that poor health does not cause accidental i n j u r y a n d the frequency of claims should not be greater than for the man in good health. Nevertheless, the severity of any accident in terms of claim dollars is much greater for a m a n in poor health than for a normal risk. In fact, every company's files show n u m e r o u s cases where essentially minor injuries have disabled the policyholders indefinitely due to some disease complication. Also, particular care must be taken in the u n d e r w r i t i n g of death benefits as it is not always possible in the event of a claim to differentiate between a clear-cut accident a n d a health condition which caused an accident. For example, a man having a heart attack while driving a car might incur an accident causing d e a t h or prolonged disability that would not have occurred h a d he been in normal health. Retrospectively, it is not always possible to d e t e r m i n e that the heart attack was the cause of the accident. W e must, therefore, even in accident insurance appraise the health of the policyholder before making a decision on approval of the application. Financial Responsibility. T h e second factor that must be considered is the financial responsibility of the applicant. T h e hazard f r o m the standpoint of financial b a c k g r o u n d varies according to the size of the policy. In a small policy the financial status of the

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applicant can, to a great extent, be overlooked unless it is particularly unpromising. For a total coverage of, say, $50 a week and under, it is safe to issue a monthly or weekly indemnity equal to as high as 75 per cent of earnings and with no particular fears in connection with finances. T o d a y we are in the throes of inflation and high taxation. W e must realize that income and take-home pay are quite different in all economic groups and there is a particular divergence in the high income brackets. Therefore, unless taxation is considered, a company might very easily, by applying the rules of the past, be insuring a man for more than his take-home pay. Since the proceeds of an accident and health policy are not taxable, it is quite apparent that in underwriting large indemnities, we must bear in mind the take-home pay and must underwrite a lower percentage of gross income than we used to do in the days of normal taxation. Amount Applied For. Serious thought must be given to the underwriting of a risk who is applying for a large amount of income insurance or principal sum (death and dismemberment), and equal care must be exercised where the individual is applying for only small indemnities but where the total amount of either income insurance or principal sum carried in all companies is on a large scale. For example, many companies today will decline to write or participate in any risk who carries over approximately $1,000 a month in income insurance or $50,000 in principal sum. T h i s may seem to be a peculiar and illogical underwriting rule, as many agents will explain that "it is true that John )ones is carrying a large amount of insurance, but his income is $25,000 yearly and he needs the insurance." All of this may be true, but the insurance companies know from sad experience that whenever a risk carries income insurance beyond a very comfortable subsistence level, an unconscious moral hazard is presented. After all, regardless of a man's status in life, he can get along on $1,000 a month without hardship. It should be noted, too, that today the benefits from an accident and sickness policy are tax free and in these days of high taxation $1,000 a month net is equivalent to a much larger income. So often, a health condition of a borderline nature will induce the policyholder to take life easy for the $1,000 a month which, even with a changed mode of life, can carry him indefinitely in comfort.

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From the principal sum standpoint, the problem is even more acute. So many n a t u r a l deaths have an element of the accidental and even though the assureds were in every respect above reproach, the lawyers h a n d l i n g the estates may see visions of large a m o u n t s of money for the beneficiaries a n d s u b m i t claims on d o u b t f u l cases. All the companies have many files showing large claim payments on questionable claims that presumably would never have been presented if the a m o u n t at stake had been a few thousand dollars rather than a very substantial figure. All of this philosophizing on " j u m b o " risks isn't theory—experience definitely shows a greater frequency a n d severity on the larger income insurance contracts and a greater frequency on the larger principal sum policies. T o d a y we are in a period of inflation and business expansion. T h e result is that there is a greater d e m a n d than ever, as well as one which is valid a n d legitimate, for high principal sums. Some of the companies have actually specialized successfully in the writing of very large a m o u n t s of principal sum. T h e s e particular companies, however, have special departments to h a n d l e the larger risks with streamlined methods resulting in lower overhead and less acquisition cost. Also, by specializing in the large principal sums a n d applying a realistic rate, these companies have sufficient spread to absorb the losses, at least u n d e r present conditions. Character. T h e moral character of the applicant is all i m p o r t a n t because, regardless of the type of coverage or amounts, there is n o underwriting hedge against the man w h o is decidedly substandard in moral fiber. U n d e r the heading of the moral factor in underwriting must come an applicant's business character as judged by his general r e p u t a t i o n , his d r i n k i n g habits, his family life a n d any other character pointers t h a t have a bearing on the question of whether he is a desirable citizen. A m a n whose business ethics are poor may not only stretch a claim too far b u t also may partially or wholly m a n u f a c t u r e a claim. A m a n who drinks to excess may be the victim of m a n y types of circumstances which breed serious claims. A m a n whose family life or general character is not in accordance with accepted standards often r u n s into serious difficulty which may cause or prolong claims. Occupation. In addition to all of these factors, there are certain

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occupations which, f r o m a practical standpoint, cannot logically be insured. For example, there are some occupations that are too u n h e a l t h f u l for illness insurance, such as those in which workers are exposed to a silicosis hazard or are dealing with certain types of furs. From an accident insurance viewpoint, a few occupations are so very hazardous that despite a high p r e m i u m it is not logical to offer coverage. O n e other phase of the occupational hazard is associated with p r o p e r rating. It is very essential that the companv have the exact duties of the applicant so that it can be sure that it is not issuing cut-rate insurance. In all dealings with occupational coverage, it is necessary to bear in m i n d that the occupation influences the claim in two ways: (1) causing frequency a n d / o r severity of claims; (2) prolonging the claim by keeping the policyholder away from work a longer period of time than would be the case in a less strenuous occupation. T h e first of these is self-explanatory. T h e second can easily be understood if we realize that a truck driver with the same injury as an office man is going to be away from work, on an average, considerably longer. A new development patterned after the Lloyd's of London operation has been the creation by some companies of special facilities to take care of unusual risks. For example, a company writing merely a commercial type of coverage would not want to insure a boxer, wrestler, or automobile racer. If, however, it has a large volume of such business and can apply the proper rating schedules, there is n o reason why this type of accident insurance cannot be successfully underwritten. T h a t is particularly true if the operation is streamlined with both overhead and acquisition lower than on commercial business. Underwriting

Special

Lines

Hospital Insurance. Hospitalization insurance, which is a very widespread type of coverage, presents n o special underwriting problem. Its handling is essentially like that of accident and sickness insurance and all of the factors, except perhaps income, have to be considered in the selection of hospitalization risks. T h e r e is usually a m a x i m u m a m o u n t which a company will underwrite a n d a f u r t h e r m a x i m u m in which it will participate. In these days

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of inflation, however, hospital room and board and miscellaneous expenses are very high, and some policies have been attempted which might be termed catastrophe or excess hospital coverage in which no restrictions are placed on the a m o u n t of hospital insurance carried. P o l i o Insurance. Polio is a n o t h e r special line which has been written in large volumes. T h e r e is no individual underwriting except that generally no coverage is issued if there has been a case of polio in the family within the preceding ninety days. Actually, from a purely financial point of view the companies should underwrite polio as a class by e l i m i n a t i n g the epidemic areas. However, that action would defeat the very purpose of polio insurance and the companies have written it freely in the epidemic areas. Sources of

Information

T h e Application. W e have briefly surveyed the underwriting hazards and can now consider the underwriting means of ferreting out the necessary information. First, of course, is the application. Since it is the practice, virtually without exception, not to require a medical e x a m i n a t i o n in accident and sickness insurance, the application should give the company a complete picture of the risk. If the application is filled out carefully, completely and truthfully, any company can rely mostly on it for success in underwriting. In former days, the application might be considered to have had two types of questions, those to which the answers would be considered as representations, and others to which the answers were in the nature of warranties. A representation merely represents that the facts are basically true, whereas a warranty specifically states that the facts are definitely and literally true. Statutes, court decisions, and the practice of the business have now made all questions on an application merely representations. I n claim settlements, however, misrepresentations under certain conditions are handled exactly like warranties. T h e basic concept of making a representation have the same effect as a warranty is that any misrepresentation must be material. T h e test of materiality is that the false statement in the application affected either the acceptance of the risk or the hazard assumed by the company. For example, if a man was 5' 7 " in height and weighed 180 lbs. but stated in the application that he weighed 160 lbs., this mis-

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statement is not a misrepresentation and should not affect the claim or the policy. If, however, this same man actually weighed 280 lbs. and stated on his application that he weighed 160 lbs., this type of misrepresentation could be handled as if it were a warranty and could avoid the policy. If a question on the application asks, "Do you have diabetes?" and the applicant definitely had diabetes but answered negatively, this could avoid the policy even though the claim had nothing to do with diabetes. T h e above examples are over-simplications but indicate the theory of underwriting interpretation of the application. T h e Agent. T h e second source of underwriting information is the agent himself. Every company classifies an agent in accordance with its knowledge of him, the business that he submits, and whether or not he is careless in his detail or painstaking in giving the proper information. If a given application is received from Agent "A" in whom the company has little confidence as a result of its past experience, the company may require considerable additional information; whereas if the same application should come from Agent "B," who they know from the past submits good business in the proper form, it can be passed without further inquiry. Inspection Reports. T h e third means of obtaining the necessary information is from the inspection report which is used by most companies on applications for large indemnities, and on cases respecting which the underwriter has any suspicions. These inspection reports are merely additional facts on the applicant obtained by one of the inspecting companies by making inquiries among neighbors and business acquaintances of the applicant and sometimes by asking pertinent questions of even the applicant himself. Doctors' Reports. Another method of effecting a further checkup on an application is to obtain a doctor's report on any condition mentioned in the application, either past or present. An agent can facilitate and speed up the acceptance of applications by obtaining and submitting any necessary doctors' reports with the original application. As a general rule, the companies require the applicant to submit the facts of his medical past without expense to the company. T h e agent should, therefore, make arrangements for the applicant to submit a doctor's report as a supplemental part of the applica-

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don. An alternative is for the agent or the company to write the doctor, in which event the agent should receive from the applicant a signed authorization to obtain such a report. T h e more experienced agents always carry these "doctor's authorization" forms and use them, if necessary, when taking the application. In this brief analysis of underwriting, we have discussed the hazards and, very briefly, the methods of securing information for determining the hazards. Assuming that we have all of the necessary information, we are now ready for our real j o b of underwriting, which is a matter of judgment of the underwriter based on years of past experience. He must look at the assembled facts in the following light: Applicant Jones shows certain unfavorable characteristics. T h e underwriter is not attempting to tell the agent what is going to happen to Jones but is attempting to invoke the law of averages by trying to figure what would happen to the insurance company if it had a thousand risks just like Jones. If the underwriter will remember this simple line of reasoning, he can better judge the particular applicant and can more easily sell to the agent and eventually to the applicant the result of his underwriting action. Alternatives

in Handling

Applications

Underwriting action necessarily involves four alternatives on the part of the company: Acceptance on the basis on which the application is submitted; outright rejection; a modified type of coverage with either reduced or less liberal type of contract than applied for; and the use of a waiver. Acceptances and rejections are self-explanatory. T h e fewer applications, however, that an insurance company must reject outright, the better its service to the public in general and to that company's agents. Therefore, every underwriter looks at a submission in the light of a possible revised program or a waiver before rejection; and the more experienced the underwriter, the more applications he will salvage via these two methods. A Modified Program. A modified or changed program of coverage should not be difficult for the agent to place as in every instance the risk is definitely substandard. T h e company and agent are merely trying to find some basis on which the policy may be issued with a moderate degree of safety from a claim standpoint. T h e

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types of changes consist mostly of offering accident only insurance instead of accident a n d sickness insurance, offering the policy applied for b u t in reduced amounts, or offering a less liberal type of coverage in reference to the extent of benefits, both in length of time of payment a n d in n u m b e r of extra features. Waivers. Accident a n d sickness rates are based upon risks that are in normal, everyday health. T h e r e f o r e , every approval of an application or c o n t i n u a n c e of a policy must be predicated on the assumption that the assured has not deviated from normal health standards; otherwise, the rating schedule would be out of gear. T h e r e are only three ways in which a company can obtain normal risks based u p o n k n o w n adverse information. T h e first is the declination of the poor risk in full, which, of course, throws out all substandard cases. T h e second is a rate-up for substandard cases which, for m a n y reasons, cannot be attempted in the accid e n t a n d sickness field. T h e third is by means of waivers elimin a t i n g any s u b s t a n d a r d conditions. Many applications can be accepted standard except for one k n o w n condition. T h i s objective is accomplished in the accident a n d sickness business by excluding coverage for the ailment in question, r a t h e r t h a n by a rate-up similar to that employed in life insurance. For example, assume an applicant shows a definite history of appendicitis without an operation. Providing it feels confident that "appendicitis" was the right diagnosis, the insurance company can accept this risk by eliminating from the policy any benefits for appendicitis. Waivers are actually one of the most constructive developments for both the insuring public and the agents but, nevertheless, they are often misunderstood. If it were not for the practice of using waivers, thousands of accident and sickness applications would have to be rejected outright. Economic

Conditions

Commercial business can be cancelled and coverages adjusted a n d the business otherwise controlled. Sound business practices, however, are not compatible with changes in business on the books. Many companies can t r u t h f u l l y boast that on the conventional commercial business they have never made a blanket increase on existing business. Unless the losses a n d the trend therein are too drastic a n d un-

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favorable, a company corrects a bad situation by raising rates or underwriting standards on new issues, b u t lets existing business alone. T h e corollary to the favorable record of the past in not having too many changes even on existing business is that a company must be alert to changing economic conditions and make the necessary quick a d j u s t m e n t s on new business. Several companies have rcscarch d e p a r t m e n t s which are constantly surveying a n d appraising the experience of today in the light of what changes are necessary for tomorrow. In these days of inflation, many permanently questionable practices have infiltrated the accident and sickness field. High indemnities, j u m b o risks, many specialty propositions, and other plans can be underwritten successfully today, but with a reversal in business trend each company has to p u t on its dark reappraisal glasses. Conversely, many lines will actually be better in a deflationary period. Polio insurance where costs have risen so dramatically; hospital insurance where the extra expenses are so m u c h higher than in the past; blanket medical reimbursement in which the doctor bills and other expenses are continuously rising—all could be better underwritten in a deflationary period than today. It is, therefore, necessary that the accident and sickness u n d e r w r i t e r a n d executive be ever aware of today's conditions and be a good guesser on what is going to h a p p e n in the f u t u r e .

REINSURANCE

Reinsurance is the principle of insurance as applied to insurance. A l t h o u g h voluminous, interesting, and enlightening books have been written for the student of reinsurance, the basic principle is just that simple. Even an insurance company must be certain that one loss, contingency, or occurrence cannot too vitally affect the loss ratios a n d finances of the company. In practice, reinsurance is somewhat complicated and has many programs which make it a technical type of business. Since the f u n d a m e n t a l purpose of reinsurance is to prevent too much loss in the event of a single contingency, the application of the reinsurance principle in the commercial accident a n d sickness field may vary in scope from the ceding of half of an individual $50 a week accident policy to the ceding of a million dollars

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or more in excess of the company's retained liability in the event of a catastrophic occurrence or contingency. Types Facultative and Treaty. T h e r e are two general types of reinsurance from a functional standpoint: (1) facultative reinsurance; and (2) treaty reinsurance. A reinsurance agreement can be negotiated to cover an entire class of risks, or it can be negotiated to cover one specific risk. T h e former is called treaty reinsurance; the latter is called facultative reinsurance. Treaty reinsurance is automatic; every risk in the reinsured class is thus assumed. Neither party has the option to offer or accept particular risks in the class. Facultative reinsurance is not obligatory; the ceding company is under no obligation to offer the risk for reinsurance and the reinsurer has the option of accepting or rejecting the offer. T h e r e are three general types of reinsurance agreements, depending u p o n the method of settling losses and of paying premiums: Q u o t a Share. T h e reinsurer has a fixed share in each policy. For example, in a 25 per cent quota share contract the reinsurer would have a one-quarter share of each policy covered by the reinsurance. T h e reinsurer would pay one-fourth of every loss, no matter how large or how small. T h e reinsurer would receive one-fourth of the p r e m i u m written on each reinsured policy; however, the reinsurer would undoubtedly allow the ceding company a discount on the ceded premiums with which to pay the acquisition and administrative expenses incurred by the ceding company. Surplus. T h e ceding company cedes the surplus over a certain retention on all policies exceeding that retention. For example, a company may be willing to retain $100 weekly indemnity on any one life. W h e n a policy is issued for more than $100 weekly indemnity, the surplus over $100 is ceded to the reinsurer. T h e reinsurer shares in every loss according to his share in the face of the policy. For example, if the policy was issued for $300 of weekly indemnity, the reinsurer would pay two-thirds of every loss under that policy. T h e reinsurer would receive two-thirds of the premium on that policy from which a discount for expenses would be allowed to the ceding company. T h e only difference

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between a quota share treaty and a surplus treaty is that the reinsurer's share in each policy is fixed in the quota share treaty; u n d e r a surplus treaty, the reinsurer's share depends u p o n the size of the policy. Excess of Loss. T h e reinsurer does not share in every loss u n d e r this type of agreement. T h e reinsurer pays only when the a m o u n t of loss exceeds a certain sum. Let us say a policy is issued with a weekly indemnity of $300. An excess of loss reinsurance might be negotiated to provide protection against the loss u n d e r that policy exceeding $2,100. T h e reinsurer would not share in the loss until the insured had been disabled for seven weeks. Excess of loss contracts are often negotiated to protect the ceding company against several policyholders being involved in the same peril. Here the ceding company has kept its retention moderate on each policy, b u t is worried that a catastrophic accident or epidemic might involve a large n u m b e r of its policyholders. T h e premium for excess of loss protection is usually more difficult to negotiate. T h e reinsurer and the ceding company must arrive at a method of payment which reflects the probability of loss. T h i s will depend u p o n the a m o u n t of reinsurance coverage a n d the nature of the hazard involved. Sendees of

Reinsurance

A ceding insurer may seek reinsurance for a variety of reasons, the most common of which are listed below: 1. T h e ceding company may consider it prudent, in view of its size, to issue only small policies. In order to compete in the insurance market, however, it must issue larger policies. T h e ceding company will accordingly negotiate a surplus contract a n d cede the surplus on its large policies. 2. A ceding company may issue a line of insurance which could produce an enormous loss in the event of a catastrophe, such as an airplane accident or an epidemic. A company writing ticket aviation accidental death insurance or polio insurance could, for example, suffer huge losses in the event many of its policyholders should be on a big plane which crashes or should come down with polio. Such a company would negotiate reinsurance to protect it against losses in excess of a certain sum resulting from one accident or epidemic. An epidemic in this instance would be the

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motivating factor for the reinsurance but the actual negotiations would be for an excess of loss coverage based on a certain period of time. 3. A company may be just entering a new field of accident a n d sickness insurance. T h e company could easily make costly mistakes in the beginning which would jeopardize the continuance of the program. Here the company might seek the advice of a reinsurer which has had experience with that class of policies. T h e reinsurer would teach the company how to write the business a n d protect its portfolio with reinsurance d u r i n g the early stages of development. A p a t t e r n for this type of reinsurance might be for the ceding company to take a very small retention in the beginning a n d to increase this retention over a period of time. Actually, the reinsurer is b u i l d i n g an accident and health d e p a r t m e n t for the reinsured a n d the contract should be based upon the reinsured company agreeing to cede at least a small portion of its retention over a period of several years. 4. A company may be e x p a n d i n g at a rapid rate. Since expenses must be prepaid out of surplus, the company might find this expansion d r a i n i n g its surplus dangerously. Here the company could reinsure a n d transfer the u n e a r n e d p r e m i u m liability to the reinsurer. It would then be free to expand its writings without financing these writings from its own surplus. Reinsurance is just as necessary to the insurance structure of a company as insurance is to the economic life of a nation. A l t h o u g h we have o u t l i n e d the principal characteristics of reinsurance, we have not a t t e m p t e d to describe the many unusual circumstances into which reinsurance comes into play. W i t h o u t it, however, there would never have been the company growth, the b r e a d t h of coverage, a n d the service to the public that exist today.

CLAIM

ADJUSTMENT

An insurance policy is a contract between the insurance company a n d the policyholder. It is just as definite and valid a contract as any that could be made. A good salesman might emphasize that this contract is peace-of-mind insurance, the test of its value being when some contingency mentioned in the contract occurs and a claim is presented. T h e claims d e p a r t m e n t of an insurance

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company, therefore, has the obligation of carrying o u t the contract when the contingency happens. T h e claim adjuster must be a combination salesman a n d technician. H e is one of the few men in the insurance company who comes into actual contact with the buyer, as most functions in an insurance transaction, other than claim settlement, are performed by the agent or broker for the policyholder. Hence, it is necessary that the insurance adjuster pay what is rightfully d u e under the policy—no more, no less—but, at the same time, in the interests of p u b l i c relations he must pay the claim courteously a n d in a friendly, businesslike m a n n e r . Procedure Although there are many facets, bypaths, a n d complications in a claim settlement, as the voluminous court records will testify, the actual claim routine is very clear-cut a n d simple. If any student of insurance will read the Standard Provisions of an insurance policy, he will see that the law imjxises obligations and provides protection to both parties in the h a n d l i n g of a claim. Claim procedure is not complicated. Either via the home office or through an agent the company is notified by phone, in person, or in writing, that the policyholder has incurred a loss apparently covered by the policy. T h e company then attempts to secure all of the facts in connection with the loss. T h i s is accomplished by the company furnishing essentially standardized forms asking for the necessary i n f o r m a t i o n . Such forms are called preliminary claim blanks. In accident a n d sickness insurance, the information which is sought is usually the date of the accident or sickness a n d the detailed description thereof. Past accident or sickness history is generally required also. O n the reverse side is a set of questions for the doctor p e r t a i n i n g to the i n f o r m a t i o n given by the claimant, particularly dates, type of disability, a n d extent of disability; and if the accident or illness is severe, the doctor's estimate of the length of time that the assured will be disabled. Except for the executive class, it is usually required that an employer's statement be submitted verifying the fact that the claimant was away from work d u r i n g the periods for which he is presenting claim. Perhaps the majority of claims are actually settled, in practice, on the basis of the preliminary claim notice. If the disability is severe, a n interim report, merely advising that the assured is still

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disabled, is required at monthly or periodic intervals, together with a doctor's verification. When the claim is ready for settlement, a final proof of loss is required, restating the basic facts of the disability and showing that the assured has recovered and is back at work. It must likewise be accompanied by a doctor's verification, after which the final settlement will be made. Methods of

Investigation

F r o m an insurance company's standpoint, the majority of claims are routine and are paid, as mentioned before, on the basis primarily of information supplied in the preliminary blank. However, many claims must be thoroughly investigated and there is where the ingenuity, resourcefulness, and technical knowledge of a claim adjuster must come into play. T h e r e are many methods of investigating claims. In brief outline, they are as follows: 1. If the assured is in a hospital, its records are always available and may be consulted. A claimant may not be entirely truthful in his claim blank but usually he wants to get well and his hospital records tell the true story. 2. Investigations in person by the insurance adjuster. So often an insurance adjuster will call on a bedridden claimant only to find that just that day he happened to go out for a walk to the doctor's office or to take care of the one emergency that required him for three minutes at his office. 3. Credit reports are secured. When a claim is questionable or lengthy but perhaps not serious enough for the company's own adjuster to make a personal visit, the company will use the nationwide facilities of the inspection companies to supplement its own information. T h e inspection company acts in the capacity of the company's investigator in so far as general or specific information is concerned. 4. Sometimes a claim may hinge on a doctor's diagnosis and, as all accident and sickness policies allow the claimant to go to his own doctor, it is often necessary to supplement the reports of the assured's doctor with that of the company's own medical examiner. T h e company has the right to examine a claimant and in serious or unusual cases that procedure is followed. 5. History is very important and companies freely exchange information on their risk experience. Therefore, part of a claim

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investigation is to check the experience of other companies. Also, doctors' statements previously filed may have a bearing on the claim in question, particularly in so far as pre-existing diseases are concerned. Generally speaking, such diseases are not covered and one of the problems of the claim adjuster is to determine whether the disability is a new one or has been pre-existing. Hence, a careful investigation of the assured's previous medical and insurance history is important. 6. T h e r e are many kinds of investigations that cannot be generally classified due to the peculiar personality and unusual characteristics of numerous and varied claim situations. Often it is necessary to check on an insured's age, or to consult an employment record, an army record, Board of Health reports, and even immigration records. In fact, if an insurance adjuster were reminiscing, he could tell many interesting stories—one even had to check tombstones in a cemetery. Accidental Death Claims. Accidental death claims are always given a time preference and must be investigated immediately. One of the major problems in a death claim is whether the physical condition of the assured caused the accident, or whether it was a clear-cut accidental death. T h e background of this brief statement is found in many voluminous files. U n d e r the Standard Provisions of a policy, the company has a right of autopsy which is occasionally necessary to determine the cause of death. O n e of the other major problems is suicide, and deliberate attempts to collect large sums for dismemberment or loss of eyes. T h e claim files on this type of investigation are sometimes better reading than a good detective story. Importance

of

Application

Accident and sickness insurance is usually written without a medical examination. Therefore, the facts on the application are of extreme importance in claim settlements. These facts must be investigated and if there are any important misrepresentations, the claim can often be denied on the theory that the policy was never in force. U n d e r these conditions, all premiums that have been collected u n d e r the policy are refunded and the policy is in effect void from date of issue. This procedure requires very careful, thorough claim investigation and is only followed when the facts backing such voidance of the policy are incontrovertible.

C H A P T E R IX

UNDERWRITING, REINSURANCE AND CLAIM ADJUSTMENT-PERSONAL

NONCANCELLABLE

CONTRACTS By Alfred W. Perkins* A noncancellable accident and sickness contract may be defined as a contract providing insurance against disability resulting from bodily injury or sickness which does not give the insurer the option to cancel or otherwise terminate the contract at or after one year from its effective date. It is, I believe, the only "casualty" type of coverage which is written on a unilateral basis, i.e., with the control of the contract resting solely in the hands of the insured. T h a t is one of the reasons why companies writing this type of coverage sometimes refer to their policyholders as policyowners. Since the writing of the first contract in 1907, no line of accident and sickness insurance has experienced more problems. It has been the main cause of failure of some companies, including the company which originally introduced it; life insurance dividends have been cut because of unfavorable experience in this line; and for a period of time in the early thirties it was almost impossible to obtain the coverage. T h e amount presently in force represents a very small portion of the total accident and sickness volume in this country due primarily to the unfavorable past history. Many insurance companies have been reluctant to enter the field and it was not until 1951 that a trend towards the writing of the coverage became noticeable. T h o s e of us who have reviewed and studied the past history of this line have become convinced that poor selection and a disregard of fundamental underwriting principles played a large part in the unfavorable experience. T h e companies now writing • Vice President, Union Mutual I.ife Insurance Company. 146

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the coverage emphasize the importance of good selection a n d u n d e r w r i t i n g and insist on an adherence to f u n d a m e n t a l principles. SELECTION

W h a t do we mean by selection? T h i s word means many things to many people, but let me use it in its broad sense. "Selection of of a risk" may be defined as the entire process of o b t a i n i n g a prospect for consideration by a company's underwriting department. Such a definition immediately leads to consideration of two m a j o r factors, namely, the agent soliciting the risk, and qualifications of the risk. Full consideration of the first factor does not lie within the scope of this paper. It is, however, a most important one and is being given very carefid attention by all companies writing this line. It definitely is integrated with top level company policy a n d is treated differently by many companies. It has a direct bearing on the type of contracts made available for sale and in some instances has influenced the company's decision as to the writing of this coverage. As we shall see later, it also involves an underwriting principle. Factors in

Selection

O n e company in its instructions to agents on selection has this to say: " T h e lite insurance agent in his selection of accident a n d sickness prospects should consider carefully three things: 1. Physical ability to qualify. 2. T h e mental a t t i t u d e to regard his insurance fairly. 3. T h e moral stamina to stand upright in the face of adversity." T h e same points are also found in the Disability Insurance Sales Course published by the International Association of Accident and H e a l t h Underwriters, which goes on to add: " W e insure the minds of our applicants just as much as we insure the bodies." Since risks to be submitted for underwriting depend entirely on the selection initially made by the agent, his reaction to the above three cardinal principles is important. I wish I could make the statement that most companies spend a good deal of time a n d effort consulting with the agent on these principles. U n f o r t u n a t e l y

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they do not, and the agent gets most of his experience on selection t h r o u g h rejections by the underwriting department. However, there are definite current trends towards correction of this situation through education. T h e first point, "Physical ability to qualify," is usually the easiest one for the agent to determine. An established agent may have already insured the particular risk for some other line such as life insurance, or well chosen inquiries from people who know the prospect may give the desired results. T h e second point, " T h e mental a t t i t u d e to regard his insurance fairly," although not as easy to ascertain as the first point, can be determined by the agent at the time of the interview. It is essential that the prospect be interested in protection and that he does not regard the contract as an investment. Here the home life of the prospect is i m p o r t a n t but his business reputation a n d treatment of others should also be given consideration. T h e last point, " T h e moral stamina to stand u p r i g h t in the face of adversity," is most difficult of determination. No company expects its agents to be psychologists. But if an agent is lucky, he may have heard of something in the prospect's past life that would either tend to qualify or disqualify him. An agent should know generally what makes some individuals good risks and others poor risks. A desirable risk usually has a good business reputation, a n d normal family relationships. If the risk furnishes freely all necessary information required for insurability, he probably will be desirable. Risks which are reluctant to give desired information, or whose backgrounds involve extramarital entanglements, dishonesty in business, questionable associations or the like, will probably be regarded as poor risks. In the final analysis a practical approach to selection must be taken by the agent. T h i s is usually done by asking himself the following question: If I were the company, would I, on the basis of my present information, consider this application favorably?

UNDERWRITING

Selection of a risk is the first preliminary step to underwriting. In fact, it is not possible for an agent to select a risk without doing field underwriting, this being the first of three separate stages in

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the underwriting process. T h e other stages are lay underwriting and medical underwriting. Field

Underwriting

Field underwriting occurs at the time of selection and is guided by agency training programs and the application. An agent must recognize the importance of the application. Since it will become a part of the issued contract, the agent must obtain complete answers to all of the questions appearing thereon; otherwise, as he will soon learn, his business will be held up. Most companies return incomplete applications to the agent which necessitates his making another call on the applicant. In addition, the agent must arrange for the medical examination of the applicant which will probably be required by the company. Lay

Underwriting

T h e lay underwriter concerns himself with all phases of the application, referring to the medical department those points of a technical nature regarding the physical status of the applicant. H e realizes that, once issued, the policy may remain in the control of the applicant for a good many years to come and that he must evaluate the risk with this in mind. He will be able to ascertain, on a preliminary review of the application, whether there are certain further facts which must be obtained. For example, the applicant may have been hospitalized at sometime in the past. If so, the reasons for such hospital care must be clearly determined and copies of the hospital records may have to be obtained. Or, again, the risk may have recently received checkups from his doctor, in which case the reasons for and results of such checkups must be secured. W h e n considering the moral, financial and occupational elements of a risk, the lay underwriter utilizes an inspection report which gives factual data supplied by an independent source. In addition, personal inspection of the risk by a company investigator is not uncommon in some areas. Having received all requested data, the lay underwriter is now ready to evaluate the risk. He knows from past experience that there are certain danger signals which directly affect loss ratios. For example, if the application reveals that the business a n d

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r e s i d e n c e a d d r e s s a r e t h e same, h e k n o w s t h a t t h e claim d e p a r t m e n t will h a v e difficulty in d e t e r m i n i n g t h e d u r a t i o n of a c l a i m . T h i s p o i n t a l o n e will cause r e j e c t i o n of t h e risk by m a n y comp a n i e s . A review of t h e b u i l d ( h e i g h t a n d weight) of an a p p l i c a n t is i m p o r t a n t . D e f i n i t e s t a n d a r d s h a v e been set u p a n d t h e a p p l i c a n t ' s b u i l d m u s t lie w i t h i n t h e p r e s c r i b e d limits. A n o t h e r i t e m of g r e a t significance is e a r n e d i n c o m e . O n e of t h e m a j o r reasons f o r t h e u n f a v o r a b l e e x p e r i e n c e in t h e early t h i r t i e s was t h e app a r e n t neglect of this m a t t e r by u n d e r w r i t e r s . Disability benefits a r e t a x f r e e to t h e c l a i m a n t a n d if such benefits r e p r e s e n t a l a r g e p o r t i o n of his i n c o m e t h e r e will be n o incentive f o r the c l a i m a n t t o r e t u r n to w o r k . T h i s will result in p r o l o n g e d claims for disability. U n d e r w r i t i n g L i m i t s . Present u n d e r w r i t i n g practice of c o m p a n i e s w r i t i n g n o n c a n c e l l a b l e benefits is fairly s t a n d a r d . O n t h e average, f o r e a r n e d i n c o m e s below $6,000 coverage b e t w e e n 60 a n d 75 p e r cent of e a r n e d i n c o m e will be p e r m i t t e d . For e a r n e d i n c o m e s m u c h a b o v e $6,000, a l i m i t of 50 p e r c e n t is usually set. Most c o m p a n i e s believe t h e r e is a m a x i m u m l i m i t b e y o n d w h i c h they s h o u l d n o t p a r t i c i p a t e . T h a t is, regardless of t h e 50 p e r c e n t r u l e , t h e r e is a l i m i t to t h e a m o u n t of tax free disability coverage w h i c h a n y i n d i v i d u a l s h o u l d be a b l e t o o b t a i n f r o m all c o m p a n i e s . I n effect, they a r e saying t h a t good u n d e r w r i t i n g recognizes t h e d a n g e r of i n s u r i n g any i n d i v i d u a l b e y o n d a certain l i m i t , as d o i n g so m a y r e m o v e t h e incentive to r e t u r n to work n o m a t t e r w h a t t h e e a r n e d i n c o m e m a y be. T h i s is called t h e participation limit. T h e a v e r a g e p a r t i c i p a t i o n limits of those c o m p a n i e s p r e s e n t l y w r i t i n g n o n c a n c e l l a b l e coverage is $750 per m o n t h for a c c i d e n t a n d $600 p e r m o n t h f o r sickness. T h e o r e t i c a l l y , t h e r e can b e n o j u s t i f i c a t i o n f o r d i f f e r e n t limits for a c c i d e n t a n d sickness. Loss of i n c o m e d u e to sickness is usually j u s t as great as loss of i n c o m e f r o m a c c i d e n t , so t h a t the same coverage is n e e d e d by t h e policyo w n e r in e i t h e r case. H o w e v e r , past e x p e r i e n c e o n large a m o u n t s of sickness coverage for a n i n d i v i d u a l has been m u c h m o r e unf a v o r a b l e t h a n f o r similar a m o u n t s of a c c i d e n t coverage. T h u s , g o o d u n d e r w r i t i n g practice dictates a d i f f e r e n t i a l in t h e p a r t i c i p a t i o n limits. I n a d d i t i o n to t h e p a r t i c i p a t i o n l i m i t (total in force a n d a p p l i e d f o r in all c o m p a n i e s ) , t h e r e is a l i m i t to t h e a m o u n t w h i c h a n y

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i n d i v i d u a l c o m p a n y will issue a n d r e t a i n a t its o w n risk. T h i s is r e f e r r e d to as the c o m p a n y ' s retention limit. N o c o m p a n y cares t o r e t a i n such a m o u n t s t h a t o n e or two b a d claims will h a v e a n a d v e r s e effect o n its over-all loss ratio. I n t h e o r y , such a l i m i t s h o u l d p r o b a b l y b e a r some r e l a t i o n s h i p t o v o l u m e of business in force or to n e w business w r i t t e n p e r year. I n practice, such ret e n t i o n limits a r e pretty nearly s t a n d a r d f o r all c o m p a n i e s . O n t h e average, c o m p a n i e s will consider issue of b e t w e e n $300 a n d $400 m o n t h l y on a n i n d i v i d u a l . O c c u p a t i o n a l Classifications. T h e lay u n d e r w r i t e r m u s t d e t e r m i n e t h e o c c u p a t i o n a l classification of t h e a p p l i c a n t . Such classification, in a d d i t i o n to establishing the p r e m i u m s w h i c h m u s t b e p a i d , may well i n d i c a t e t h e policy f o r m a n d m a x i m u m a m o u n t s of coverage a c c e p t a b l e to t h e c o m p a n y , regardless of e a r n e d income. T h e typical o c c u p a t i o n a l classification m a n u a l f o r n o n c a n c e l l a b l e coverage is m u c h m o r e simplified t h a n for c o m m e r c i a l coverage. T h e r e are p r o b a b l y t h r e e reasons f o r such simplification. First, c o n c e n t r a t i o n of t h e sale of this c o v e r a g e has been to t h e business or professional m a n . Secondly, t h e r e h a s never b e e n e s t a b l i s h e d a statistical basis for such classifications, h e n c e t h e necessity of b r o a d coverages. Last b u t c e r t a i n l y n o t least, t h e u n d e r w r i t e r m u c h m o r e closely a d h e r e s to t h e d e f i n i t i o n of w h a t c o n s t i t u t e s a n o c c u p a t i o n a l classification. T h e f o l l o w i n g e x a m p l e of o n e c o m p a n y ' s d e f i n i t i o n of occupat i o n a l classifications is typical of present-day p r a c t i c e : Class 1—Those i n d i v i d u a l s w h o a r e e n g a g e d in office or clerical w o r k in a stable business. R e g u l a r salary—little traveling—no selling. E x a m p l e s : B a n k employees, office a n d clerical workers. Class 2 — " W h i t e collar" g r o u p s n o t m e e t i n g r e q u i r e m e n t of Class 1. E x a m p l e s : Buyers, agents a n d b r o k e r s , lawyers. Class 3—"One m a n " occupations. E x a m p l e s : Dentists, physicians a n d surgeons. Class 4—Typical skilled m a n u a l workers. E x a m p l e s : H o u s e p a i n t e r s , p l u m b e r s , b u s drivers. Class 5—Other i n s u r a b l e o c c u p a t i o n s , some physical h a z a r d . E x a m p l e s : F a r m laborers, l i n e m e n , boiler m a k e r s . A g o o d u n d e r w r i t e r t h o r o u g h l y u n d e r s t a n d i n g these d e f i n i t i o n s will h a v e little t r o u b l e in r a t i n g a risk.

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Change of Occupation. Noncancellable policies insure a risk at a rate applicable to the occupation in which he is engaged when he makes his application, and the company cannot subsequently increase the premium if the insured changes to a more hazardous occupation. Therefore, it is necessary for the lay underwriter to scrutinize carefully the applicant's occupational history in order to (1) determine that there is a reasonable likelihood that he will continue to earn more money than he can obtain from insurance while disabled, and (2) obtain some indication that he will stay in his present position and will not soon acquire work which may be of a more hazardous nature. Some companies require that a person be in an occupation for at least six months before issuing a noncancellable contract to him, although no doubt this rule is often broken where the indications are that he will not soon engage in a more hazardous occupation. For instance, a medical doctor who has recently graduated from medical school will in all likelihood pursue the profession for which he is trained, and, therefore, can safely be written at the applicable rate. On the other hand, a person who has spent five years of his life working as a carpenter and has only within the two months previous to his application obtained a job selling hardware or building material should not be accepted at the more favorable rate. Similarly, a person who has in the past jumped from job to job and demonstrated no ability to stay at one occupation for any length of time should not be given a noncancellable contract. Companies which sell both a noncancellable contract and one which can be terminated at the company's desire will usually put this class of risk on the cancellable form for six months or a year until he has demonstrated some stability in his current occupation. Adverse Selection. Not the least of the other problems which confront the lay underwriter is that of adverse selection. He must be on guard against those people who have some knowledge of defects or some motive for buying insurance that would render them poorer than average risks. Sometimes such applicants are aware of a medical history that they have not indicated on the application or they have been suffering from some symptoms which they feel may cause them to be disabled in the future. T h e insurance industry may be unique in that it regards very suspiciously the customer who wants to buy. A person who walks into

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a h a r d w a r e store, stating, "I want to buy that jackknife" is usually welcomed with open arms a n d given the best service available in the shop. However, the same person walking into an accident a n d sickness insurance agency stating that he wants to buy a disability policy will be regarded very suspiciously by b o t h the well-trained agent a n d the home office underwriting force. T h e n a t u r e of insurance, the way it is sold, and the highly competitive methods used by most companies today make it very unlikely that there are many good risks with a desire to buy who have not been personally solicited by some agent. T h i s factor in itself, of course, would not cause negative action to be taken by any company; however, most companies would scrutinize carefully any application received in such a m a n n e r and would be inclined to spend a considerable a m o u n t of time and money to investigate any possible adverse medical history. O n e other consideration which may be taken into account on risks applying for a large a m o u n t of coverage is the extent of the individual's responsibility to others. An applicant who is apparently making $12,000 a year and has a wife and three children will u n d o u b t e d l y have no incentive to present a claim u n d e r a policy providing $400 per m o n t h coverage unless he suffers f r o m a true disability. He will have a real incentive to return to work and restore his former earnings as soon as he can reasonably d o so with safety. O n the other hand, the person who is m a k i n g $12,000 a n d is single might well enjoy a rather good standard of living on $400 per m o n t h , and, even if he did not f r a u d u l e n t l y present a claim initially, h e might not be averse to taking a trip to Florida for a m o n t h , thereby lengthening the period of claim, even t h o u g h his physical condition might allow him to return to work at an early date. At least, experience has proven that some people in similar circumstances have acted in that way. In considering the moral aspect of u n d e r w r i t i n g in conjunction with the medical, it may be pertinent to use the example of an applicant with a so-called functional m u r m u r . Briefly, medical science tells us that a functional m u r m u r is a slight abnormality of the h e a r t beat which can be determined by the stethoscope, b u t is actually of n o medical significance and should not contribute to a n early death or to an extended disability claim. However, an unscrupulous insured q u i t e possibly would be able to retire

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indefinitely on his insurance policy with such a history. It is possible because it is particularly difficult to tie down this type of heart disorder from a medical viewpoint. A person with some knowledge of medicine could simply say that he had suffered from vague pains of the left chest, a n d most competent medical men would advise him to take it easy. In any litigation regarding such a case, an insurance company would be at a definite disadvantage as all medical witnesses called would have to admit that the risk did have a m u r m u r , and although the majority of them might feel that it was simply a functional disorder of no real importance, nobody could say with good conscience that it would not be proper treatment for a risk with that type of m u r m u r a n d with a history of heart pains to take an extended vacation if his financial circumstances were such that he could do so. In concluding this part of o u r discussion, I would like to point out that I have purposely painted a black picture in order to illustrate the contingencies which an underwriter must consider. A l t h o u g h keeping them in m i n d , an underwriter must take the attitude that the majority of his applicants are honest. In most instances mere indications of a poor moral or occupational background are not in themselves sufficient to warrant adverse action, although they do constitute a warning to the underwriter to use a certain a m o u n t of caution a n d not overlook some pertinent fact which might easily be disregarded on what otherwise appears to be a desirable risk. Medical

Underwriting

Unlike the situation for commercial coverage, underwriting requirements for noncancellable insurance usually call for a medical examination. W i t h o u t exception all companies require medical examinations for their long-term sickness policies regardless of the a m o u n t of monthly benefit which is requested. T h e medical examination is first reviewed by the lay underwriter, who, as a result of supervision by the medical d e p a r t m e n t soon learns the requirements for a standard risk. After obtaining this knowledge he will refer to the medical d e p a r t m e n t only those cases which may call for some medical action. If the risk is standard physically a n d qualifies as to the other

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aspects which we have discussed, the underwriter assigns the occupational classification a n d approves the risk. In considering the medical history of any applicant for noncancellable accident a n d sickness insurance, both the field a n d h o m e office underwriters must realize that the applicant himself may not understand the significance of his past medical history as applied to this type of coverage. T h e r e f o r e , it is desirable for the field underwriter to get as many details as possible regarding any medical consultation mentioned by the applicant, just as it is necessary for the home office u n d e r w r i t e r to obtain an attending physician's report regarding any recent history. For example, many applicants will conscientiously indicate that they have seen their physicians for physical checkups and that the results were negative. An investigation may reveal that the consultations were p r o m p t e d by symptoms indicating some nervous, digestive, or cardiac disorder. Although this problem is not peculiar to noncancellable coverage, it probably causes more difficulty in this line than in either commercial accident and sickness insurance or life insurance because of the strict underwriting practices necessitated by the noncancellable feature, and the fact that many histories of this n a t u r e will have much greater effect on morbidity than on mortality. In many instances, the insured's belief that he is O.K., backed u p by his doctor's statement to that effect, and the insurance company's attitude, on the contrary, that he is a substandard risk can be a t t r i b u t e d to the difference between clinical and insurance medicine. T h i s difference can be illustrated by a hypothetical m a n age 35 who has recently seen his physician for a vague pain a r o u n d the heart a n d has successfully passed all of the physician's tests, including blood pressure, electrocardiograph, a n d X-rav. Naturally, the physician tells the risk that he is all right, not to worry, and to report back within a year. T h e insurance company, on the other h a n d , may either decline him for sickness insurance or offer a very restricted policy because it must immediately become concerned with the degree of average health that he may have for the succeeding twenty-five years. It is apparent that many difficulties will arise as a result of situations similar to this, a n d it is advisable for field underwriters to spend

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some time developing this point with any risk who appears to be substandard. Alternatives

in Handling

Applications

Waiver. If the risk is not standard physically, the lay underwriter discusses the case with the medical examiner to see if there is an action which may be taken that will make it possible for the company to accept the risk. T h e most common practice is to attach to the policy a rider eliminating from coverage any disabilities arising from the impairment which makes the risk currently substandard. This is usually referred to as a waiver. By such means many applicants who would otherwise be declined because of an impairment that might cause f u t u r e disability are able to obtain coverage. A few examples will illustrate this practice: Impairment Asthma Eczema Knee Migraine Tuberculosis

Waiver Wording Asthma or hay fever Eczema or any disease of the skin Any injury to or disease of the (right) (left) knee Migraine or headache Tuberculosis in any form

It is obvious that all impairments cannot be handled so easily. T h e degree of the impairment may have to be taken into consideration which may result in a problem of so wording the elimination waiver as to be fair to both the applicant and the company. Lengthening Elimination Period. T h e insurance contract usually eliminates from coverage the first three days of illness. Contracts may be issued with such elimination periods ranging from three to one h u n d r e d and eighty days. Some impairments which would make the risk substandard for one elimination period may be removed by increasing the length of the elimination period. For example, an applicant with a past history of hay fever would be substandard and would require an elimination rider if the elimination period of the contract were three days but usually would be considered standard if the elimination period were increased to thirty days. T h u s , standard coverage may sometimes be granted by increasing the elimination period. Extra Premium. Another method of treating substandard risks

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has been applied to a limited extent by some companies. It follows the life insurance practice of r e q u i r i n g an increased p r e m i u m b u t issuing a standard contract. Such practice has largely been confined to contracts for applicants who are substandard because of build. For applicants within certain limits pertaining to build, an increase in p r e m i u m between 10 and 30 per cent is now being charged by some companies. U n f o r t u n a t e l y this m e t h o d cannot be applied generally because the durations of many disabilities are subject to some control by the policyowner. It seems impossible to determine a rate structure u n d e r such conditions. O t h e r Modification. If in the o p i n i o n of the lay u n d e r w r i t e r the applicant is substandard for other than physical reasons, that is, for reasons associated with a financial, moral or occupational factor, other action must be taken. If a contract is issued at all u n d e r such conditions, usually it will be restricted in at least one of the following respects: Plan, elimination period or a m o u n t of coverage. T h e r e is no d o u b t that substandard cases are the most difficult of all to handle. C o m p a n y policy dictates that the underwriter's j u d g m e n t shall be fair a n d u n p r e j u d i c e d , but what h a p p e n s in practice? T h e underwriter carefully reviews the entire case, discusses it with other experienced underwriters, draws on his own past experience and finally reaches a decision. In d o i n g this he will naturally consider the type of business usually submitted by the field underwriter involved in the case. U n d e r w r i t i n g is really a correlation of selection, field underwriting, established company underwriting practices a n d judgm e n t on the part of the u n d e r w r i t e r who must pass o n a particular risk. Successful u n d e r w r i t i n g by any company will be o b t a i n e d only t h r o u g h strength along all of these lines.

REINSURANCE

For a good many years it was not possible to obtain reinsurance for noncancellable coverage. T h i s resulted in keeping each company's issue limit to a m i n i m u m . It is now possible to o b t a i n it on a limited basis. Most reinsurance contracts require the issuing company to keep a rather large proportion of the risk itself a n d sometimes require that the reinsurance company be given a

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chance to pass on the original u n d e r w r i t i n g before acceptance. If the present trend continues, it may result in a general raising of the issue limits of all companies. CLAIM ADJUSTMENT

In addition to the p r e m i u m structure for noncancellable contracts, which lies outside the scope of this paper, the success of any company's noncancellable business will depend on good u n d e r w r i t i n g and claim practices. A good underwriter may simplify the h a n d l i n g of claims. T h a t is, if he obtains all the necessary facts at the time of underwriting, one of the most troublesome of all claim problems should be removed, namely, the h a n d l i n g of a claim where there is some suggestion of pre-existence. By preexistence is m e a n t that a claim had its origin prior to the date of the contract. T h e terms of the contract for the first two or three years after issue restrict claims to those having their inception subsequent to issue. Of course, there will always be a few cases where the policyowner does not reveal an i m p a i r m e n t (known to him) in the application. If this is discovered by the company within the time period after issue that is p e r m i t t e d by law, it is common practice to rescind the contract, a n d pay back to the policyowner the premiums paid plus interest. However, if there has been good underwriting, particularly in the field, such cases will be confined to a m i n i m u m . I am happy to say that only 2 per cent of the total claims presented to companies on this line of coverage are of a f r a u d u l e n t n a t u r e . T h e r e f o r e , at least 98 per cent of the work of the claims d e p a r t m e n t is in servicing honest but disabled policyholders. Basically, the i n f o r m a t i o n necessary for the consideration of a claim u n d e r commercial contracts, disability income u n d e r life insurance contracts a n d claims u n d e r noncancellable contracts is similar. Mechanical processes are somewhat different, although the same affirmative action must be taken shortly after the receipt of a notice of claim, despite the fact that waiting periods on the noncancellable contracts may be longer than in the case of commercial contracts. C o m p a n y policy makes it imperative that

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immediate consideration and processing should be given to these types of claims. T h e handling of noncancellable disability claims requires the application of h u m a n relations, public relations, diplomacy and a touch of everyday detective work. T h e claims representative handling noncancellable claims must bear in mind that the policyowner may continue his insurance for many years until he attains some specified age such as 60, 65 or even 70. After the contract has been purchased, the policyowner's first personal contact with the company in almost every instance is through the claims department. It is, therefore, necessary that the first impression be exemplary whether it involves a minor or serious disability. Contrary to the usual situation of a dissatisfied customer patronizing another merchant, a dissatisfied noncancellable disability policyholder, whose insurability is being questioned, cannot purchase the same coverage with another company and, hence, can become an unreasonable and sometimes an unmanageable claimant. T h e m a n n e r in which claims are handled will have a very direct effect on agency operations. Claim

Procedure

A claim form is supplied the policyowner which is filled out by him and the attending physician. In the majority of cases the claim form is approved as submitted and claim payments made according to the contract. No investigation is needed or made. Provisions of the contract reserve the right and opportunity of examination of the policyowner by the company. Examinations by the company are necessary if there is some d o u b t about either the disability itself or the extent of such disability. If the condition for which claim is made may result in long periods of disability, a routine check is made by a claims representative. T h e purpose of such a check is to determine that the disability exists and to give the Claims D e p a r t m e n t some idea of the total liability under the contract. Continuance proofs of disability are filed periodically by the policyowner and statements are also obtained from the attending physician. Nearly every period of prolonged total disability is followed by a convalescent period during which the policyowner may be able to resume

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some of the duties of his occupation. Some contracts provide for partial payments d u r i n g such a period, others do not. Dishonest

Claims

T h e r e is n o class of people that by reason of nationality, occupation, profession, or geographic location has a monopoly on honesty. T h e u n d e r w r i t i n g requirements previously described would indicate that the market for noncancellable disability is chiefly with business and professional people whose education and, therefore, intelligence is much above the average. T h e dishonesty among these people takes on the complexion that we associate with the suave kid glove "Ponzi." Several specific cases will illustrate the point. A 35-year-old physician received a medical discharge from the Army and was granted a 40 per cent disability pension for a condition diagnosed as angina pectoris caused by coronary artery disease. No reference to any d e p a r t u r e from good health, medical treatment or hospitalization was mentioned in the application or declaration to the medical examiner. T h i s discovery was made d u r i n g the investigation in connection with a claim for the same condition less than two years after the policy was issued. Since the misrepresentation was material to the risk, the legal d e p a r t m e n t recommended that the policy be rescinded with ref u n d of all premiums plus interest. A 40-year-old physician with membership in high medical societies, who also held a teaching position as assistant professor of medicine, was in a side-swiping automobile collision with no damage to one car and only superficial damage to the other. T h e doctor continued his normal activities for ten days and then presented a claim for a traumatic heart condition. The medical dep a r t m e n t advised that the particular condition would normally require bed rest for not less than six weeks. T h e physician, shortly after the date of alleged disability, travelled to Europe and covered five countries in rapid order. His contract had different limitations for accident disability versus sickness, namely, first-day a n d lifetime accident coverage versus thirty-day elimination sickness coverage with duration limited to ten years. The provisions of the contract would have enabled him to present recurrent

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claims at any time for disability resulting from the alleged i n j u r y plus the fact that at the time of his retirement he could claim recurrence of the traumatic heart condition. Differences in Accident and Sickness

Claims

I have previously mentioned that theoretically there is no justification for different limits for accident and sickness coverage. T h e r e is, however, a marked difference between accident and sickness claims. In the first place, the incidence of permanent disability resulting from injury as against permanent disability caused by sickness to the preferred risk policyowner with the longterm accident and sickness coverage is very low. A recent study of pension disability cases, i.e., claims ten years old and over on lifetime disability policies, revealed that permanent disability d u e to injury contributed only 5 per cent of the total. T h e remainder were sickness and mental disabilities. Even in claims of temporary disability we find the incidence of claim to be four sickness to one accident. Secondly, in most instances there is definite evidence of an injury and it is remarkable how Mother Nature takes care of even the very serious injuries. T h e r e are many claims for disabilities for sickness where no objective symptoms can be determined by medical science. We are then confronted with the honesty of the claimant. T h e investigator or claim representative handling noncancellable claims must be experienced enough to be able to meet and deal with not only the disabled policyowner but with physicians and lawyers as well. He cannot use the movie type of district attorney tactics in his investigations. T h e information he is seeking cannot be forced, it must be induced. Handling

Bona Fide

Claimants

After we have eliminated the 1 or 2 per cent of f r a u d u l e n t claims, our problem is to deal with the bona fide disabled policyowner. T h e noncancellable claim man must always realize that he must be just without being generous and must always take time to be kind. T h e claim man can be of very material help in creating in the claimant the mental attitude of regarding his insurance fairly. T h e claim man can also be of help with the claimant who has had a prolonged serious illness, either physical or mental. Al-

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t h o u g h t h e c l a i m a n t m a y h a v e m e a s u r e d u p in every respect at t h e t i m e o f s e l e c t i o n , we m a y find u n d e r u n f o r t u n a t e

circumstances

t h a t his m o r a l s t a m i n a has b e e n i m p a i r e d by his illness. T h e c l a i m m a n c a n b e o f m a t e r i a l h e l p in r e a s s u r i n g the c l a i m a n t a n d initia t i n g , w i t h t h e c o n s e n t a n d c o o p e r a t i o n of his p h y s i c i a n , a r e h a b i l i t a t i o n . D e p e n d i n g o n t h e n a t u r e o f his disability, most c o m p a n i e s will l o o k w i t h f a v o r u p o n , a n d e x t e n d c o o p e r a t i o n to, the c l a i m a n t w h o desires to r e h a b i l i t a t e h i m s e l f t h r o u g h g r a d u a t e d r e t u r n to work o v e r a c e r t a i n p e r i o d of t i m e . T h i s was a great s t u m b l i n g b l o c k in t h e t h i r t i e s w h e n c o m p a n i e s h a d the r e p u t a t i o n , justly or o t h e r w i s e , o f t e r m i n a t i n g t h e c l a i m t h e first day they h a d knowledge o f a n y business a c t i v i t i e s or even o f a short visit t o an office. T h e h o n e s t c l a i m a n t o f t e n lost c o n f i d e n c e in h i m s e l f a n d , w i t h t h e p o s s i b i l i t y o f h a v i n g to e s t a b l i s h a n o t h e r three-, four- or sixm o n t h w a i t i n g p e r i o d , was r e l u c t a n t to r e t u r n to business u n t i l he was a b s o l u t e l y c e r t a i n o f success. I n a d d i t i o n to the c l a i m techn i q u e in h a n d l i n g these s i t u a t i o n s , we have also a d v a n c e d by the i n c l u s i o n in o u r c o n t r a c t s o f a r e c u r r e n t disability clause. I t is always a d v i s a b l e o n t h e l o n g disabilities, i.e., t h o s e c o n t i n u i n g b e y o n d a year, f o r t h e c l a i m a n t to b e visited by a c o m p a n y c l a i m r e p r e s e n t a t i v e . T h e c l a i m a n t t h e n knows t h a t h e is b e i n g c o n s i d e r e d as a h u m a n b e i n g a n d is d e a l i n g w i t h h u m a n s a n d not with a cold-blooded

financial

i n s t i t u t i o n . T h i s will i m p r o v e his

m e n t a l a t t i t u d e t o w a r d t h e c o m p a n y a n d in t u r n s t r e n g t h e n his i m p a i r e d m o r a l s t a m i n a t h a t we h a v e previously discussed. T h e n o n c a n c e l l a b l e c l a i m m a n m u s t always realize that t h e c l a i m a n t will b e a r e p e a t c u s t o m e r a n d that h u m a n beings react l i k e h u m a n beings. T h e d e t e r m i n a t i o n of t h e t i m e w h e n disability ends is usually a matter

of agreement

among

the

policyowner,

his

physician

a n d t h e c l a i m s r e p r e s e n t a t i v e . I t is i m p o r t a n t t h a t such d e t e r m i n a tion b e f a i r to all p a r t i e s a n d most c o m p a n i e s t h e r e f o r e use only e x p e r i e n c e d p e r s o n n e l in s u c h instances.

SIGNIFICANCE OF INTERRELATIONSHIP

T h e r e c a n n o t b e a d i s t i n c t s e p a r a t i o n between s e l e c t i o n , u n d e r w r i t i n g a n d c l a i m s e t t l e m e n t s . As I have tried to p o i n t o u t , they are interrelated a n d dependent on one another. T h e y constitute

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one continuous chain, starting with selection by the agent, then field u n d e r w r i t i n g by the agent, u n d e r w r i t i n g by the company and finally settlement of claims by the company. As a chain is no stronger than its weakest link, so a company's success in this line of coverage will be no greater t h a n the effectiveness of its policy as to any of these fundamentals.

CHAPTER

X

UNDERWRITING, REINSURANCE AND CLAIM ADJUSTMENT-GROUP CONTRACTS By Edward A. Green* T h e purpose of underwriting is to provide satisfactory financial results for the insurer by so evaluating risks assumed as to keep claim and administrative costs within the premium rates charged. T h e claim and administrative costs under a policy are related to its contract provisions, which may vary considerably from one policyholder to another. T h u s , underwriting is closely concerned with both rate-making and contract provisions. Although a full knowledge of these fields is necessary for proper underwriting, I shall refer to them only casually since these subjects are covered in detail in other chapters. T h e underwriter is one of a triumvirate required for a successful group insurance operation, the other two of which are the distributor and the administrator. Although the prime responsibility of the underwriter is securing satisfactory financial results consistent with the relative degree of importance attached to growth and earnings by broad company management policy, his decisions must take into account the responsibilities of the other two. An organization whose underwriting policy failed to recognize competition would soon wither away. Likewise, an organization whose underwriting policy failed to recognize the problems of premium collection and claim settlement would soon find itself saddled with an unwieldy operation and intolerable expense. In fact, the interdependence of underwriting, sales, and administration is so close in group insurance, and the penalty for its lack in day-to-day operations is so immediate, that in many companies these functions are centralized under one control even where individual policy underwriting, sales, and administration operate effectively as separate departments. • Second V i c e P r e s i d e n t , J o h n

Hancock 164

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UNDERWRITING

General

Background

T o gain the right perspective on its underwriting, several facets of group insurance must be examined. Lack of understanding of some of these facets may be the reason for occasional statements that have been made that there is very little underwriting done in connection with group insurance. Flexibility. Usually, group insurance is an integral part of any broad personnel management program. T h e earliest group policies were purchased by employers who recognized the value of employee welfare measures to improve and stabilize the employeremployee relationship, thereby promoting more efficient conduct of their business. T h e decision of the Supreme Court of the United States in 1949 that employee benefits are subject to collective bargaining brought them fully into the field of industrial relations. They are an important segment of that portion of the bargaining agreement popularly known as "fringe benefits." T h e introduction of group insurance benefits into collective bargaining has resulted, in many instances, in their joint management by industry and labor through equal representation on a so-called Taft-Hartley trusteeship. In order to play an effective part in the broadening field of employer-employee relationships, group insurance must have flexibility in policy writing, interpreting and amending. Even though broad general underwriting rules for the acceptance of new risks and administration of coverage in force can be formulated, the application of these rules cannot be reduced to a mechanical procedure even to the extent prevalent in the underwriting of individual policies. Group insurance, with its mass distribution methods and its continual enlargement of patterns of coverage and benefits to meet the demands for comprehensive health plans, has been one of the most effective means of meeting, through private enterprise, the less questionable of the aims of those seeking socialized insurance. Early group coverages were generally confined to employers with large working forces, but more recently means have been devised to offer the benefits to smaller groups. T h e minimum number of lives required for a single policy has been reduced from

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fifty to twenty-five generally and, in some instances, to ten or even fewer. Many insurers are writing compulsory cash sickness insurance u n d e r the New York and New Jersey laws for groups having as few as four lives. G r o u p insurance has also been made available to small employers, either t h r o u g h a policy issued to a trade association to cover the employees of its members or by means of a policy issued to the trustees of a f u n d established by two or more employers in the same industry. Policies issued to Taft-Hartley trusts or labor unions may cut broadly across employer lines regardless of size. New and expanded coverages have been developed. T o the longestablished weekly indemnity loss of time and accidental death a n d dismemberment insurance for employees, and hospital a n d surgical expense insurance for employees and dependents, have been added such coverages as medical expense, laboratory and X-ray examination expense, supplemental accident expense, poliomyelitis expense a n d major-medical expense insurance for employees a n d dependents. At the present time, four states ( R h o d e Island, California, New Jersey a n d New York) have laws requiring that wage earners have protection for loss of time as a result of nonoccupational disabilities. T h e s e laws spell out the m i n i m u m level of coverage and many of the terms of coverage. In all but R h o d e Island, where the law provides for a monopolistic state f u n d , a substantial portion of the compulsory coverage is provided by g r o u p insurance specifically designed for the purpose. G r o u p underwriting techniques have had to keep pace with these fast changing economic and social needs. Broad Initial Underwriting. G r o u p insurance is written on a yearly-renewable term basis and the risk is re-evaluated each year in the light of such things as the loss ratio of the case, any changes in composition or character of the risk, current enrollment and employment conditions in the industry. T h e insurer can change the premium rate on each anniversary; and the insurer and policyholder jointly can change the schedule of benefits or any terms of the coverage not required by law. Experience rating of the risk is applied, either through a dividend formula or through retroactive or prospective rate adjustments. Since each case can seek its proper rate and coverage level through a n n u a l renewal underwriting and

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experience rating, g r o u p insurance tends to be underwritten initially in very broad classes of risk. Standards of initial underwriting vary a m o n g insurers. Some have been willing to take highly questionable risks initially, relying on renewal underwriting to bring them out whole in the long run, while others have a t t e m p t e d to gear their initial underwriting to satisfactory immediate as well as long-range results. Recent Instability. T h e volume of group accident a n d sickness insurance in force has grown at a phenomenal rate in the last few years. T h e estimated 1952 p r e m i u m income of all companies for this line of business aggregates slightly in excess of a billion dollars, which is over two and one-half times the three h u n d r e d and eighty-six million dollar figure for 1948. T h e competition among insurers to secure a large volume of this rapidly growing business has been intense. Many companies entered the field of group accid e n t a n d sickness insurance for the first time and have been possessed with a desire to build u p a backlog of business, even at a temporary financial loss if necessary, to support their organizations. D u r i n g this period of rapid growth there has been a steady inflation of costs of surgical, medical a n d hospital care as part of the rise in cost of living. T h e factors which have contributed to marked growth may have affected considerably the basic philosophy on which g r o u p insurance has developed over the years. Since group accident and sickness benefits have become increasingly a part of the basic wage p a t t e r n , the interpretation of such as earned benefits appears to be a factor affecting claim experience. Changing ideas on the part of employees, even of the rank and file workers, regarding the standards of hospital service and medical treatment which they should have, work in the direction of higher loss ratios. A semiwar economy has resulted in an influx of marginal labor into the e m p l o y m e n t market, longer working hours and three-shift operations, all of which tend to increase the rate of morbidity. T h e state of flux created by rapid growth in volume, entry of new companies into the field and the changes in our economy has resulted in a recent lack of stability of underwriting in the g r o u p accident a n d sickness field with many carriers showing substantial losses. W h i l e the industry-wide financial results in this field have

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not been as favorable in the last few years as they h a d been previously, there is some evidence that underwriting practices are r e t u r n i n g the experience to a more stable condition. M a g n i t u d e of Single Case. T h e largest g r o u p case in existence covers about 400,000 lives and several cover well over 100,000. Beyond these j u m b o risks, a single g r o u p accident and sickness case with an a n n u a l p r e m i u m as large as a million dollars is not a rarity. Even on the average, this volume would represent about one h u n d r e d group cases and hence about one h u n d r e d different u n d e r w r i t i n g decisions. If the same volume of business were written on an individual policy basis it would involve in the neighborhood of ten thousand separate decisions. In underwriting a g r o u p case of substantial size a misclassification of risk or a failure to recognize a rapidly changing risk can lead to large and immediate losses. In fact, an occasional case has thrown up a substantial loss in the early months, even before administrative procedures have been completely set u p a n d experience figures accumulated to give any warning. Such a situation has occurred more frequently when n o r m a l employment practices have been violently disrupted, such as in the early years of W o r l d W a r II or the beginning of the depression. Considerations

or Factors

T h e underwriting of g r o u p accident a n d sickness insurance is based on the risk of the g r o u p as a whole and, unlike individual underwriting, requires no medical examination nor any individual evidence of insurability other than the customary r e q u i r e m e n t t h a t the covered individual be actively at work on the date his insurance and that of his dependents becomes effective, a n d that benefits shall not be provided for claims actually incurred before the insurance becomes effective. T h e r e are n o individual waivers or exclusions such as are used in the underwriting of individual policies and each person insured is provided full coverage irrespective of any pre-existing conditions. T h e group underwriter is concerned with such things as: industrial hazards; composition of the group; economic level, location a n d surroundings of individuals m a k i n g u p the group; schedule of benefits a n d eligibility requirements, which preclude individual selection, give a broad spread of risk in each class a n d meet local

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conditions; satisfactory participation of those eligible to give an average distribution of healthy lives; compliance with the laws of the jurisdiction in which the contract is written; and policy provisions which do not involve unreasonable expense to administer. Few group risks are rejected outright, provided the prospective policyholder is reliable, is recognized as a legitimate purchaser of group insurance and has adequate means of administering the case satisfactorily. Underwriting evaluates the risk and assigns a premium rate which may be standard or include a loading for additional hazard. Industry. Since group accident and sickness insurance is written initially in very broad classifications and covers only nonoccupational disabilities, most industries fall into the standard category. However, some industries, such as furriers, marble and stone yards and mills, mining, quarrying, tanneries and refractories, require a rating because of an industrial hazard which results in a higher than normal nonoccupational morbidity. Of course, industrial hazards are constantly being reduced through mechanization and plant improvement. Many industries are now considered standard which were rated a few years ago because of dust, heat or other similar hazards. Even though group accident and sickness coverages normally do not provide benefits for occupational accidents or sicknesses, occasionally a policyholder will want to supplement workmen's compensation benefits by putting some of his group coverages on a twenty-four-hour basis. Many industries that are standard for nonoccupational coverage require rating for twenty-four-hour coverage. Composition of Group. Risks vary within an industrial classification, depending upon the composition of the group. For instance, a rate for a group depends upon the proportion of insurance on female lives. Morbidity statistics show that females, as a result of higher claim frequency and longer duration, experience morbidity about 50 per cent greater than that of males if maternity benefits are excluded or about double if they are included. Persons at older ages experience greater morbidity than those at younger ages and married females greater than single females. Therefore, an underwriting evaluation of the risk takes into account any abnormal proportion of coverage on individuals at advanced ages

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or on married females. Also, occasionally hospital or surgical coverages may be continued to pensioners, in which case the evaluation of the risk must recognize the substantially higher claim cost which the pensioners experience. A waiting period, which a new member entering the group must serve before becoming eligible for coverage, confines the benefits to full-time, active members and protects the claim experience of the group against the fluctuating hazards of transitory members. It also may reduce the amount of record keeping, especially in a business of a seasonal nature. Although a commonly used waiting period is three months, longer or shorter periods are sometimes more adaptable to protecting the experience of an individual case. Normally, coverage is related to employment and ceases when the employment of the covered individual terminates, except that it may sometimes be continued for a period after termination of employment due to temporary layoff. However, with some union groups or some groups arising from collective bargaining, coverage will be related to membership, or availability for employment, or recent employment history of the covered individual. Theoretically, a person who is not actively at work has no loss of earnings to insure against except to the extent that any loss of state unemployment benefits, due to unavailability for work because of disability arising during a period of unemployment, may be so considered. Furthermore, a period of unemployment provides the free time for corrective medical care. If the covered group includes individuals who are not actively at work, the risk must be appraised accordingly. Although major-medical expense insurance is a newly developed coverage, the limited statistics available show that claim costs advance steadily with age in a pattern more like that of life insurance than of the other accident and sickness coverages and that claim costs are substantially above the average for persons with large incomes. Therefore, the additional factors of the average age of the group and the proportion of covered individuals in the higher income brackets are employed in evaluating a risk for this coverage. Economic Level, Location, Surroundings. As I have mentioned, the economic level, location and surroundings of individuals making u p the group affect the risk. Substandard working or liv-

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ing conditions and low earnings are apt to give rise to an extra health hazard, even t h o u g h the industry itself is not classified as an extra hazardous industry. W h e n the status of the members of a g r o u p is questionable, such as when a substantial p o r t i o n of the insurance benefits are to be on unskilled workers, consideration is given to plant conditions, the level of employee earnings, any pre-employment or periodic physical examinations or preventive medical care provided by the employer, housing a n d sanitation conditions in the area in which the employees live, a n d recreational a n d medical facilities available for employees. At one time the textile industries in the South were rated partially because their labor market was largely rural agricultural where a reduction in income did not necessarily represent severe economic hardship. T h e covered individual could go back to the f a r m with a reduced income for disability and be better off economically than if actively at work. W i t h the more recent industrialization of the South a n d the i m p r o v e m e n t of living conditions in industrial areas, these ratings have disappeared a m o n g the better groups. Schedule of Benefits. A schedule of benefits which will p r o m o t e a community of interests between the covered members of the group, the policyholder a n d the insurer is necessary for sound claim control. All parties concerned should find it to their advantage to prevent the occurrence of the h a p p e n i n g insured against. If benefits are too liberal, economic factors, r a t h e r than health factors, may control the claim rate a m o n g those with m i n o r impairments. Many an individual with a mild heart i m p a i r m e n t , which a physician could certify as disabling, may actually be better off at work. T h e weekly income to which a n individual is entitled when disabled should be sufficiently less than he receives when on the job so that his prime interest is to be at work; a n d since accident and sickness insurance weekly benefits are not taxable income, they should be lower t h a n take-home pay after deduction of taxes. U n d e r present circumstances, a benefit of two-thirds of gross pay for individuals with m o d e r a t e income, graded down sharply for the highest paid, is considered a b o u t the m a x i m u m that can be u n d e r w r i t t e n soundly. Usually weekly benefits are based on c u r r e n t normal earnings excluding overtime pay a n d bonuses; yet u n d e r the compulsory cash sickness laws of California and New Jersey, benefits are based on a r a t h e r remote

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wage history which can lead to overinsurance on individuals whose wages are declining. Although hospitalization or surgery are unpleasant enough in themselves to discourage the individual's seeking them unnecessarily, a degree of coinsurance of the cost of hospital or surgical care by the covered individual is desirable to discourage luxury accommodations and extra treatments which may be desirable but not medically necessary. Many of you have probably seen the cartoon in a recent issue of the New Yorker, in which a patient, all prepared for examination, is saying to the doctor, "I've got g r o u p insurance, so don't pull any punches." Generally, the dollar a m o u n t of hospital daily room and board benefit equal to the prevailing charges for semiprivate accommodations, a n d surgical and medical benefits equal to a b o u t 75 or 80 per cent of prevailing charges in the locality where most covered individuals will be treated, is considered a b o u t the m a x i m u m that can be underwritten soundly. Hospital special service benefits are usually limited to ten, fifteen or twenty times the daily room a n d board benefit, although a proportion, such as 80 per cent of charges in excess of this amount, may be covered u p to a much higher m a x i m u m . Full Payment Plans. Some hospital expense insurance plans have been written which provide for full reimbursement of the costs of ward or semiprivate accommodations for a given n u m b e r of days without limit on dollar a m o u n t , plus all charges for miscellaneous services connected therewith. Such plans lack the underwriting protection provided by coinsurance. T h e claim cost will be directly influenced by the general price level, as well as the rate of hospitalization and average length of hospital stay, a n d will be subject to the fluctuations of this level. Some underwriting protection can be secured by agreement, or at least a basic understanding, with the hospitals involved a n d the cooperation of the doctors who largely decide hospital admissions, discharges a n d what hospital services are medically necessary. Currently, such understanding a n d cooperation are secured more easily and are more effective where the risk is confined to a limited locality rather than widespread geographically. Additional protection can be secured by such things as a n additional rating to allow for a f u t u r e increase in costs, a shortening of the usual one-year rate guarantee to permit rates to follow costs more closely, or a modifi-

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cation of the experience r a t i n g sufficient to build u p a d e q u a t e reserves to tide over periods of rapid or temporary fluctuations in cost. Full payment surgical plans are impractical without doctor cooperation because of the variance of surgeons' charges. In some areas the doctors have developed, t h r o u g h their medical societies, schedules of fees which they agree to accept in full payment for surgical treatment of individuals below prescribed income limits who are insured for their schedule. In these areas the writing of the doctor-sponsored schedules has m a d e available to those within the income limits full payment surgical coverage which satisfies the r e q u i r e m e n t of a scheduling of benefits for the various operations necessary for a d e q u a t e control of claim costs. Spread of Risk. Since g r o u p insurance u n d e r w r i t i n g ignores personal factors in regard to the individuals insured, sufficient spread of risk must be secured within the g r o u p to control the effect of selection against the plan on the part of individuals. G r o u p insurance is usually written either on the n o n c o n t r i b u t o r y basis—that is, with the policyholder paying the entire cost of the insurance— or on the contributory basis with the policyholder and the covered individual sharing the cost; occasionally a case is written where the covered individuals pay the entire cost. All eligible individuals are automatically insured u n d e r a noncontributory policy a n d there is n o o p p o r t u n i t y for individual selection. W h e n the covered individual pays any of the cost, each participant is required to apply for coverage, a n d a m i n i m u m proportion, usually 75 per cent, of those eligible are required to make application before the policy is p u t into effect in order to realize a reasonable spread of risk within the g r o u p . Likewise, if dependents are to be covered, usually 75 per cent of those with eligible d e p e n d e n t s must be enrolled before d e p e n d e n t coverage can be p u t i n t o effect. T h e 75 per cent participation r e q u i r e m e n t may be increased for cases of less t h a n fifty lives. Incidentally, an unreasonably low schedule of benefits is apt to discourage enrollment a n d make a t t a i n m e n t of the 75 per cent r e q u i r e m e n t difficult. Anyone who signs u p for himself or his d e p e n d e n t s after a period of time, usually thirty-one days a f t e r becoming eligible, is required to present individual evidence of insurability in order to be sure t h a t he is not applying when he has knowledge of a n i m m i n e n t claim.

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Eligibility for coverage should be determined on a basis which avoids individual selection. If the policyholder is a single employer, all of his employees, or all of a class or classes of his employees determined by conditions pertaining to employment, should be eligible. If the policyholder is an employer association or a trustee set u p by two or more employers in the same industry, all of the employees of each participating employer, or all of a class or classes determined by conditions pertaining to employment, should be eligible. Most multiple employer groups are written on a noncontributory basis, b u t if employee contributions are involved, usually an enrollment of 75 per cent of the eligible employees of each participating employer is required. If the policyholder is a union or association of employees, all members, or all of a class or classes of members determined by conditions pertaining to membership, should be eligible. T h e waiting period, in addition to its effect on the composition of the g r o u p which I have already mentioned, also helps to prevent selection against the g r o u p by a new employee seeking employment in anticipation of an early claim, especially in times of a tight labor market when employment standards may be relaxed. Law. T h e r e are laws in many states affecting group accident a n d sickness insurance. A n u m b e r of these laws cover such underwriting factors as: to whom a g r o u p policy may be issued; who may be eligible for coverage; who may pay for the insurance; and requirements for a non-discriminatory schedule of benefits. T h e y vary considerably f r o m state to state and the underwriting of each case takes into account the laws of the jurisdiction involved. Also, it should be clear that the individual signing the master application for the insurance has the legal right to do so. Certain types of groups may require something beyond an individual signature, such as a vote by the board of directors or the membership. Administrability. An analogy that has been used from time to time to explain g r o u p underwriting goes something like this: If we were to stand at a busy intersection and pass out insurance coverage to the first thousand people who go by, we could expect average morbidity experience. O n the other hand, if we were to advertise in the local newspaper that we would pass out such coverage to the first thousand people who go by that point after

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n i n e o'clock on a certain m o r n i n g , we would be besieged with poor risks a n d could expect very poor morbidity experience. Alt h o u g h this analogy may illustrate the f u n d a m e n t a l principle of a d e q u a t e spread of lives in the selection of the risk, it ignores such important u n d e r w r i t i n g factors as stability, c o n t i n u i n g cohesiveness of the group, ability of the g r o u p to pay for the insurance, and methods of p r e m i u m collection and record keeping which hold expense at a m i n i m u m . T h e s e items are of vital concern to the underwriter if he is to secure satisfactory financial results for the insurer. T h e employees of a single employer usually form a cohesive g r o u p . T h e employer's records provide the mechanics for centralized, economical, smooth a d m i n i s t r a t i o n ; a n d where the cost is shared by the employer a n d employee jointly, payroll deductions provide for ready collection of the employee's share. T h e members of a labor u n i o n or an association of employees also usually form a cohesive group, b u t available records may be inadequate. If contributions for insurance are a part of dues a n d an effective method of collecting dues is in operation, or if a payroll deduction system can be installed with the cooperation of the employer, adequate f u n d s may be on h a n d to meet p r e m i u m payments when they come due. Unless there is continuity of leadership a n d absence of factionalism, the g r o u p may lack stability. Employees of members of a trade association can be a cohesive stable g r o u p if the association has a strong a n d efficient central administrative office, a n d if its executive officers a n d individual members are predominantly backing the program a n d investing time a n d money in it. Unless the association office is adequately prepared to collect f u n d s f r o m individual members and to maintain records, difficulty may arise in administering the case within the low expense margin inherent in g r o u p insurance premiums. T h e policy is usually issued to the trustees of a f u n d set u p by the employer members of the trade association for the purpose of purchasing a group insurance program. As a general rule, such cases are written with the participating employer paying the entire cost of his employees' insurance, the contributions to the f u n d beginning sufficiently in advance of coverage so that the f u n d has a reserve at all times to meet p r e m i u m payments as they become due, and the contributions being sufficient in a m o u n t to

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provide a margin for any contingencies or expenses of administration not borne by the general treasury of the association. Individuals covered under a T a f t Hartley trust, created on the basis of bargaining agreements between one or more employers and one or more labor unions, usually constitute a cohesive group. A centralized method of keeping records and collecting funds must be developed. Frequently the money for the fund from which premiums are paid is contributed by employers as a specified amount per hour, per day or per week worked by each covered employee. In an industry with stable employment the amount of money available for premiums may be predicted with a reasonable degree of accuracy, and a plan and schedule of benefits may be purchased with premiums equal to a substantial proportion of the amount contributed by the employers, leaving only a reasonable margin for the expense of administering the trust and for future contingencies and rate adjustments. In a less stable industry a more modest plan and schedule of benefits is required in order to leave a sizable margin in the fund for fluctuations in contributions. It is desirable that contributions to the fund begin well in advance of insurance coverage so that the trustees will have sufficient money on hand at all times to meet premium payments as they become due. In connection with administrability, I might mention that a policyholder with adequate facilities and personnel may qualify for self-accounting—a system whereby he, rather than the insurer, keeps the records of covered individuals and issues the certificates of insurance, thereby reducing his cost of insurance. His regular personnel records and procedures often require only minor adjustments to take on this additional responsibility. He submits the premium at regular intervals, along with a concise summary of the amount of insurance in force, the insurer merely conducting periodic audits of the policyholder's records. Renewal Underwriting. Each year as a case comes up for renewal, it is re-evaluated on the basis of any change in industrial hazards, composition of the group, size of group, percentage enrollment and adequacy of schedule of benefits. If the loss ratio has been unfavorable, a study is made to determine whether the poor experience is inherent in the group itself or is a chance fluctuation,

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non-recurring in nature. A review of the past trend in loss ratio and a statistical survey of the frequency, duration, cause and distribution of claims may be utilized. If the higher claim costs appear to be the normal pattern of the case, an increased rate for renewal is determined in accordance with a rating formula. Frequently, a rising loss ratio can be corrected by negotiation with the policyholder, resulting in adjustment of benefits, waiting period, eligibility requirements, or enrollment or claim procedures. T h e possibility of a large policyholder self-insuring his plan rather than be charged with another's cost will not permit much spreading of cost from one policyholder to another, and hence, any case of large size is expected to meet at least its own claims and expenses over a reasonable period of time. Transferred Business. T h e transfer by the policyholder of group insurance from one carrier to another is generally unsatisfactory, involving extra work on the part of the policyholder and increased administrative and acquisition expense on the part of the insurer. Occasionally, there is a valid reason why the transfer would be beneficial to both the policyholder and the new insurer but frequently transfers are motivated by a desire, at the time of a renewal rate increase, to secure a rate lower than the normal experience of the group would justify. T h e procedure in evaluating a risk on which a transfer is proposed follows the renewal underwriting pattern rather than that of a new risk with no experience behind it.

REINSURANCE

Probably the outstanding feature of group accident and sickness reinsurance is the fact that, outside of the relatively small amount of catastrophe reinsurance in force, it has been utilized nearly always for other than underwriting reasons. T h e buyer rather than the primary insurer has initiated most group reinsurance. Sometimes the insurance is the result of a consolidation of a number of plans which have been in force with two or more insurers. T h e pol icy holder's relationship with each has been satisfactory and rather than take his business away from any of them, he has placed it directly with one insurer with instructions that specified portions be reinsured with the others. Sometimes

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the buyer has negotiated with two or more insurers and he finds it difficult to select one carrier from among the competitors, especially if he has financial or other business relationships with more than one of them. If the choice is sufficiently difficult, he may select one company as the original insurer, with specified portions reinsured with the others. This is contrary to the practice in most other lines of insurance where reinsurance is initiated by the primary insurer to relieve him of part or all of a hazard that he is unwilling to carry himself. His unwillingness arises either from the large amounts involved or the peculiar nature of the particular risk in relation to the normal risk he is carrying. However, the amount involved in a maximum group accident and sickness claim on any one life is relatively small and even a local epidemic or catastrophe, producing excessive losses on a particular case, would probably have only limited effect on the over-all experience of an insurer with widespread operations. Even though an insurer with limited group operations might hesitate to accept a very large case entirely on his own, I believe that in nearly all group cases where reinsurance has been used the primary insurer would have been willing to retain all of the risk. Mechanics Where a portion of a case is reinsured, the primary insurer issues his contract to the policyholder covering the full benefits and the policyholder's routine contact with respect to all of the insurance is with the original insuring company, which handles the enrollment and installation procedures, certificate issuance, premium accounting, record keeping and claim payments for all the companies involved. T h e relationship between the primary insurer and the reinsurer is covered by a separate reinsurance agreement. T h e reinsurance represents a percentage of the insurance on each life, rather than all the insurance on a percentage of the covered individuals. T h e original insuring company transmits to each reinsurer his proper proportion of each premium paid, less the reinsurer's proportion of claim payments, less a charge for administrative expense and less any taxes or commissions paid by the original insurer on the reinsurer's part of the business.

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Each reinsurer is responsible for the p r e m i u m rates charged on its portion of the business, a l t h o u g h practical considerations result in considerable uniformity of rates u n d e r such an arrangem e n t . Each reinsurer also is responsible for the determination of dividends or experience rating in accordance with its own form u l a on its portion of the business. T h e reinsurer accepts all actions of the original insurer with respect to the validity of claims, retaining the right to review the original insurer's action as it may relate to the f u t u r e . T h e reinsurer also has the right to examine the insurer's books to satisfy himself that record keeping is adequate. Cost U n d e r a reinsurance setup, the cost of insurance to the policyholder will be lower than if the business were divided among the different companies in the same proportions by means of separate contracts, since duplication of work is avoided in h a n d l i n g records of individuals insured, p r e m i u m accounting and claim payments. O n the other hand, the use of group reinsurance involves some additional cost to the policyholder over that which would be incurred if all the business were retained by one insurer because of the additional work involved in operating the reinsurance agreement. O n a large case the additional cost is relatively insignificant, whereas for the smaller case it could be relatively large. As a result, the r a t h e r i n f r e q u e n t cases where g r o u p reinsurance has been used have been the large ones. A review of the a n n u a l reports of many insurers indicates that somewhere between 2 a n d 2i/ 2 P e r cent of all group accident a n d sickness business is reinsured. CLAIM

SETTLEMENT

Since there is very little a d j u s t m e n t involved in the payment of g r o u p claims, the words "claim settlement" are more appropriate than "claim a d j u s t m e n t " for characterizing the benefit payment process. By a n d large, the classes of people served by group insurance have very little savings to fall back on in times of emergency and p r o m p t claim settlement is essential if the insurance is to ac-

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INSURANCE

complish its purpose of tiding them over periods of disability. Hence, group accident and sickness claim settlement procedures are designed to get the benefit payments into the hands of the disabled as quickly and as easily as possible.

Proof of Claim G r o u p accident and sickness coverages, being very broad in nature and practically restriction-free, permit a very simple proof of claim. In the case of a claim for weekly indemnity loss of time benefits, only three simple statements are necessary: one from the policyholder that the claimant is away from work as the result of a nonoccupational disability, giving the date he last worked; one f r o m the attending physician that the claimant is u n a b l e to work, giving the cause and probable duration of the disability; and one of identification and description of disability from the claimant. I n the case of a claim for hospital, surgical or medical benefits, a statement from the policyholder will suffice when supported by an itemized bill for the services rendered on which is given the cause of disability. A hospital expense insurance claim form 1 has been designed by the Health Insurance Council to secure the advantages of simplicity and uniformity for both the hospitals and the insurance industry. It is in fairly general use. T h e form contains a statement by the employer identifying the covered individual and describing his coverage, a statement by the hospital as to the length of stay and charges made, and a form by which the covered individual may assign his benefits to the hospital. Hospital, surgical or medical benefits are frequently assigned directly to the party rendering the service, making it unnecessary for the patient to advance the full amount of the bill and to recover his insurance benefits subsequently. T h i s is particularly helpful in the case of hospitalization since hospitals usually req u i r e deposits at time of admission. In many areas hospital admission plans have been developed by the j o i n t efforts of the H e a l t h Insurance Council and the local participating hospitals, under which an assignment of insurance benefits may be taken in lieu of or as a credit against deposit requirements. 1 A copy of this form appears in Appendix L.

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Draft

As a result of the simplicity of proof of claim and the desire to get payments into the hands of the covered individuals promptly a n d when most needed, m a n y group cases are written where the policyholder handles the settlement of all but the unusual or difficult claims. T h i s procedure has the f u r t h e r advantage of developing a n d promoting better employee-employer relations since immediate economic aid to the employee creates good will a n d greater loyalty toward his employer. T h e proof of claim is submitted by the claimant to the policyholder who prepares a d r a f t on the insurer in conformity with instructions in a m a n u a l especially prepared for his use by the insurer. T h e claim file is forwarded to the insurer and is reviewed by him at the time the d r a f t is presented for payment. Difficult or unusual claims a n d claims u n d e r cases that are not on the policyholder d r a f t basis are given p r o m p t review and payment is m a d e by trained claim m e n in field offices or the home office. Prevention

of Abuse

A l t h o u g h g r o u p claim settlements are based on the assumption that 99 per cent of the people are honest, steps are taken to catch the occasional malingerer or illegitimate claimant. Follow-ups are made of individuals who do not r e t u r n to work within a reasonable time after the probable d u r a t i o n of disability given in the doctor's statement, and long-term disabilities are checked periodically as a matter of routine. A charge u n d e r hospital, surgical or medical coverage which appears out of line with the diagnosis is questioned. Occasionally, when there is something suspicious about a claim, the insurer will make use of the policy provision giving him the right to examine the claimant. In rare cases where f r a u d is suspected, a thorough investigation will be made of all circumstances s u r r o u n d i n g the claim. By these means, the policyholder's experience is guarded against abuse.

AN

UNDERWRITING

ORGANIZATION

Before closing, it may be of interest to describe briefly a n existing organization for g r o u p underwriting. T h i s organization,

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which underwrites group life insurance and group annuities as well as group accident and sickness insurance, includes men in the field, a home office department consisting of four divisions, underwriting, contract, research and annuity, and a selection committee operating at policy level which has actuarial, administrative, legal and sales as well as underwriting representation. Salaried home office representatives located throughout the country have underwriting as well as sales and service duties. A great deal of pre selection is done by these men with the aid of an extensive Group Manual and supplementary instructions, and much of the information for home office underwriting is secured by them. In the underwriting division, a home office underwriter reviews and acts upon every case, new or renewal. Even though many cases are processed routinely, others require considerable negotiation and study to develop coverages, benefit scales, and policy provisions which satisfy the policyholder and meet the insurer's requirements for sound administration and claim cost control. An experienced underwriter is assigned to underwrite, in all its phases, business in a designated geographical area. In this way he becomes thoroughly familiar with local conditions in his area and is able to give understanding, individual attention to each policyholder. T h e contract division prepares and issues insurance contracts and contract amendments, prepares application, certificate, endorsement and rider forms and commission agreements, and handles the filing and approval of all these forms with the separate state insurance departments. In the research division statistics, both intra-company and intercompany, are accumulated and studied; new forms of insurance are developed; industrial, economic, and sociological trends are followed; rates and rating procedures are prepared; and unusual problems of individual policyholders are studied for sound solution. •

•

•

Let me close by repeating a fantasy I used in talking with a group field organization something over a year ago which gives an intensely practical, if somewhat incomplete and slightly face-

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tious, picture of group underwriting. After reviewing the developm e n t of underwriting techniques which provide sufficient flexibility to meet the demands of industrial relations a n d changing social and economic conditions, and the effects of phenomenal growth, inflation and rising claim rates on underwriting efforts to keep claim and administrative costs within the assumptions used in rate determination, I said: "You know, an underwriter really is h u m a n . Sometimes after an evening of indulgence in—shall we say cheese sandwiches—he has a n i g h t m a r e . He finds himself out on a tightrope, stretched between the tops of two tall buildings, with only a pole for balance. From one direction strong winds of competition try to blow him off, o n t o the side of insolvency. From the other direction equally strong a n d equally practical gusts of financial responsibility try to blow him off, onto the side of no business. Continual crosswinds and up-drafts of relations with policyholders, agents a n d brokers add to the difficulty of his balancing act. More recently, as margins between gross p r e m i u m and net cost have narrowed, the balancing pole in the hands of the dreamer has become shorter. As business has grown and benefits have continued to e x p a n d , the buildings have grown taller and taller. At the same time, the winds have grown stronger. Fortunately, it is only a dream."

CHAPTER

XI

RATES AND RESERVES-PERSONAL COMMERCIAL AND NONCANCELLABLE CONTRACTS By J o h n H. Miller* T h e premium paid by the policyholder for insurance, generally referred to as the gross premium or the manual rate, comprises three elements: the pure premium, which is the anticipated cost of the benefit payments, a loading for expenses and taxes, and a margin for contingencies and profit. T h e generally accepted criteria for proper insurance premium rates are that they be adequate, reasonable and equitable. Premiums must be adequate in order that the solvency of the insurer be maintained and that its guarantees be valid. Competition has the effect of keeping premiums at a reasonable level. In the field of individual accident and sickness insurance, with more than five hundred companies engaged in the business, this is a very active force. Also, competition and the necessity for adequate rates require that rates be equitable among the various classifications of policyholders according to occupation, sex, and age. T H E PURE PREMIUM

T h e pure premium may best be described as the product of the claim frequency and the average claim value. T h e claim frequency or number of claims occurring during a year among a stated number of insureds is alternatively referred to as the claim rate or as the probability of occurrence of the insured contingency. However, the term "claim frequency," being commonly used and quite expressive, will be employed in this discussion. Where the benefit or indemnity payable upon occurrence of the event insured against is a fixed sum, as in life insurance or insurance against • Vice President and Actuary, Monarch Life Insurance Company.

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accidental death, the average claim value is the stated amount of insurance. However, in the case of most accident and sickness benefits, the amount of the claim is a variable depending upon the length of disability, the duration of hospital confinement, or the amount of expense incurred, as the case may be. 1 Method of

Computation

Unless the claim frequencies and average claim costs are substantially the same at all ages covered by the insurance, the pure premium should be computed on a one-year term basis for each age. As an illustration of the computation of pure premiums, if the probability or frequency of accidental death at a given age is one per 1000, and the benefit payable in this event is $5000, the one-year term pure premium for this benefit is the product of the two factors, or $5. In the case of a policy paying a weekly benefit of $25 during total disability of eight days or longer, the claim frequency would be the proportion of policyholders who suffer a disability of this duration each year, and the average claim value would be the present value of an annuity of $25 per week payable during the period that the claimant remains disabled. If, at a given age, twenty people out of every hundred insured suffer such a disability during the year, the claim frequency is .2. If the average period of disability, commencing with the eighth day and not extending beyond the limit covered by the policy, is four weeks, the average claim value would be the indemnity payable for four weeks, or $100, ignoring any discount for interest earnings. T h e annual one-year term pure premium would therefore be .2 times $100, or $20. In the calculation of yearly term pure premiums, interest may be disregarded unless the indemnity limit, that is, the maximum period for which disability indemnity will be paid, is fairly long. In some cases the pure premiums may be developed from an analysis of claim experience without a separate calculation of claim frequency and average claim value. For example, if the number of days of disability for which indemnity is payable is divided by the number of insureds exposed to risk, the direct result is the average number of days of compensable disability per insured, i In some lines of casualty insurance, it may be noted, the average claim value per unit of indemnity is referred to as the severity rate.

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which is the same t h i n g as the product of the claim frequency a n d the average n u m b e r of days of disability on each claim. However, the concept of a p u r e p r e m i u m as the product of the claim frequency a n d the average claim value is so generally applicable that it seems clearer to discuss the development of premiums in terms of these separate factors. Basic

Data

It is a p p a r e n t f r o m this that the calculation of one-year term p u r e premiums is a fairly simple matter if we have available suitable tables of claim frequencies a n d average claim values. T h e real p r o b l e m is e n c o u n t e r e d in determining or developing proper ass u m p t i o n s as to these two variables. In life insurance, the claim frequency is generally referred to as the rate of mortality, or the probability of d e a t h in any given year of age. Many sources of inf o r m a t i o n on mortality rates are available, including extensive data on p o p u l a t i o n mortality a n d on the mortality among insured lives. T h e c o m b i n e d experience of the principal life insurance companies in this country is analyzed in considerable detail a n d published a n n u a l l y . Similar data for accident and sickness insurance, however, are not available. T h i s is not because companies have been unwilling to cooperate in the compilation of experience data, b u t because there are such variations in the provisions of the policies, in the m e t h o d s of sale and underwriting, and in the risk characteristics of the insureds that it is difficult to find a g r o u p of companies whose data are properly comparable. A notable exception is the statistical plan of the Bureau of Accident a n d H e a l t h Underwriters which has in the past provided—and is again in the process of providing—a great deal of information on the experience of a n u m b e r of companies issuing similar policies. B u t most of the i n f o r m a t i o n currently available from this source relates to accident insurance, the sickness insurance transacted by these companies having been heretofore somewhat limited in volume. P o p u l a t i o n statistics have not provided a very useful source of data for accident a n d sickness rate-making purposes. In the first place, such morbidity data as have been collected by public agencies are limited to the incidence or frequency of a small n u m b e r of specific diseases, or to special studies conducted in limited

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areas. Secondly, any data obtained from the general population may be unsuitable for rate-making purposes in view of the absence both of antiselection by applicants and of the selection exercised by the insurers. T o the extent that selection by the insurer balances or outweighs antiselection by applicants, the experience among insured risks will deviate in one direction or the other from that among the general population. The Subjectivity

Factor

T h é basic problem of sickness insurance underwriting lies in the subjectivity inherent in disability and an individual's reaction to it. Sickness and disability are relative terms. It is often very difficult to determine the commencement or existence of disability; and recovery is generally a gradual process with no clearly identifiable point at which a person who has been ill again becomes well. If the individual has no source of income during disability, he will probably return to work just as soon as he possibly can, perhaps before his doctor would agree that he should. On the other hand, if he is adequately insured, he is unlikely to cut short the normal period of convalescence. And, if he is overinsured, so that his income from disability insurance is not substantially less than the net income or take-home pay that he is able to earn, he might endeavor to extend the convalescent period beyond that which a conservative physician would recommend. T h i s problem of subjectivity in sickness insurance has been expressed in the quip that to collect on life insurance the insured must be dead, to collect on accident insurance he must have had an accident, while to collect on sickness insurance he must have a policy. This, of course, is a gross overstatement, but it emphasizes the demonstrated fact that in sickness insurance the level of claim experience is not unrelated to the amount of benefit. Obviously, if sickness insurance could be bought by anyone at any time, people who have become sick or who have been told by their doctor that they need medical treatment would be ready buyers of policies. T o combat this type of antiselection, the companies writing sickness insurance must exercise very careful underwriting. T h i s process of underwriting or selection is sometimes criticized as being a method by which the companies insure only the most select risks. Actually, the purpose is to counteract the

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antiselection to which the companies are always naturally exposed, a n d to permit those who are not currently ill or in an impaired condition to obtain protection at a cost a p p r o p r i a t e to the normal risk. In g r o u p insurance, where antiselection is largely eliminated by the u n d e r w r i t i n g methods employed and the conditions of the insurance contract, individual selection has been satisfactorily eliminated. Field Force as a Factor A l t h o u g h the final selection of applicants for individual policies rests with the home office underwriter, he must make his selection from the business that is submitted to him by the company's agents a n d brokers. Accordingly, the process of selection includes the prospecting and solicitation carried on in the field by the producers as well as the functions of the home office underwriting department. T h e quality, training, and supervision of the field force have a great deal to do with the characteristics of a company's business. It follows, then, that in judging whether a particular experience table is a p p r o p r i a t e as a basis for c o m p u t i n g rates, consideration must be given to the selling methods a n d to the character of the field force to be employed. W h e r e the experience of another company or companies is used, every care should be taken to see that the underwriting standards, the effectiveness of the selection, a n d the source of business underlying the experience do not differ materially from those of the company for which the rates are being prepared. Third-Party

Interest

Factor

I n those forms of sickness insurance which provide reimbursem e n t to the insured for the cost of medical expense, there is, in addition to the considerable degree of control which the insured exercises as to the frequency and extent of claims u n d e r any form of sickness insurance, the effect of a third-party interest. W h e n an insurer agrees to pay for the cost of surgical operations according to an established fee schedule, or to pay a certain n u m b e r of dollars d u r i n g each day of hospital confinement, part of the control of the claim costs has, in effect, been placed in the hands of any doctors and hospitals that may be called upon in the f u t u r e to

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provide medical treatment to the insured. In some cases expenses are paid on the basis of blanket reimbursement u p to a specified limit, as u n d e r the miscellaneous hospital expense provision which generally pays all hospital charges other than room a n d board, u p to a specified limit, such as $200. U n d e r a blanket expense limit of this type, a f u r t h e r element of uncertainty is introduced since the claim cost will vary according to the price level, in addition to being responsive to other influences. Blanket expense provisions, except on a basis limited to comparatively low m a x i m u m amounts of reimbursement, or to expenses caused by accidental injury, have therefore not been offered in policies that are noncancellable and g u a r a n t e e d renewable at a stated p r e m i u m rate. Classification

of Risks

O n e of the criteria to which p r e m i u m rates should conform, as m e n t i o n e d earlier, is that they be equitable. T h i s requires that the applicants be classified according to the degree of risk involved. For example, a steeple jack obviously presents a greater risk t h a n a college professor, a n d a m a n in his fifties is more likely to experience a long illness than one in his thirties. Hence, it is proper for rates to reflect these variations in risk to the extent t h a t they can be measured. In life insurance, rates vary by age b u t are usually u n i f o r m according to sex a n d for most occupations. Only in the more hazardous occupations are extra premiums charged. In accident and sickness insurance, age is sometimes disregarded, within limits, a n d generally is a less i m p o r t a n t factor in the determination of the rate than sex or occupation. A m o n g the wide range of occupations accepted for life insurance at the same standard rate, there is considerable deviation in accident a n d sickness classifications and in the corresponding p r e m i u m rates. Originally these occupational classifications were t h o u g h t of only as taking into account the physical hazard of the i n d i v i d u a l occupation. W i t h advances in safety engineering in so many industries, the risk of occupational injury has, in most cases, decreased substantially. T h e r e still remains, however, a wide variation in the actual claim experience among different occupational groups. T h i s may largely be a reflection of the fact that there a r e

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INSURANCE

social, economic and environmental characteristics associated with most occupations which exert a strong influence on the health of the individual. In respect to sex, the experience under sickness insurance varies greatly. T h e extent of disability and hospitalization among women is usually found to be from 50 to 100 per cent greater, or even more, than that for men at the same age. In major medical expense insurance, the importance of the three-party relationship, involving the insurer, insured, and provider of medical care, is quite evident. Since the cost of medical care, particularly of physicians' services, tends to vary with the patient's income, the income level of the insured has come to be thought of as another factor in classifying risks and establishing rates for this type of benefit. Effect of Ignoring

Equity

T h e extent to which underwriting classifications should be refined has long been a subject of debate. In the days of assessment life insurance it was held by advocates of the assessment system that all people should pay the same rate regardless of age. In that experiment the practice of selling unequal values at the same price in a free market resulted in disaster to many associations. Today we sometimes hear the argument that health protection should be regarded as a form of social insurance and should, within broad limits, be sold to all people at a uniform premium rate. A little analysis, however, will show why risks must be classified and premium rates graded according to the measurable factors which influence the frequency and size of benefit payments. In a free competitive market, if one insurer uses an average rate for all risks while another varies the rate according to demonstrable differences in risk, the former will receive a disproportionate share of the insureds who represent the greatest risk, while the insurer who differentiates according to the degree of risk will be able to sell most of its business among prospects involving less than the average risk. T h e first insurer would therefore be forced by the pressure of competition and the necessity of self-preservation to adopt a system of classifications similar to that used by its competitor. Hence, just as a storekeeper must price his merchandise in relation to its cost if he is to stay in business, insurers must

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RESERVES

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adopt similar methods to maintain a reasonable relationship between premiums and the basic cost of protection. T h e uniform rate basis may be practical under monopolistic conditions, but even under these conditions there are limits to which it can be extended on a voluntary basis. If an average rate designed to cover all risks without classification is substantially above the value of the insurance to those individuals who present the least risk, this group may decide that the protection is not worth the cost, just as the younger people were reluctant to pay the high and increasing cost of assessment life insurance when that movement was approaching its day of reckoning. Level

Premiums

T h u s far I have described the methods and some of the problems involved in arriving at yearly term pure premiums. If it happens that these rates do not vary widely by age over the range of ages at which the insurance is to be issued or renewed, the average of these rates may be used as a uniform pure premium for all ages. If, however, these yearly term rates increase substantially with age, then one of three other methods may be followed. T h e benefits may be reduced at the higher ages so that the pure premium does not increase materially with advancing age, thus permitting the use of a flat rate. A second method is to use a flat rate payable up to a specified age, with a higher rate payable after attainment of that age. T h i s is often called the step-rate plan. T h e other method, which is often used for disability insurance, particularly when issued on a noncancellable basis, is to compute a level premium in essentially the same way that level premium life insurance premiums are computed. A single premium is obtained equal to the present value of the yearly term pure premium for each age involved, allowance being made for mortality and interest. T h e n , by dividing the single premium by an annuity payable during the life of the insured up to the limiting age of the policy, an annual level pure premium is obtained. LOADING

Having obtained the pure premium payable over the term of years for which the policy may be renewed, whether by averaging

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the yearly term premiums or by computing a level premium according to age at issue, the final step is to add a loading for expenses, taxes, and profits or contingencies. An important element of expense is the commission and other acquisition cost involved in selling and renewing the insurance. In the field of insurance a large number of policyholders is required to permit the sharing of the risk; and the development of new coverages to meet the changing economic problems of life requires a continual influx of new policyholders. T h e insurance agent, therefore, performs a service essential to our system of voluntary protection and should be remunerated at a level which will attract competent and conscientious individuals who can present and explain to the public the protection available against the economic hazards of sickness and injury, and who can advise them in the development of their programs for personal and family security. Acquisition

and Other Costs

T w o patterns of commission scales are found in this business. One is similar to that in life insurance where renewal commissions are comparatively low and the first year commission is much higher. T h e other is similar to the compensation arrangement in the fire and casualty business where the rate of commission paid in each renewal year is generally the same as in the first year. T h e argument for the first, or unlevel form of commission, is that the principal function of the agent is the sale of new business and that he should be compensated more for a new sale than for the renewal of a policy. On the other hand, the level scale of commission is said to minimize the transferring of business from company to company at the time of renewal. Whatever their relative virtues, it appears that more and more of the business is being sold on the unlevel, or life insurance, type of commission scale. T h e loading must also contain a provision for administrative expenses, including the cost of issuing policies, billing and collecting premiums, and paying claims. Provision must be made, of course, for the premium tax and for other taxes, licenses and fees required in the conduct of the business.

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The Persistency Factor A very important though perhaps not obvious element in the determination of the expense loading is the persistency of the business. Because of the expense of selecting and underwriting the business, issuing policies, and setting up records, the first year administrative expense is much heavier than the renewal expense. Also, if the commissions are on an unlevel basis, the first year acquisition expense is much greater than the renewal commission charge. Since the extra first year expenses must be spread over the years that the policies remain in force, the average expense rate will depend, to a considerable extent, on the persistency of the policies issued. Thus, with the same commission scales and the same expense of performing each function in the issuance and administration of business, two companies might have considerably different over-all expense rates simply because one experiences a much greater lapse rate than the other. Persistency is, then, a very important element in determining the premium rates or net cost of insurance. A reduction in the lapse rates will result in decreased average expense rates, making possible lower premiums to the public and at the same time increasing the earnings of the agents. Mention was made of the fact that the yearly cost of protection generally increases with advancing age of the insured. When the loading for expense is added, this increase with age may be largely or entirely offset over a considerable range of ages since it is usually found that, at the younger ages, the average size of policy is smaller and the lapse rates are higher, as compared with the more advanced ages. Both of these tendencies result in higher expenses per dollar of premium. Because of this higher expense rate at the younger ages, the use of a uniform manual rate may, in some cases, be fully justified despite the fact that the yearly term pure premiums increase with advancing age. Margin jor Profit and

Contingencies

Finally, the manual rate will contain a margin for profit and contingencies. Some margin is essential since there are so many elements in the determination of manual premiums—claim frequency, average claim value, lapse rates, expenses, interest earn-

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ings, investment profits and losses, and taxation—which are subject to variation in the f u t u r e . These margins in the premiums permit the a c c u m u l a t i o n of contingency reserves, which are necessary since the business is one that is subject to the effect of epidemics, catastrophes a n d the business cycle. T h e r e is a tendency for disability claims to be prolonged d u r i n g periods of unemploym e n t a n d therefore a company must be in a position to meet heavier than n o r m a l benefk payments d u r i n g times of depressed business a n d high u n e m p l o y m e n t . W h e n conditions become adverse, these contingency f u n d s may be drawn upon to meet benefit payments in excess of those anticipated in the premium structure, or to meet losses from investments or from other sources. After a d e q u a t e contingency reserves a n d surplus f u n d s have been accumulated, the stock company will be able to declare dividends to the investors w h o have contributed the risk capital that was needed to finance the development of the business a n d to g u a r a n t e e the fulfillment of the policies issued. A company issuing accident and sickness insurance on a participating basis will normally charge somewhat higher premiums t h a n those charged by the n o n p a r t i c i p a t i n g companies in order that, u n d e r n o r m a l conditions, a portion of the p r e m i u m may be r e t u r n e d to the policyholder as a dividend. Comparatively little individual accident a n d sickness business has been issued on a participating basis, b u t with the recent entry of a n u m b e r of m u t u a l life insurance companies into the field, there is a tendency toward the wider use of participating policy forms. If premiums are f o u n d to be e q u i t a b l e in the light of developed experience, dividends may be d e t e r m i n e d as a u n i f o r m percentage of the m a n u a l rates, or according to a scale of percentages graduated by policy d u r a t i o n . However, if analysis should indicate greater margins at some ages than others, or on certain policy forms, or in certain classifications, the dividends should be determined so as to restore equity, as far as practicable, among the various ages, policy forms, a n d classifications. T h e relation of the contingency margin to the total rate should d e p e n d on several considerations, including the nature of the risk assumed, a n d the right of the insurer to increase the p r e m i u m rate on renewal if it should be found to be inadequate. If the m a x i m u m p a y m e n t is small and the claim frequency is fairly

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195

high, a very narrow margin should be sufficient; but if the insurer may be called upon to pay a very substantial sum on the occurrence of a rather unlikely contingency, the premiums should contain a substantial contingency margin and the insurer should be entitled to a higher rate of profit than in the former case. In the first instance the experience may be expected to be highly stable, whereas in the second case extreme fluctuations are likely to occur.

RESERVES

Various types of reserves are required for accident and sickness insurance. T o assure the ability of the company to carry out its promises, these reserves must be adequate, and to permit a correct analysis of the trend of its earnings, they must be determined with reasonable accuracy. Policy

Reserves

T h e use of a level premium where the risk increases with advancing age implies that policy reserves will be maintained, as in life insurance. In the early policy years the pure premium portion of the rate collected will exceed the current benefit payments. Since, in the later years, the benefit cost will rise above the level pure premium, this excess during the early years should be accumulated, with interest at an assumed rate, to provide the fund known as the "policy reserve" or "active life disability reserve." In the case of noncancellable accident and sickness insurance, such a reserve is required by law. Where a level premium is charged on a policy that is not guaranteed renewable, it is the practice of some companies to carry a similar reserve even though not required by law. Other companies consider that a part of their surplus or general contingency reserves is available for the same purpose in place of a specifically designated reserve. Strictly from the viewpoint of solvency, such a reserve is not necessary since the insurer has the right to refuse renewal of the policies or to condition the renewal upon payment of an increased premium. Moreover, the necessity for such a reserve may be minimized or even obviated by the fact that expenses are generally lower in the renewal years than in the first year. As a result, some of the in-

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A C C I D E N T AND SICKNESS INSURANCE

crease in claim cost on account of advancing age is offset by a reduced expense rate. Another consideration is the equity in the unearned premium reserve, which is mentioned in the next paragraph. But, even though an active life policy reserve may not be needed to assure solvency, the maintenance of such a reserve, in addition to the unearned premium reserve, will permit a more accurate determination of the level and trend of the underwriting results. Unearned Premium

Reserves

All companies are required to maintain an unearned premium reserve representing the portion of the gross premiums paid corresponding to the unexpired terms of the policies. On an annual premium policy issued on July 1, the unearned premium at the end of the calendar year would be half of the full premium. Thus, on the assumption that the policy issue or renewal dates are distributed evenly throughout the year, it is customary to set up half of all premiums in force as an unearned premium reserve. T h e theory of this is, of course, that in the middle of the policy year only half of the protection purchased has been realized and therefore half of the premium should be on hand to cover future benefit payments for which the company may become liable. This reserve is somewhat redundant since most of the expense is either paid or accrued at the time the premium is received. Accordingly, the unearned premium reserve contains an inherent margin of safety which is continuously being released between premium dates on one policy but which is fully retained for the business as a whole so long as the total volume of premiums does not diminish. Loss Reserves Since the unearned premium reserve and noncancellable reserve are held only to provide for losses occurring within the term of the policy but beyond the statement or balance sheet date, additional reserves must be held for all illnesses or injuries which have had their inception on or before the statement date but for which full payment has not been made. Benefit payments on these cases are chargeable to the premiums already earned on or before the date on which the claim is incurred. These claim or loss re-

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serves fall into several categories. If a company has notice, as of the statement date, that a policyholder insured against accidental death has been killed in an accident, it must set up as a liability for an accrued loss in process of payment the amount of the death benefit. Similarly, if a company has notice that an insured has had a compensable period of disability of one week, there is an accrued liability in the amount of the indemnity for a week. However, if this insured is not known to have recovered, there is, in addition to the accrued liability for compensable disability to the date of the statement, a contingent liability for the probable benefits that will be payable with respect to disability continuing beyond the statement date. Unreported

Claim

Reserves

Since provision must be made for all sicknesses or injuries commencing or occurring on or before the statement date, reserves must also be set up for the losses which have occurred on or before but have not been reported until after that date. These reserves for unreported claims will include not only the estimated benefits accrued to the statement date on claims of which the company had not then been notified but also the contingent liability for disability or hospitalization occurring thereafter on claims that continue into the next year or statement period. It is obvious from their nature that these liabilities for contingent benefit payments cannot be determined in exact amount until long after the statement date. Nevertheless, by use of formulae, claim annuities and average claim costs, reasonably accurate determinations of reserves to cover these liabilities can be made within a short time after the date as of which a balance sheet is being prepared. Contingency

Reserves

In addition to these specific reserves, contingency reserves should be established or ample surplus funds maintained for a number of purposes. T h e r e is, for example, a distinctly seasonal variation in the occurrence of accident and sickness claims. Sickness claims generally are concentrated most heavily in the four months of January through April, while accident claims tend to be heavy in the summer months. Thus, unless allowance is made for seasonal variation, a statement covering the first eight or nine

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INSURANCE

months of the year might show an underwriting loss even though the results of the year as a whole are profitable. As has been mentioned, the level of disability losses is also very sensitive to business conditions, so that there is a cyclical variation. T h i s calls for the accumulation of surplus or contingency reserves during periods of prosperity or high employment to meet the increased payments that may be anticipated when unemployment rises. Reserves or surplus funds should also include an allowance for catastrophic losses as exemplified by such occurrences as the T e x a s City disaster and the Woodbridge, New Jersey railroad wreck. T o the extent that a company's business is concentrated geographically or in certain occupations, the need for reserves against catastrophes is increased. Another hazard which should influence a company in its policy with respect to the level of its reserves and surplus is that of epidemics. At the time of the influenza epidemic of 1918, there was comparatively little sickness insurance business in force so there is no adequate record of the effects of this particular epidemic, although 1918 was undoubtedly a critical period for the sickness insurance business as it was for the life insurance business. Since that time, influenza has struck rather heavily on a few occasions, resulting in substantially higher benefit payments for the year involved, but not to a critical extent. For companies writing the rather recently developed polio coverage, the epidemic problem is a very real hazard, since this disease, while not strictly localized, does strike individual communities, counties or states with particular severity. Companies writing this business in large volume should seek a very broad geographical distribution in order to avoid serious underwriting losses.

IMPORTANCE OF

REVIEWING

EXPERIENCE

However the premiums may have been developed, it is important both from the standpoint of assuring the safety and soundness of the company and equitable treatment of policyholders that a continuous check on the adequacy and equity of premiums be made. T h i s can generally be done by comparing premiums earned with losses incurred, or by comparing the actual experience with the basic assumptions underlying the manual rates.

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199

T h e company writing noncancellable accident and sickness insurance must be particularly on the alert for trends which may point to higher f u t u r e claim costs, since the p r e m i u m on a noncancellable policy cannot be increased. Ample policy reserves a n d contingency reserves must therefore be m a i n t a i n e d and prem i u m s adjusted u p w a r d on f u t u r e business if any indication of inadequacy is discovered. Although every effort is made to arrive at a rate which will be both a d e q u a t e and reasonable for each classification of risk, there is obviously no way to predict accurately the n u m b e r , character, d u r a t i o n or severity of illnesses or injuries, or the price level which will influence the expense of administration, or the interest rate which will d e t e r m i n e the earnings on invested funds. Past experience a n d current conditions should be studied carefully to provide an indication of the probable behavior of all of these variables in the f u t u r e , b u t obviously no analysis of the past, however complete, can produce an accurate forecast of the f u t u r e . Hence, the work of the actuary is not only to establish a suitable rate based on the most probable assumptions as to f u t u r e conditions, b u t also to m a i n t a i n a continuing comparison between the assumptions and the actual results, and to make changes or adjustments in the level of rates just as soon as it is indicated that the current rates are moving out of the rather narrow channel b o u n d e d on one side by reasonableness a n d on the other side by adequacy.

C H A P T E R XII

RATES AND RESERVES-GROUP CONTRACTS By

EDWARD M .

NEUMANN*

T h e principles, practices and problems involved in the making of rates and the setting up of reserves for group accident and sickness contracts are quite different from those for personal commercial and noncancellable contracts. Actually, they differ considerably for the various types of coverage included in the framework of the group definition. Some general remarks about rates, reserves, dividends and retrospective rating may help to bridge the gap between the personal and the group contracts. Following this general discussion, the main types of group insurance will be reviewed from the standpoint of variations in general principles. T h e popular forms of group coverage are as follows: Accidental Death and Dismemberment Accident and Sickness (Weekly Payment) Hospital Expense Surgical Expense Medical Expense—Total Disability or In-Hospital Medical Expense—Non-disabling or Comprehensive Major Medical Expense Poliomyelitis Expense T h e contract provisions and the selection and underwriting of various forms of group accident and sickness insurance have been explored in other chapters. There is no need, therefore, for a lengthy description of the benefits provided. However, for convenience of reference, a short summary of the usual benefits under these policies or riders is shown in the appendix. 1 • Second Vice President a n d Associate Actuary, T h e P r u d e n t i a l Insurance C o m p a n y of America. 1 See A p p e n d i x K. 200

R A T E S AND R E S E R V E S PREMIUM

201

RATES

T h e principles of gross premium rates for both participating and nonparticipating group contracts are somewhat similar to those for participating ordinary life insurance, in that they usually contain margins to allow for the poorer classes of risks (at least they did until the upsurge in claim experience and exjjenses during the past year or so). T h e redundancy in premium can be passed back to policyholders having average or better than average financial experience, in the form of dividends under participating contracts and retroactive refunds of premium under nonparticipating contracts. In addition, the stock companies reflect good experience by allowing advance rate credits to reduce renewal premiums under nonparticipating contracts. T o a somewhat lesser extent mutual companies also reduce renewal premium rates. T h e r e was a day when considerable uniformity prevailed in gross premium rates, and the strong competition centered around net costs, benefits and administrative practices. Nowadays, however, with the possible exception of the accidental death and dismemberment coverage, which has fallen into a rather stereotyped mold, every company seems to develop a different pattern of rate schedules. Competition is really fierce, involving as it does pitched battles on the subject of gross premiums as well as the true net costs, which are gross premiums less dividends or rate credits and refunds. Since the net cost and not the gross premium is the final measure of the cost of insurance, it is customary for a company's manual of rates to vary only in broad classes reflecting the most important factors which affect morbidity and expense experience. Furthermore, from the viewpoint of need for nondiscrimination and convenience of administration, it is desirable to have the manual of rates apply uniformly throughout the United States and Canada, although some special charges for extra morbidity may be made for local conditions. T h e companies are required to file their rate manuals with a number of state insurance departments, and this adds further weight to the argument for a uniform manual. How the rate structure takes into account the various factors and how

202

ACCIDENT

AND

SICKNESS

INSURANCE

the gross premiums develop into the net cost picture will be discussed later. RESERVES

T h e setting u p of reserves can be considered from two angles: (1) Annual statement requirements and special reserves approved for individual company needs, and (2) dividend or experience rating formula provisions. T h e two may correspond in general, adjusting for the difference between calendar and policy year accounting, but more detailed and specific treatment is provided for u n d e r the formula provisions to allow for varying conditions u n d e r policies or classes of policies. T h e more general reserve picture for the a n n u a l statement will be discussed first, while noteworthy specific reserve items for dividend or experience rating formulae will be mentioned later under the individual types of coverage. T h e a n n u a l statements required of life insurance companies differ quite considerably from those required of fire and casualty companies, although the same types of accident and sickness insurance are transacted by life and casualty companies. T h e two statement blanks developed along different lines to allow for the great diversity of insurances issued and the varied impact of the Federal income tax. However, on the whole the two statement blanks lead to the same aggregate reserves and other liabilities. In the life blank, the aggregate reserve for group accident and sickness policies is determined as follows: Unearned. Premium

Reserve

T h i s reserve is made u p of about four parts. Usually, the principal item is the p r o rata part, from the December 31 of the year of account to the next premium d u e date, of the premiums in force on policies r u n n i n g one year or less. T h e theory, of course, is to reserve the proper portion of the premiums which have been collected or are d u e and unpaid for the current premium period to take care of claims, expenses and other charges which will arise prior to the next premium due date. 2 2 T h e proportion can be determined in several different ways: (1) true unearned, (2) assumption of even daily distribution throughout the calendar year, or (S) assumption of even daily distribution t h r o u g h o u t the month. T h e true unearned p r e m i u m method takes into account the exact number of days

R A T E S A N D RESERVES

203

A n o t h e r statement item concerns the very few g r o u p policies which r u n for more t h a n one year, principally to set the renewal date to coincide with other fiscal anniversaries. T h e unearned p r e m i u m reserve for such policies is generally obtained by an exact inventory (e.g. 9 / 1 6 of the 16 m o n t h s p r e m i u m paid for a policy issued on J u n e 1 a n d renewing on October 1 of the following year). A third item involves the premiums paid in advance of their d u e dates in the following year, for which the u n e a r n e d p r e m i u m reserve is set u p at 100 per cent of the premiums paid. T h e final item u n d e r this unearned p r e m i u m reserve is the reserve for rate credits a n d retrospective returns. T h i s usually represents the earned portion of retroactive r e f u n d s accrued from the last anniversary to the December 31 of the year of account, as determined by experience rating formulae u n d e r n o n p a r t i c i p a t i n g contracts. However, it may also include a reserve for prospective rate credits projected to the next policy anniversary. These reserves are generally obtained by seriatim a p p r o x i m a t e calculations for the larger g r o u p cases a n d an over-all calculation for the smaller cases, taking into account the current year's claim experience since renewal and the effect of experience rating formula factors as determined from special tests. Present Value of Amounts

Not Yet Due on Claims

T h i s is truly a reserve and as such is separated from other claim to the next premium due date (e.g. 10/31 of a monthly p r e m i u m if the next due date is January II. 73/365 of an annual premium if the next due date is March 15). T h i s method, which is used by most of the large companies, can be applied by means of an inventory, but even with p u n c h card installations this is exceedingly expensive. Consequently, a p p r o x i m a t e calculations of the average n u m b e r of days to go are m a d e for monthly p r e m i u m policies, which constitute the vast majority of all groups. A seriatim or a p p r o x i m a t e valuation method can be adopted for quarterly, semiannual a n d a n n u a l p r e m i u m policies depending u p o n the q u a n t i t y of cases involved. T h e second method which assumes an even distribution throughout the year produces an unearned p r e m i u m reserve of 50 per cent of the premiums in force; i.e., one-half month's p r e m i u m on monthly p r e m i u m cases, one-eighth year's on quarterly, one-quarter year's on semiannual a n d one-half year's on a n n u a l . T h i s is the easiest method, but if there is any volume of business other t h a n monthly premium, the reserves are a p t to be inaccurate due to a skewness in distribution. T h e third method compensates by allocating a n n u a l , semiannual and quarterly cases to the proper d u e month of the year. T h e y are then valued as falling d u e in the middle of the m o n t h (e.g. 11/24 on J u n e a n n u a l p r e m i u m cases), and monthly p r e m i u m cases are reserved for at 50 per cent.

204

A C C I D E N T A N D SICKNESS I N S U R A N C E

items which make up the policy claim liability for statement purposes. It represents the present value of weekly indemnity, hospital, medical, poliomyelitis expense, etc. payments which will fall due after the year of account on approved claims, claims in course of settlement and incurred and unreported claims. T h e present value must be estimated from past experience, and a common way of obtaining the item is as follows: First, the total claim liabilities including this reserve are obtained by determining the ratio of the payments charged during the current year on claims which began in prior years to the claim payments made during the last quarter of the previous year, and then applying the ratio to the claim payments made during the last quarter of the current year. T h e totals are adjusted to allow for such items as claims paid but not yet on the company's books and the extended liability on California Unemployment Compensation Disability policies. Further adjustments might be necessary in the event of an epidemic or other unusual morbidity outlook, and in any event to introduce an element of conservatism. Past years' experience as revealed by the preparation of Schedule O, which is a reconciliation of accident and sickness claim liabilities, is also a valuable guide. T h e separation of these total liabilities into the present value of amounts not yet due and the policy claim liability items is estimated from previous years' experience as determined from special studies and in the course of the preparation of Schedule O. Reserve for Future Contingent Other Similar Benefits)

Benefits (Deferred

Maternity

and

T h i s must be carried for any policy providing for an extension of benefits after termination of the employee's insurance due to cessation of active employment or to termination of the group policy. T h e greatest amount of reserve by far is required for the customary extension of maternity and obstetrical benefits to cover confinement of a female employee or the dependent wife of a male employee during the nine months after termination of the employee's insurance. One method of calculating this reserve is to obtain each year a reconciliation of maternity or obstetrical claims which had incurred dates during the first nine months of the current year. T h e

RATES AND RESERVES

205

incurred dates are defined as the dates of entry into the hospital and as the dates on which the obstetrical procedures were performed. This reconciliation is related to a total benefit in-force which approximates the average for the last nine months of the previous year, during which conception presumably occurred. T h e approximation is three-fourths of the J u n e 30 "in-force," plus one-fourth of the December 31 "in-force." This average of reconciliation of claims to "in-force" is then applied to the corresponding approximate "in-force" during the last nine months of the current year. In practice, the ratio is derived from the experience of the last three years to minimize fluctuations which are bound to occur in a liability which is a function of the birth rate. T h e calculation is made separately for the four coverages of employees' and dependents' hospital and surgical expense insurance. T h e regular extension liabilities are obtained in a similar manner by keeping a reconciliation of non-maternity and non-obstetrical employee claims occurring during the first three months of the current year where the employee was first unable to work during the previous year. T h e reconciliations are then ratioed to the "inforce" at the end of the previous year, and the liability is calculated by applying the ratio to the current year-end's "in-force." Since it is impossible to obtain a similar criterion of "date first unable to work" for dependents, the same ratio is used as for the employee liability. This is applied to the "in-force" at the current year-end of employees insured with respect to dependents. Since the average number of dependents for each employee insured with respect to dependents is 2.2, the final liability is obtained by multiplying the previous figure by 2.2. These extension reserves are set up on the assumption that all insurance under policies containing such benefits is terminating on the annual statement date; they are not limited to only the expected payments to be made in the following year on the actual terminations of insurance.

Reinsurance Both assumed and ceded reinsurance are included in determining the gross liability. T h e individual reserve items are calculated for reinsurance ceded in a manner consistent with the foregoing description of reserve calculations, and they are deducted to ob-

206

A C C I D E N T A N D SICKNESS I N S U R A N C E

tain the aggregate net reserve set forth on the liability p;ige of the statement. Special

Reserves

From time to time it is necessary to set u p reserves to take care of unusual or hazardous conditions. O n e example would be the "Pool" and "Policy" reserves held d u r i n g and following W o r l d W a r II in accordance with the W a r Department G r o u p Insurance R a t i n g Plan for g r o u p insurance on employees involved in costplus-a-fixed-fee government war contracts. O t h e r examples are the liabilities required for the New York disability benefit law assessments against the insurance carriers. O n e is called the reserve for assessment for administration expense, the other the liability for the assessment for the sick unemployed. Both are prescribed by the state on the basis of the total taxable payrolls of the groups insured by the particular carrier. T h e reserve for the expense assessment is the estimated a m o u n t to be paid to the state for its current fiscal year ending on the following March 31. O n the other hand, the liability for the sick unemployed is more of a true reserve item. In addition to the estimated assessment for the current fiscal year, each carrier is required to accumulate f u n d s d u r i n g these years of full employment to build a bulwark against economic catastrophes which may arise in the f u t u r e turn of the economic cycle. O n the theory that these assessments are levied u n d e r the taxing power of the state, they can be paid out as taxes, and the reserves for the assessments held in the item "Taxes, Licenses and Fees Due or Accrued." Contingency

Reserves

T h e s e are purely voluntary reserves which may be held as a separate item u n d e r "Special Surplus Funds" in the a n n u a l statement, or which may be included without allocation in unassigned surplus. Such reserve or surplus f u n d s are built u p to enable the company to meet marked unfavorable increases in its over-all claim experience which might arise as a result of serious epidemics a n d catastrophes, good examples of which are the influenza epidemic of W o r l d War I a n d the Texas City disaster of several years ago. Although several states, either by law. Commissioner's ruling or

R A T E S AND

RESERVES

207

voluntary agreement with the I n s u r a n c e Commissioner, req u i r e the a c c u m u l a t i o n by specific f o r m u l a of contingency reserves for group life insurance, only o n e state, Missouri, requires a similar reserve for g r o u p accident and sickness insurance. T h e f o r m u l a stipulated as a m i n i m u m is to set aside 2 per cent of net p r e m i u m s each year but not more in any year t h a n 10 per cent of the a m o u n t necessary to reach the u l t i m a t e goal, which is 50 per cent of net premiums.

DIVIDENDS

AND

RETROSPECTIVE

RATING

As m e n t i o n e d in the section on p r e m i u m rates, there a r e usually margins in the gross p r e m i u m s available for return in the form of dividends or rate credits to groups having average or better than average financial e x p e r i e n c e . T h e company must first d e t e r m i n e the aggregate a m o u n t of r e d u n d a n c y for all of its g r o u p accident and sickness business. T h e n it is necessary to establish f o r m u l a e and rules by means of which the total divisible surplus can be allocated to the individual groups. In d e t e r m i n i n g how m u c h of the total redundancy shall be divisible surplus, the company must exercise its best j u d g m e n t on such items as the a m o u n t of funds to be set aside for contingency reserves, u n f a v o r a b l e claim trends, unassigned surplus and, in the case of stock companies, stockholders' dividends. T h e r e are substantial variations in the details a n d in some of the principles of the formulae established by the companies for dividends and retroactive refunds. Actually, the f o r m u l a e are closely guarded secrets, whereas the gross p r e m i u m rates themselves are available in rate m a n u a l s on file with state insurance d e p a r t m e n t s or in brokerage or sales offices. However, the general principles of the f o r m u l a e for b o t h m u t u a l a n d stock companies a r e r a t h e r similar and will be o u t l i n e d in the following discussion. T h e f o r m u l a e are of two distinct types—tabular or asset share; both m i g h t be used for different segments of the business of the same company. T h e t a b u l a r a p p r o a c h is usually applied to the smaller cases where less credence can be given to the e x p e r i e n c e of the individual case. F u r t h e r m o r e , there is apt to be m u c h less redundancy, or none at all, in the p r e m i u m s charged for smaller

208

A C C I D E N T AND SICKNESS INSURANCE

groups; thus, a simplified formula is all that is warranted. T h i s might consist of a simple set of tables showing the refund percentages of premium, which percentages vary by a limited number of factors such as size of premium and claim rate, or even by duration. An asset share fund is maintained for all policies coming under this mode of distribution, and changes in factors can be made from time to time as experience dictates. T h e asset share type of formula, applicable to the larger cases, is much more elaborate. A record of income and outgo items must be maintained for each case. T h e income items consist of premiums and interest; the outgo of charges for incurred claims, taxes, commissions, administrative expenses and sales and installation costs. Some of the items such as premiums and the cash claims part of the claim charge are inventoried, while the others are derived by actuarial analysis or cost allocation. A running check should be kept on the component parts of the formula so that the aggregates correspond rather closely to the company totals for this class of the business. T h e current year's earnings of the particular group are obtained by striking a balance between income and outgo. Of course, not all of the current year's earnings or the accumulation from past years can be disbursed in the form of refunds. Provision must be made for the group's contribution to the company's contingency reserves or unassigned surplus funds for the future protection of the business. Greater charges for contingencies must be made against certain groups employed in hazardous occupations. This is of primary importance on 24-hour coverage for accidental death and dismemberment. A deduction from earnings must also be made for any special reserves, such as were discussed in the section on reserves. T h e next element to be provided for is the assessment of losses arising from other cases which have developed unfavorable experience. Such losses should be deducted by means of a credibility factor from the earnings of cases with favorable experience, either directly in the form of a risk sharing charge or indirectly as a variable increased contingency charge. T h e refund can then be calculated on an accumulative basis, or perhaps more scientifically by following through the preceding processes for the current year and then adjusting on a formula basis to allow for previous years' surpluses or deficits. This latter

RATES

A N D

209

RESERVES

past experience factor method has the advantage of permitting an orderly progression between succeeding years' formulae when sights are changed. Many details are involved in the determination of the various income and outgo items and of the charges for risk sharing and contingency reserves. However, time will permit comment on only two important aspects. T h e incurred claim charge may be determined as a weighted average charge or as the actual claims under the particular case. T h e weighted average is calculated from the actual claims of the case and the expected claim rate under all cases, with the weighting being derived from a credibility factor. U n d e r this system a refund may be paid on a case, particularly if it is a smaller one, even though its actual claim experience is not favorable. T h e use of actual claim charges is more satisfactory, however, as it results in the r e f u n d of the redundancy in p r e m i u m to the cases which have had favorable experience and thus have contributed to it. T h e other aspect has to do with sales and installation expense charges. These expenses are generally of such magnitude that it is not practicable to charge them off in the first year. They are usually amortized over a period of years with allowance for interest and lapses. Mention should be made in passing of prospective rate credits or re-ratings. Both stock and mutual companies may adjust prem i u m rates for renewal in the light of past experience. Such adjustments, either u p or down, should be determined on experience rating principles. In the case of some stock companies, the prospective credit is inherently linked u p with the calculation of the retroactive r e f u n d . T h e total of the two may be calculated together with one-half applied as a refund and the other half as a prospective credit. So much for the general discussion of rates, reserves and experience rating. Let us turn now to the individual types of coverage with their special problems on rate making and reserves. R A T E S AND R E S E R V E S — S P E C I F I C

Accidental

Death and

LINES

Dismemberment

Competition has tended to mold for accidental death and dismemberment coverage a pattern of uniform rates per thousand

210

A C C I D E N T A N D SICKNESS I N S U R A N C E

dollars of d e a t h benefits. Variations a m o n g companies take the f o r m of different classifications of industries for each of the rate brackets, which are generally as follows:

N o n o c c u p a t i o n a l Coverage 24-Hour Coverage—Industry 24-Hour Coverage—Industry 24-Hour Coverage—Industry 24-Hour Coverage—Industry

Class Class Class Class

A— B— C— D—

Monthly P r e m i u m s per $1,000 $.09 .10 .15 .20 .30 or more (Consult H o m e Office)

Companies review their classifications of industries periodically a n d particularly when they find some other company has changed its classification. O n e of the handiest guides is the a n n u a l report of the G r o u p Mortality Committee of the Society of Actuaries. T h i s shows the d e a t h rate, with accidental death rate tabulated separately, for all of the coded industry classifications. Of course, this report does not give any data on dismemberments, but claim payments on t h a t account are only a b o u t 6 per cent of total accidental d e a t h a n d dismemberment claims. Naturally, the dismemb e r m e n t claim rate varies considerably with industry, and the experience of the company should be reviewed from time to time for both dismemberments a n d deaths to keep tabs on underwriting policy a n d financial results. Special reserve problems may arise from insuring relatively unk n o w n or hazardous risks. For instance, the usual standard aviation provision in these contracts pays full benefits for accidents while riding as a passenger on a regularly scheduled passenger flight of a commercial aircraft. Subject to some underwriting, this provision has been broadened so as to cover a passenger on any kind of a flight provided he has no duties whatsoever aboard the aircraft. Let us take the case of a policyholder whose business requires the employees to do a considerable amount of flying, singly or in groups, in company planes and also in chartered aircraft. T h e extra hazard is somewhat u n k n o w n , but here it would be customary to charge an extra p r e m i u m for the broader accidental death a n d dismemberment coverage. Sound actuarial practice would require accumulating specific reserves d u r i n g good claim years to an a m o u n t sufficient to meet, perhaps, two years

R A T E S A N D RESERVES

211

anticipated claims. T h e reserves can then be drawn upon d u r i n g bad claim years or to meet increased loss sharing charges for heavy losses on other similar groups. Accident

and Sickness (Weekly

Payment)

It is customary for the manual of rates for weekly indemnity insurance to provide rate tables for the variety of benefit plans issued by the company, such as different waiting periods before benefits commence, different durations of benefits, nonoccupational or 24-hour coverage, and inclusion or exclusion of maternity benefits. In addition, for each of the benefit plans, the factors which are commonly reflected in separate rates or ratings are the female composition of the group, the industry classification (only a relatively few classifications are sufficiently worse than average to require substantial ratings), and the relative proportion of insurance on individuals in the group at the higher ages (rating u p is not usually required unless there is a really significant volume of coverage at ages over 60 or 70). T h e size of the p r e m i u m is the most important factor from the standpoint of anticipated expense experience, but the type of administration, such as whether the plan is noncontributory, may also be reflected in separate rates or ratings. In addition to the factors cited above, which affect the experience of groups in general sufficiently to require separate rate classes, many other factors come into play on individual groups. Some of these are the marital status of female employees, the general economic and health characteristics of the group insured, the status of the labor market in the area and the personnel practices of management. It would be impossible to evaluate all such factors, as well as to anticipate accidental fluctuations, and to apply them to the derivation of a manual of rates. Usually, this is a function of renewal re-rating unless the prior experience of the individual group is known, or the general characteristics of the group, such as location in a poor morbidity area, require special rating at issue. T h e first step in establishing manual rates is to derive premiums for the main bulk of industry classifications which considered standard. Some of the rate schedules extant were rived from an inter-company experience study reported

net are deby

212

A C C I D E N T A N D SICKNESS

INSURANCE

Gilbert W . Fitzhugh in a paper entitled " R e c e n t Morbidity upon Lives Insured under Group Accident and Sickness Policies and Premiums Based T h e r e o n . " 3 T h a t experience produced male and female claim costs for four principal group accident and sickness plans. Mr. Fitzhugh constructed a composite basic morbidity continuation table from the male claim costs of these four plans supplemented at the longer durations by reference to existing morbidity tables. T h i s continuation table enabled the male claim cost to be obtained simply for any combination of waiting period and duration of benefit. By analogy to the loading method promulgated by the New York Superintendent of Insurance for group life insurance, Mr. Fitzhugh loaded the monthly net premiums per $10 of weekly indemnity by 15 per cent plus 18 cents to obtain the gross monthly premiums which were used as the basic rates for groups under which the benefits on female lives comprised less than 11 per cent of the total. T h e female claim costs for the four plans of insurance (all of which limited maternity benefits to six weeks) averaged twice the male costs, and this was reflected in the loading for female lives. For example, if the benefits on females were between 11 and 21 per cent of the total, the rate would be 115 per cent of the male rate, and if between 31 and 41 per cent, it would be 135 per cent thereof. At the close of World W a r II, the Society of Actuaries established a committee to study the group morbidity experience. T h e committee has produced a series of annual reports which show claim costs for the principal plans of insurance for the various percentage groupings of benefits on female lives. T h e groupings were required because the companies generally no longer maintained exposures for males and females separately. Morton Miller analyzed this intercompany experience in his paper entitled " G r o u p Weekly Indemnity Continuation T a b l e Study." 4 He derived a basic morbidity table by graduating the crude male claim costs estimated from the raw data of eleven different plans of insurance. Also shown are the variation of claim cost by sex, average duration of benefits by age, the relationship between acci3 Published in 1937 in the Transactions Volume 38. * Published in 1951 in the Transactions III.

of the Actuarial of the Society

Society

of

America,

of Actuaries,

Volume

R A T E S AND RESERVES

213

dent and sickness claims, annual claim frequencies and other information. In the discussion of the paper, several other interpretations and graduations of the data and supplementary experience were given which are helpful in reviewing the entire picture. In approaching the subject of deriving gross premium rates from net claim costs, we must keep in mind that inter-company claim experience is not necessarily directly suitable for rate making. Inter-company reports always pertain to a prior period of experience and hence should be projected for any significant trends. Furthermore, the type of groups insured, claim practices, underwriting, etc. may make it necessary to adjust inter-company experience to the level expected by the individual company. T h e loading to convert net claim costs to gross premiums serves two major purposes. T h e first is to provide a margin for unfavorable claim experience, that is, worse than average claims on some groups, and for contingency reserves. As mentioned before, average premium rates will not be adequate for all groups because of the many factors and accidental fluctuations that affect their experience. T h e other purpose is to provide for commissions, taxes and other operating expenses of the insuring company. Since the usual commission scale is graduated downward by size of premium and since some other expenses do not vary proportionately with the size of the group, it is obvious that the same loading would not be necessary for all sizes of cases. It is common practice to allow for this situation by establishing the scale of gross premiums for the smaller size groups and then incorporating into the manual of rates a scale of premium volume discounts. T h e scale of discounts increases with increase in total premium of the group case for all business which is combined for commission and experience rating purposes up to a maximum, usually of 15 per cent for a volume of $300,000 annual premium or more. There has been some tendency recently to discard the traditional double loading for females which has applied to all plans of insurance including maternity benefits. T h e newer and more accurate concept is to load the basic male premiums for female maternity and non-maternity benefits separately, depending upon the experience for the different plans. This method first produces the non-maternity benefit rates for the various brackets of percentages of weekly indemnity on female lives, by a weighted

214

A C C I D E N T A N D SICKNESS I N S U R A N C E

averaging of the a p p r o p r i a t e male and female costs by plan. T h e m e t h o d then recognizes the fact that the maternity benefit is usually for the same period, six weeks, a n d is i n d e p e n d e n t of the waiting period or m a x i m u m n u m b e r of weeks of the non-maternity benefits. T o obtain the tables of rates, an addition is m a d e to the non-maternity rates which varies by percentage bracket b u t is constant by plan. 5 As mentioned earlier, a p p r o p r i a t e ratings or loadings must be developed for substandard industries. T h e s e loadings are r e q u i r e d even though the coverage is nonoccupational. T h e higher morbidity rate in some cases is caused by the fact that the working processes tend to predispose the employees to certain diseases which have not been recognized as compensable u n d e r workmen's compensation acts; in other cases, it is merely the calibre of the working force. T h e Fitzhugh paper analyzed the experience in various industries and more recently, the 1951 report of the G r o u p Mortality and Morbidity Committee of the Society of Actuaries also contained an industry analysis. Such experience, supplem e n t e d by the underwriting experience of the individual comp a n y can be used to determine the proper classifications a n d the loadings which are generally applied to the basic male rates. Quite independent of these loadings are those required in the event that 24-hour coverage is afforded. T h i s coverage is generally offered only if the nature of the business is such that the employees do not qualify for workmen's compensation insurance, or in the rare case that benefits are written to supplement work5 For instance, a c o m p a n y m a y d e t e r m i n e f r o m its e x p e r i e n c e a n d also i n t e r - c o m p a n y d a t a t h a t t h e gross p r e m i u m for a f e m a l e s h o u l d be 165 p e r c e n t of t h a t for a m a l e on 13-week p l a n s w i t h o u t m a t e r n i t y benefits b u t only 140 p e r cent o n 26-week plans. For t h e first b r a c k e t of i n d e m n i t y on f e m a l e lives, i.e.. less t h a n 11 p e r cent, t h e w e i g h t e d average r a t i o t o m a l e cost ( a s s u m i n g 5 p e r cent female) is .95 -(- (-05 X 1.65) or 1.0325 for 13 week plans, a n d similarly 1.02 for 26-week plans. I n c i d e n t a l l y , a l o a d i n g in t h e first b r a c k e t is a n i n n o v a t i o n a m p l y justified by e x p e r i e n c e , b u t u n t i l recently it was cust o m a r y to use t h e m a l e p r e m i u m rates directly. Similarly, in t h e second b r a c k e t , 11-21 p e r cent, w h e r e t h e e x p o s u r e has b e e n f o u n d to average 15 p e r c e n t , t h e w e i g h t e d average l o a d i n g is .85 -f- (.15 X 1-65) or 1.0975 for 13-week p l a n s a n d 1.06 f o r 26-week plans. T h e s a m e type of o p e r a t i o n can be used t h r o u g h o u t , i n c l u d i n g t h e a s s u m p t i o n of 95 p e r cent f e m a l e in t h e 91-100 p e r c e n t b r a c k e t . T h e p r e m i u m r a t e f o r t h e m a t e r n i t y benefit is d e t e r m i n e d by e x p e r i e n c e as for an all f e m a l e g r o u p , a n d t h e t a b l e of r a t e s i n c l u d i n g m a t e r n i t y benefits is o b t a i n e d by a d d i n g to t h e n o n - m a t e r n i t y rates f o r all p l a n s of i n s u r a n c e .05 of t h e m a t e r n i t y benefit p r e m i u m in t h e less t h a n 11 p e r cent b r a c k e t , .15 of t h e p r e m i u m in t h e 11-21 p e r cent bracket, etc.

R A T E S AND

RESERVES

215

men's compensation benefits. W e do not have a great many data to guide us, but an empirical solution has been to apply the following loadings to the basic male rate, regardless of female composition, according to the industry classification for accidental death and dismemberment insurance: Industry Class A— 6 % Industry Class B - 2 0 % Industry Class C - 4 0 % Industry Class D — 7 0 % or more (Consult Home Office)

Although group accident and sickness premium rates are generally independent of age, it is well known that there is an increased claim frequency, as well as claim duration, among older persons. It is difficult to derive appropriate loadings for higher age groups, and in fact so difficult that some companies do not use them. However, Mr. Fitzhugh's paper does give a basis in presenting the claim costs for various attained age groups, and Mr. Miller's paper shows the average duration of claims by age groups. Both studies indicate there is a significant increase in the cost of disability benefits at age 50 and above. One method of loading is to assume that the percentage of weekly indemnity on the lives of employees aged 60 and over is a measure of the exposure at the critical higher ages: Percentage of Weekly Indemnity Over Age 60 Less than 1 0 % 1 0 % but less than 1 5 % 1 5 % but less than 2 0 % 2 0 % but less than 2 5 % More than 2 5 %

Percentage Loading on Basic Rates None

M i n i m u m loading 3 0 %

T h e group policies issued in conformity with the legal provisions of the cash sickness states—California, New Jersey and New York—have premium rate schedules which are basically the same as other group accident and sickness policies. However, it is necessary to include in the premium rates for New York " D . B . L . " plans a loading to cover the reserves for assessments for sick-unemployed benefits. Assessments for state administration expenses can be taken care of by a special loading or in the general loading, as

216

A C C I D E N T AND SICKNESS

INSURANCE

is usually true for C a l i f o r n i a " U . C . D . " and New Jersey " T . D . B . " plans. As an e x a m p l e of special reserves in this section, the dividend or experience rating formula should call for an accumulation of a reserve for cash sickness plans based on a historical wage formula when the premiums are charged as a percentage of current wage. T h i s would guard against the possibility of premiums declining m o r e rapidly than the benefits provided currently. Hospital

and Surgical

Expense

M a n u a l rates for group hospital and surgical expense insurance, just as for group accident and sickness insurance, cannot geared initially to the experience to be expected under

be any

particular group of insured lives. Initial premium rates for employee hospital expense insurance vary by female composition of the group, the industry classification (here again, only a relatively few classifications have sufficiently worse than average experience to make it necessary to rate them substandard), and the relative proportion of insurance on individuals at the higher ages. T h e initial p r e m i u m rates for employee surgical expense insurance usually depend only on female composition and on the relative proportion of insurance on individuals at the higher ages. I n the case of dependent hospital and surgical expense insurance, there are no female, industry or age loadings. T h e rates usually vary only by the dependency status of the employees according to one of the following bases: 1. Three Rate Basis: a) Child (ren) only b) Wife only c) Wife and child (ren) 2. Two Rate Basis: a) One dependent b) More than one dependent Normally, the distribution of employees at issue is used to determine a composite rate to be charged for all employees with dependents. T h i s rate is then recalculated at renewal or as experience dictates. Sometimes a single rate basis is used which is not dependent on the actual distribution of the employees in-

RATES AND RESERVES

217

sured with respect to dependents. Care must be taken to guard against antiselection in the choice of the premium rate basis. From the standpoint of anticipated expense, the same factors are involved as were outlined in the accident and sickness section. Additional factors such as marital status, geographical location which reflects variations in the costs of living, the way in which the community and its medical practitioners organize their health facilities, as well as the general attitude of the insured individuals, employers and physicians towards the use of hospitals and medical facilities, all affect the morbidity experience of individual groups. Here again, the net effect of all these factors will become apparent as experience develops under any particular insured group. Hence, it is necessary to re-rate renewal premiums to reflect the emerging experience to the extent that it can be considered significant and not due to accidental fluctuations. These coverages are probably somewhat less subject to accidental fluctuations than is usually the case with group accident and sickness experience. However, they are subject to greater geographical fluctuations, and care must be exercised in setting underwriting policy and the manual rates. For instance, some areas have an oversupply of hospital facilities which results in over-utilization either by choice of the individuals insured or choice of the doctors for conditions which prior to existence of the insurance would have required little or no hospitalization. Higher rates are necessary in such areas, or, more important, proper underwriting to safeguard against losses, such as a requirement for a coinsurance factor. For group employee hospital expense insurance, the first step in establishing manual rates is to derive net premium costs for the main bulk of industry classifications which are to be rated standard. However, the experience of all industry classifications is generally bulked together to derive the net premium costs for dependents hospital expense insurance and for employee and dependents surgical expense insurance. Because of the paucity of available experience, the Group Mortality and Morbidity Committee of the Society of Actuaries began in 1948 to make annual and special studies of the four coverages. These inter-company studies did not permit of a segregation of the experience of males and females nor of a distinction between hospital room and board benefits and miscellaneous services. T o

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A C C I D E N T AND S I C K N E S S

INSURANCE

fill the gap, Stanley W . Gingery presented a wealth of inter-company material in his paper entitled "Special Investigation of G r o u p Hospital Expense Insurance." 6 T h i s paper developed claim frequencies, claim durations, and average miscellaneous service payments. Consequently, it furnishes the separation of net annual claim costs between room and board and miscellaneous services benefits. T h i s was done separately for male and female employees. In addition, the net annual claim costs for the female category was split between maternity and non-maternity benefits. In the case of dependents coverage, the net annual claim costs were developed separately for dependent spouses and dependent children. Here again, the claim cost for dependent spouses was split between maternity and non-maternity benefits. From these data, it is possible to develop net annual claim costs for a variety of plans of insurance involving different maximum room and board and miscellaneous services benefits. As a result of the availability of this material, there is a recent tendency for companies to discard the use of the old double relationship between female and male premium rates for all plans of insurance, just as under accident and sickness insurance. T h e substitute for it is the development of separate premium rates for male and for female maternity and non-maternity benefits. T h i s means that the premium rate for any female percentage bracket is obtained by weighted averaging of the appropriate male and female costs. Recently, there has also been a tendency to reduce the premium rates per unit for any particular plan which has a limit for miscellaneous services equal to a fixed number of times the daily hospital benefit where there has been an increase in the amount of daily room and board benefits provided. T h i s reflects the fact that the cost of the miscellaneous services does not vary proportionately with the room and board benefit. In effect, net annual claim costs for room and board and miscellaneous services are determined separately and assembled for all categories of insured persons, namely, male employees, female employees, dependent spouses and dependent children. T h e calculation of net annual claim costs and premium rates for group surgical expense insurance is a somewhat simpler pro• Published in 1952 in the Transactions IV.

of the Society

of Actuaries,

Volume

R A T E S AND RESERVES

219

cedure because it does not involve the two distinctly different elements of room and board a n d miscellaneous services inherent in g r o u p hospital expense insurance. T h e a n n u a l reports of the G r o u p Mortality a n d Morbidity Committee have included the experience of one surgical plan, a n d its latest study, published in 1953, contains the experience u n d e r another. In addition, the Committee published a r a t h e r extensive analysis of group surgical claims in 1948. W i t h the use of the information developed in that sample claim study, it is possible to determine employee male, employee female obstetrical and non-obstetrical, dependent spouse obstetrical and non-obstetrical, and dependent children net claim costs from the Committee's a n n u a l reports. T h e relative frequency data for various types of surgical procedures included in the 1948 special study also make it possible to evaluate any given variation in a plan of surgical expense insurance benefits in terms of the usual plans of benefits for which claim costs are available. T h e r e has also been a recent trend in group surgical expense insurance to develop separate male a n d female gross p r e m i u m rates, thus discarding the use of the 100 per cent loading for female lives, which is a considerable understatement for the more common surgical plans. In developing gross p r e m i u m rates from net a n n u a l claim costs for both hospital a n d surgical expense insurance, it must be kept in mind that inter-company claim experience is not directly suitable for rate-making purposes. T h e r e has been a very marked u p w a r d trend in the claim experience of these coverages, as has been brought out in the a n n u a l reports of the G r o u p Committee. Also, the type of groups insured, the geographical location of those groups, etc. may make it necessary to adjust the inter-company experience to the level of that expected by the individual company u n d e r the groups to be insured by it. In other respects, the method of loading for expenses a n d claim fluctuations u n d e r these coverages generally follows the principles outlined previously for g r o u p accident a n d sickness insurance. T h e 1951 report of the G r o u p Committee analyzed the experience of groups in various industries. T h i s has to be supplemented by the underwriting observations of the individual companies in order to develop loadings for substandard industries for employee

220

A C C I D E N T A N D SICKNESS INSURANCE

hospital expense insurance. Information with regard to the variation of net annual claim cost by age of the individuals insured for employee hospital and surgical expense insurance is not directly available from the records maintained under group insurance policies. However, some data on claim values and average duration of confinement are given by age groups in Mr. Gingery's paper, and the relatively higher morbidity experiences at the higher ages is confirmed by other studies, such as those of Blue Cross. These lead to loading provisions for higher age groups somewhat similar to those discussed in the accident and sickness section. Medical

Expense

Medical expense insurance did not appear on the market until about ten years ago and has been in a state of flux ever since. Except for major medical and polio expense insurance, the usual medical plans offered are (1) those requiring total disability with an exclusion of several visits or with the same number of days waiting period as the accident and sickness policy, (2) the "InHospital" plans, (3) the non-disabling or "Comprehensive" plans, and (4) "X-ray and Laboratory Examination" plans. There are many minor variations in these benefits as underwritten by the various companies, but they will be considered together in this section because of their interrelation. In the early days of medical expense insurance, there were practically no suitable statistical data for the determination of premium rates, and the initial rate schedules were outstanding examples of armchair actuarial methods. However, the early plans were quite limited in scope and were written only as riders to accident and sickness or hospital and surgical policies. T h e armchair results appeared to be rather redundant, and reductions in rate schedules have since been made. Several years ago, the claim experience for the first few years of the operation of these plans was presented by a few companies in the Actuarial Society's literature. With this information and the experience under the particular plans they underwrite, the various companies are now in a better position to re-evaluate their rate structure. T h e problems involved in rate-making are still weighty, but

RATES AND RESERVES

221

the principles and practices are similar to those discussed under the previous sections, and in fact some of the rates may be derived by direct analogy. Major Medical

Expense

About four years ago, one of the most important developments in the group business was initiated—the introduction of the socalled "catastrophe medical coverage." Heretofore, hospital, surgical and medical expense coverage has emphasized the insuring of minor expenses which might more properly be the function of the family budget and has not provided protection against really costly illnesses. T h e new coverage is a broad form of group accident and sickness insurance designed to provide protection against substantial expenses arising from hospital care, surgery, doctors' treatments, nursing care, medical supplies, etc. T h e first case on record was issued by one company on an admittedly experimental basis but it did embody two principles which we feel are fundamental. One is a deductible amount, as in automobile collision insurance, so as to avoid the expenses incident to paying small claims. T h e second is a coinsurance factor which means that the insured pays a small part of the remaining expenses, such as 20 or 25 per cent, and thus has some financial stake in keeping the costs down. T h e r e are a great number of other considerations that must be weighed in connection with a broad coverage of this nature before the exact form of the benefits and the controls which will be practicable and effective can be decided. T h e n comes the problem of evaluating all of these considerations and decisions, and arriving at a basis of premium rates. Originally, there just were no statistics available, and armchair actuarial methods were too risky on such an important coverage. One company solved this by making a comprehensive survey for a few years of a large segment of its employees, their wives and children. T h e statistics and general considerations were presented by Alan M. Thaler in a paper entitled "Group Major-Medical Expense Insurance." 7 T h e company determined from this study, and from discussions 1 Published in 1951 in the Transactions of the Society of Actuaries, Volume III.

222

A C C I D E N T A N D SICKNESS I N S U R A N C E

with employers, insurance brokers a n d g r o u p sales representatives, what plans appeared to be both sound a n d saleable. It offered an "Each-Illness," an "Each-Individual" a n d a "Family Budget Deductible" plan, with a variety of deductibles, coinsurance factors a n d m a x i m u m payments. F u r t h e r m o r e , the plans could be issued without any basic coverage or could be integrated with established hospital, surgical and medical expense coverage in the same company or in Blue Cross and Blue Shield. T h e statistical data produced some interesting results, not all of which could have been anticipated by prior general reasoning. For instance, as compared with other types of g r o u p accident and sickness insurance which usually have p r e m i u m rates independent of age, it was f o u n d that age was a very i m p o r t a n t factor, actually more i m p o r t a n t than in life insurance. T h e net claim cost for an "Each-Illness" $500 deductible plan for employees at age 65 was ten times that for employees u n d e r age 35. T h i s fact led to a rate basis by age groupings: u n d e r age 40 in one g r o u p and above age 40 in five-year age groups. T h e actual age distribution is o b t a i n e d for each group of employees, a n d an average rate is comp u t e d . Secondly, crude claim rates were d e t e r m i n e d by income levels and, since the higher incomes are to some extent a function of age, by income within each age g r o u p . T h e conclusion was that a certain latitude in distribution by income could be allowed because of the proper reflection of age, but that if more than, say, 30 per cent of the employees would earn $10,000 and up, an income loading should be imposed. T h e third i m p o r t a n t finding was the wide range in claim cost by geographical region. For example, one plan with a net claim cost of $3 per m o n t h in the Northeast area showed an a p p r o x i m a t e net cost of $4 in the West, $2 in the South and $2.50 in the N o r t h Central section. From these results, it was decided to impose a loading on the basic rates in certain high cost areas. Let us turn now to the question of using statistical data of the type mentioned to derive gross premiums. It was f o u n d in the survey that 3 per cent of the employees surveyed did not return full replies and it was estimated that this might result in an understatement of the net claim costs by 5 per cent; also that the memory factor of employees forgetting to report illnesses would call for another 5 per cent. F u r t h e r m o r e , the fact that n o adjust-

R A T E S AND

RESERVES

223

ment had been made on account of inflation that had occurred since completion of the study had to be considered. Before applying the loading to take care of all expenses, contingency reserves and margins, an additional factor of, say, 10 per cent of net should also be added to the claim costs because a large portion of the reported expenses were uninsured. (It is recognized that the existence of insurance would have increased claim outlay.) Expense and general loading should follow the company's loading formulae for other group business, but consideration should be given to the probable higher claim settlement expense and the need for greater margins because the benefits are subject to inflationary pressures. T h e premium rate basis for dependent wives seems to fit into a simple percentage of the employee's rate and varies by plan from 125 to 150 per cent. T h e rate basis for dependent children is determined in comparable fashion from the statistical data and appears to be unaffected by the age complexion of the group. T h e exposure on female employees does not seem to have as great an effect as for other group coverages; and this particular company does not load for less than 25 per cent. If the exposure is at least 25 per cent, the females are placed in the next higher age group than males, and an average rate is computed. T h e problem of claim reserves for both statement liabilities and dividend or experience rating formulae is a weighty one because of the lack of seasoned data. However, a set of factors must be arrived at, and perhaps a short example of one solution may be of interest. In the case of my own company, we found from a claim analysis of major illnesses that the average duration of treatment is about 4.5 months. T h i s average must be reduced somewhat to allow for the claim payments made at intervals during the course of treatment. A factor of .8 was chosen as representative of the average status of all outstanding claims, ranging from those on which only one final payment was to be made to those which were incurred but unreported. With the addition of one month for claim processing, the conversion to a yearly basis produces the following as the ratio of a full year's claims to be held: (4.5 X -8 + 1) -h 12 = .383 Assuming a 60 per cent claim rate, this would convert to 23 per

224

A C C I D E N T AND SICKNESS INSURANCE

cent o£ the annual schedule premium, which for conservatism might be raised to 25 per cent. A rather dramatic illustration of the need for an adequate claim reserve is seen in the results at the end of the first year of a 1000 life case insured with us. T h e incurred claim rate for the first year was satisfactory, being 40 per cent of schedule premiums. In the first month after the policy anniversary, seven claims were presented, as compared with an average of three per month in the first year. An endless variety of complications can be brought into this subject of major medical by integrating with different types of basic plans. However, it is our conviction that the coverage should be sold as broadly as possible, but not by ignoring the basic plans, since the double coverage would ruin the experience in the long run. Therefore, the major medical integration should be set up to provide payment for out-of-pocket expenses only. T h e deductible amount requirement can be either (a) the "corridor" type of arrangement requiring cash outlay of the full deductible by the insured, or (b) a provision for the application of basic plan benefits towards the satisfaction of the deductible. It is obvious that for a given major medical plan, the higher the basic benefits, the lower the cost of the major medical. Therefore, a set of integration credits can be derived from the underlying statistical data for all types of basic benefits, in the form of a table of percentage reductions from the calculated premium rates. Poliomyelitis

Expense

Although polio ranks nowhere near the top of the list of so-called "Dread Diseases" which produce the largest percentage of claims and the greatest amount of expenses under "catastrophe medical coverage," it has a dramatic appeal which has caught the public fancy. Consequently, since polio expense insurance was introduced about five years ago, the public has clamored for it, particularly in anticipation of or in the wake of epidemics. Perhaps it is needless to say that in order to have any reasonable rate basis stand up, it is necessary to have a good geographical spread of risk with no great concentration in limited areas. Most of the underlying statistical data may be obtained from the National Foundation for Infantile Paralysis and from population statistics, but insurance statistics and medical knowledge

RATES

AND

RESERVES

225

must also be drawn upon. T h e current rate basis of one company was determined almost three years ago, and it was decided to use a morbidity rate of 20 per 100,000. T h i s is close to the Foundation statistics for 1946 and 1948, but is on the conservative side when compared with the annual rate of 14 per 100,000 for the average of the period 1944-48. W h e n combined with the population distribution of 30 jier cent below age 19, the Foundation data lead to the assumption that 80 per cent of polio cases arise on children. T h e average amount of expected claim payments called for some mental gymnastics by the medical advisors; they came up with an average amount of $2000 for a maximum reimbursement rider of $5000. An analysis of industry data indicated an average of 1.8 children per family unit, and basic hospital expense insurance data produced the distribution of dependents by children only, wife only and wife and children. Combining the component parts and loading the net rates for expenses and contingencies on a marginal basis (since it is issued only with basic group hospital and surgical expense insurance) produced gross rates as follows for a $5000 maximum reimbursement plan: Employee Coverage $.06 per month Dependent Coverage—Child (ren) Only Class 16 per month Dependent Coverage—Wife Only Class 06 per month Dependent Coverage—Wife and Child (ren) Class . . .22 per month

CONCLUSION

T h e r e is no single solution to any of the problems which have been discussed. Actually, in some matters there are as many solutions as there are companies writing the business. T h i s is a healthy development as it enables fresh thought to be given to old questions and clears the air for sound experimentation on new lines of business. T h e purpose of this chapter is not to dogmatize but to attempt clarification of the entire group accident and sickness picture and to offer some practical solutions which can stimulate thought along proper channels. T h e references cited, as well as a great many other sources, have been freely drawn upon, so in selfdefense let me recall the aphorism: " I f you steal from one author, it's plagiarism; if you steal from many, it's research." T h i s must be research!

C H A P T E R XIII

REGULATION OF ACCIDENT AND SICKNESS INSURANCE By

I.

The Principle

J. F. FOLLMANN,

REGULATION

of Regulation

OF

JR.*

INSURANCE

GENERALLY

by the States

T h e principle of regulation of the business of insurance by the states a n d territories has long been accepted in the U n i t e d States. I n 1868 the constitutionality of this principle was established in the historical case of Paul v. Virginia. T h e broad pattern which this form of regulation has assumed^watchfulness over the solvency of insurers, licensing of a n d establishing qualifications for producers, a n d protection of the public from u n f a i r contracts a n d practices—is now accepted as necessary a n d proper. I n 1944, in the equally historical case of United States v. Southeastern Underwriters Association, the Supreme Court of the U n i t e d States questioned this long established principle a n d opinion developed that the business of insurance was subject to a series of Federal acts, in many cases in direct conflict with existing state law, and t h a t it was also subject to judicial decisions interpreting the "commerce clause" of the U n i t e d States Constitution. In 1945 the Congress enacted what became familiarly known as the "McCarran Act" or "Public Law 15." T h i s law was a clear affirmation on the part of the Congress that continued regulation of insurance by the states was in the public interest. T h e law made it clear, however, that the Federal antitrust laws would be applicable to the business of insurance " t o the extent that such business is not regulated by State Law." A m o r a t o r i u m period was provided during which the states could, a n d did, make any necessary and desired a d j u s t m e n t s in their then present statutes. T h e ultimate effect of this development u p o n state regulation cannot yet be • General Manager, Bureau of Accident and Health 226

Underwriters.

REGULATION

227

determined as there are n o judicial decisions since that time having direct relationship to the question. Because we are limited here to a discussion of the regulation of a specific kind of insurance, it w o u l d not a p p e a r necessary to explore the legal t h o u g h t u n d e r l y i n g the two above m e n t i o n e d decisions of the Supreme Court, nor would it a p p e a r necessary to explore the general philosophic concept of the pattern which the regulation of insurance in this country has assumed as it has evolved through the years. T h e s e explorations have been m a d e many times in other places, their sources are generally well known, a n d any reiteration here would be r e d u n d a n t . T h e r e f o r e the broad principle of the regulation of insurance by the states will be accepted as fact and only those exceptions to the general principle noted which are germane to the regulation of accident and sickness insurance. The Insurance

Commissioner

In each of the states, commonwealths, districts, and territories of the United States there is created by legislative e n a c t m e n t a regulatory official charged with the enforcement of the laws applicable to insurance corporations and their operations. Although the authority and responsibilities of this official vary a m o n g jurisdictions, the authority is always broad a n d the responsibilities are as great as the business of insurance. T h i s official is part of the executive arm of the government and generally has u n d e r him a d e p a r t m e n t of the government or a subdivision thereof. In the vast majority of instances he is appointed by the Governor or other chief executive, a l t h o u g h in a few jurisdictions he is elected. In most instances he has Cabinet status. Generally, he is designated as Insurance Commissioner or Commissioner of Insurance, a l t h o u g h in four states his title is Superintendent, in three states Director, a n d in eight other states he holds a title in addition to Insurance Commissioner such as Secretary of State, State T r e a s u r e r , State Auditor, B a n k i n g Commissioner, Comptroller General, and Fire Marshal. T h e first Insurance Commissioner was a p p o i n t e d in 1852 in the Commonwealth of Massachusetts. In thirty-eight of the states the Insurance Commissioner has under him a d e p a r t m e n t of the government generally k n o w n as

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A C C I D E N T A N D SICKNESS I N S U R A N C E

the Insurance Department. In eight states, however, the regulation of insurance is executed by a subdivision of some other department, such as State, Commerce, Corporation Commission, Business Regulation and Banking. T h e trend through the years has been toward the creation of a separate Insurance Department, three states having enacted legislation to this effect during the past two years. Contrariwise, however, the District of Columbia is presently giving consideration to amalgamation of the Insurance Department with one or more other departments of the government. T h e States of Pennsylvania and Washington similarly gave such consideration this year but these decisions were in the negative. But despite these technical variations the general administration of the insurance statutes is similar in principle in all jurisdictions. No discussion of the Insurance Commissioner would be complete without taking cognizance of the National Association of Insurance Commissioners. T h i s body, which meets semiannually and which functions through several important committees and subcommittees, is advisory only; yet its influence upon state regulation of insurance has been appreciable and invaluable, principally through the development and recommendation of model and uniform regulatory measures both statutory and administrative. T h e success and workability of the regulation of the business of insurance by the states is in no small measure attributable to this eighty-four-year-old organization. Quasi-subdivisions of this Association are six geographic Zones of states designed, when they were established several years ago, to facilitate the participation of several states in the examination of a company. Today some of these Zones have extended their interest beyond this originally intended purpose to include a variety of regulatory problems. Several accident and sickness insurance problems and proposed remedies have been discussed by certain of these Zones in recent years and at least one recommendation of the National Association had its origin in the Zones. Regulation

of Corporate

Existence and Financial

Solvency

When considering the subject of the regulation of accident and sickness insurance, it must be noted that this form of insurance is written by practically all corporate types of insurers. It is writ-

REGULATION

229

ten by both stock and mutual life insurance companies, casualty insurance companies, and fire insurance companies; by companies chartered to write only accident and sickness insurance; by reciprocals or inter-insurance exchanges; by assessment companies; and by fraternal and beneficial societies. There is a great body of law and regulation which goes to the corporate existence and financial solvency of these various types of insurers and which, therefore, has either direct or indirect bearing upon the regulation of accident and sickness insurance. This includes such vital elements as: T h e name of the corporation. T h e constitution and bylaws of the corporation and their relationship to the policy contract. R e q u i r e d capital stock or surplus and other requirements for writing each of the various lines of insurance. Licensing requirements for corporations domiciled in o t h e r jurisdictions. Provision for annual audit of the annual statement of the corporation. Provision for periodic e x a m i n a t i o n of the financial condition and affairs of the corporation. Requirements for the maintenance of reserves. Requirements for the deposit of securities. Regulation of the type and proportion of investments. Restrictions on use of corporate funds and amounts expended to acquire business. Regulation of rates (for certain types of insurance). Provision for rehabilitation or liquidation in event of corporate insolvency. Provision for the payment of various types of fees and taxes by the corporation.

Regulation

of General Company

Practices

There is an equally great body of law and regulation concerned with supervising the general practices of the insurance corporation, regardless of the lines of insurance written, and which likewise has a distinct bearing upon the writing of accident and sickness insurance. This encompasses such areas as: Certain general requirements with respect to the policy contract (such as name and address of the corporation, making any part of the constitution or bylaws a part of the policy, and provision for assessment by certain types of insurers). Requirement of insurable interest, definition of who may insure, and

230

A C C I D E N T AND SICKNESS

INSURANCE

provision for insurance of minors. (One state prohibits the insurance of "public enemies.") Regulation of lobbyists. Penalty for nonpayment of claims within a specified period. Admissibility of microfilms as evidence. Definition of various types of agents, brokers, and adjusters; establishment of qualifications for these; and provision for their licensing. Requirement that insurance be placed through resident agents or be locally countersigned. Applicability of certain criminal statutes. Establishment of general rule making authority for the Commissioner. Establishment of various types of penalties for violation of the various laws. Provision for hearing and judicial review of acts of the Commissioner. T h e r e is also the body of law a i m e d at the e l i m i n a t i o n of unfair c o m p e t i t i o n a n d deceptive trade practices. All states

have

s o m e laws in this area. Generally these laws p r o h i b i t the following acts of c o m p a n i e s and their agents: Misrepresentations and false advertising as to policy contracts. False information and advertising generally. Defamation. Boycott, coercion, or intimidation. False financial statements. Stock operations or contracts promising profits as inducement insurance. Unfair discrimination. Rebates. Other acts of unfair competition or unfair or deceptive practices. Political contributions.

to

T h e r e is, f u r t h e r m o r e , a body of r e g u l a t i o n having to d o with u n a u t h o r i z e d insurance, or insurance sold by c o m p a n i e s in states w h e r e they are n o t licensed or a u t h o r i z e d to d o business. Generally the states have enacted legislation p r o h i b i t i n g the sale of i n s u r a n c e by such c o m p a n i e s or their representatives. T h e s e laws a r e of the following types: Prohibition of unauthorized insurers to do business. Prohibition of any person acting as an agent or representative of such company. Provision for service of process on such companies. Prohibition of advertising of such companies. Prohibition to such companies for use of the courts. Prohibition against insuring with such companies.

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231

P r o h i b i t i o n of aid to such companies. Provision that contracts with such companies are voidable by the insured. Provision for taxation of business written by such companies.

Despite this body of law, the states, as evidenced by deliberations of the National Association of Insurance Commissioners since the 1880's, would appear to have difficulty in regulating the writing of insurance through the mails and across state borders without license or authorization. However, a proposed Federal measure, known as the Hobbs Bill, aimed at this problem was considered by the Congress in 1935 and 1943 but opposed by resolution of the National Association of Insurance Commissioners. Meanwhile, the Post Office Department, under various Federal statutes, has broad powers to control the use of the mails by the issuance of fraud orders. T o complete the picture it should be pointed out that the Federal Trade Commission, in 1950, promulgated a set of "Trade Practice Rules Relating to the Advertising and Sales Promotion of Mail Order Insurance." Although directed at insurance generally, the vast majority of these rules are specifically applicable to accident and sickness insurance. T h e rules define as unfair trade practices the following: Deception (general). Misleading descriptions of policies, benefits, or coverages. Deceptive concealment of exceptions, limitations, a n d reductions in policies. False advertising of " N o n - M e d i c a l " policies. False inferences resulting f r o m different benefits for the same loss. Misuse of the word "all" as a p p l i e d to benefits afforded. Advertising of benefits, losses, and causes of loss not applicable to all ages. False impressions of sicknesses covered by health policies. Misuse of synonymous names for the same sickness or physical condition in health policies. I n a d e q u a t e description of medical a t t e n t i o n or confinement requirements in accident a n d sickness policies. I n a d e q u a t e description of limitation in time or a m o u n t of benefits payable. Incomplete description of allocation or benefits u n d e r a "family g r o u p " policy. Incomplete statement of time limit or lag contained in policy. Misrepresenting t h e a m o u n t of benefits p a i d u n d e r policies issued.

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A C C I D E N T AND SICKNESS INSURANCE

Deceptive use or imitation of corporate names, trade names, or trademarks o f competitors. Misrepresenting savings effected by selling methods. Claim of approval by Federal or state agency when such is not a fact. Misrepresentation in advertisements improper though policy be available for inspection by prospective insured. Deceptive testimonials. Misrepresentation of financial condition. Nondisclosure of contingent liability of insured. Misrepresenting that policies are confined, or are especially advantageous, to a special group. Deceptive "salesmen wanted" advertisements. Aiding or abetting use of unfair trade practices.

A copy of these complete rules is contained in Appendix C. Since this vast body of law and regulation is not specifically or solely directed toward accident and sickness insurance, however, and since the principles and details of its existence are thoroughly discussed in other familiar sources and texts, there would appear no necessity here to do more than note the fact that a broad regulatory pattern exists which generally is not earmarked as pertaining to accident and sickness insurance but which nonetheless has definite and basic bearing upon that form of coverage.

II.

REGULATION

O F A C C I D E N T AND SICKNESS

INSURANCE

SPECIFICALLY

Although accident and sickness insurance has been subject to these general regulatory measures through the years, it was early recognized that this form of insurance is different in many respects from other types of insurance and hence presents special regulatory problems. Some of the most important differences lie in the fact that qualitative decisions must be made to determine the degree of sickness or the seriousness of an accident, that so many different kinds of policies can be produced to provide coverage against such a wide variety of contingencies, and that individuals not only change locations but employment as well. Consequently an appreciable body of law and regulation has developed which is directed specifically to this form of insurance. This body of law and regulation is concerned with the following

233

REGULATION

a r e a s i n t h e w r i t i n g a n d o p e r a t i o n of a c c i d e n t a n d s i c k n e s s i n s u r ance: T h e contract. Practices peculiar to accident and sickness insurance. Surveillance of rates and loss ratios. Special consideration of group insurance. Special consideration of blanket insurance. Special consideration of franchise insurance. The

Contract

I n f o r t y - s i x s t a t e s a n d t h e D i s t r i c t of C o l u m b i a t h e a c c i d e n t a n d sickness insurance contract

must be

filed

with, and subject

to

the approval or disapproval of, the Insurance C o m m i s s i o n e r . 1 Alt h o u g h these laws vary w i t h respect to detail, in practical

appli-

cability a n d effect they are, in the vast m a j o r i t y of instances, s i m i l a r since c o m p a n i e s d o i n g b u s i n e s s in several states are

disinclined

to use a f o r m u n t i l a p p r o v a l has b e e n established in all having

states

requirements.2

U n d e r this broad authority there have been established

general

standards t o be used by the I n s u r a n c e C o m m i s s i o n e r in a p p r o v i n g o r d i s a p p r o v i n g a f o r m filed w i t h h i m as w e l l as a v a s t p a t t e r n o f 1 Alabama and Tennessee are t h e two exceptions. Filing and subjection to approval or disapproval are also required in Alaska, Hawaii and Puerto Rico. 2 These laws are of the four following types: In six states the form must be filed with and approved by the Commissioner before it can be issued or delivered. In thirty-four states the form must be filed and cannot be issued for a specified period thereafter (30 days in thirty states, 15 days in three states, and 45 days in one state) unless previously approved. Subsequent to this period of time, the form can be issued unless and until disapproved by the Commissioner. In six states the form must be filed but may be issued immediately after and until disapproved. In one state the form must be filed and may be issued immediately thereafter a n d until disapproved, but such disapproval must be made within 30 days after filing. T h e forms to be filed, and which are subject to approval or disapproval, also vary in detail among the states. Thirty-three states specifically require the filing of all forms having to do with the accident and sickness insurance contract, including the policy, t h e application, all riders a n d endorsements, certificates of insurance, and other contractual forms. In eleven states the statement of such requirements is restricted to the policy itself. In two states the requirement is restricted to individual policies and related forms. T h e r e are more detailed differences, particularly with respect to group or blanket insurance forms, b u t these are not germane to a general concept of these requirements.

234 specific

A C C I D E N T AND SICKNESS

INSURANCE

requirements. Generally, the Commissioner may disap-

prove a form "if it contains provisions which are unjust, unfair, inequitable, misleading, deceptive or encourage

misrepresenta-

t i o n . " T h i s language is contained in a measure recommended by the National Association of Insurance Commissioners. 3 It, or essentially similar language, is contained in the laws of the vast majority of the states. Analysis of the language used makes evident the sweeping general authority given the Commissioner over accident and sickness insurance contracts by such law. 4 Specifically, accident and sickness insurance contracts are subject to a vast body of legislation and regulation concerning both their form and content. Many of these are the results of recommendations,

through

the years,

of the Accident

and

C o m m i t t e e of the National Association of Insurance

Health Commis-

sioners. Many others have developed locally in one or more states at the instance of the legislature or the Commissioner. P a r a m o u n t among the recommended measures is the U n i f o r m Individual Accident and Sickness Policy Provisions L a w . 5 T h i s measure is presently effective in thirty-three states and territories. 6 F u r t h e r m o r e , policies drafted to conform with this law may be issued in ten additional states and territories. 7 U n d e r the conditions of this law there are twelve required provisions for all in3 A copy of t h e r e c o m m e n d e d m e a s u r e is c o n t a i n e d in A p p e n d i x D. T h i s m e a s u r e serves, f u r t h e r , to illustrate t h e usual law r e q u i r i n g filing and approval of forms. < It is to be noted that some states a d d i t i o n a l l y grant to the C o m m i s s i o n e r a u t h o r i t y to i m p l e m e n t t h e power to disapprove by rules or regulations. I n m a n y states the C o m m i s s i o n e r also exercises t h e broad supervisory power vested in h i m by t h e e n u m e r a t i o n of his general duties and powers. 5 R e c o m m e n d e d by t h e N a t i o n a l Association of I n s u r a n c e Commissioners in 1950 a f t e r three years of cooperative effort by its Accident and H e a l t h Comm i t t e e a n d representatives of the B u r e a u of Accident and H e a l t h U n d e r writers, t h e H e a l t h and Accident U n d e r w r i t e r s Conference, and o t h e r industry representatives. A copy of t h e " m o d e l " measure is c o n t a i n e d in A p p e n d i x B and an analysis o f t h e provisions t h e r e o f in C h a p t e r V I . 8 T h e s e states a n d territories a r e : A l a b a m a , Arkansas, C a l i f o r n i a , Colorado, C o n n e c t i c u t , District of C o l u m b i a , F l o r i d a , I d a h o , Illinois, I n d i a n a , I o w a , Kansas, M a i n e , M a r y l a n d , M i c h i g a n , N e b r a s k a , Nevada, New H a m p s h i r e , New J e r s e y , New M e x i c o , New Y o r k , N o r t h C a r o l i n a , N o r t h D a k o t a , O h i o , P e n n sylvania, S o u t h D a k o t a , V e r m o n t , V i r g i n i a , W a s h i n g t o n , Wisconsin, W y o m i n g , Alaska, H a w a i i . At this writing a m e a s u r e is before t h e Congress which will grant statehood to H a w a i i . Hawaii is considered a territory in this text. 1 T h e s e states and territories are: Delaware, L o u i s i a n a , Mississippi, Mont a n a , O r e g o n , R h o d e Island, T e n n e s s e e , T e x a s , P a n a m a C a n a l Zone, P u e r t o Rico.

REGULATION

235

dividual and family group accident and sickness policies having to do with the following subject matter: Definition of the insurance contract and m a n n e r of b r i n g i n g a b o u t changes therein. T i m e limit o n certain c o m p a n y defenses for misstatements in t h e application a n d pre-existing diseases or conditions. A grace period for the p a y m e n t of premiums. R e i n s t a t e m e n t of the contract. C o n d i t i o n s with respect to notice of claim. T h e f u r n i s h i n g of claim forms. C o n d i t i o n s with respect to proof of claim. T i m e limit for the payment of claims. Persons to whom benefits shall be paid. C o n d i t i o n s with respect to physical e x a m i n a t i o n and autopsy. T i m e limits on legal actions. C h a n g e of beneficiary.

Although the company is permitted latitude in the statement of these provisions, the substance cannot be altered nor can contradictory provisions be used. The company can make changes in these provisions which are not less favorable to the policyholder or in instances where the provisions are inapplicable or inconsistent with the policy coverage. This is important since it permits companies to experiment with provisions more favorable and understandable to the policyholder. This measure also establishes eleven optional provisions which must be used if the company desires policy provisions in the following areas: C h a n g e of the insured's occupation. Misstatement of age by the insured. O t h e r insurance in this insurer. O t h e r insurance in o t h e r insurers. I n s u r a n c e with other insurers. R e l a t i o n s h i p of the insured's earnings to the a m o u n t of insurance. D e d u c t i o n of u n p a i d p r e m i u m from claim. Cancellation of the policy by the company a n d the policyholder. C o n f o r m i t y of the policy with state statutes. Loss resulting from commission of felony or engaging in illegal occupation. Loss resulting f r o m use of intoxicants or narcotics.

T h e law further provides for separate captions for the policy provisions, minimum uniform size of printing type, appropriate

236

A C C I D E N T A N D SICKNESS I N S U R A N C E

placement a n d captioning of exceptions to the policy coverage, a n d general clarity of appearance of the policy. A n o t h e r earlier and i m p o r t a n t policy provision measure reco m m e n d e d by the N.A.I.C., a n d still in effect in certain states, is the U n i f o r m Standard Provisions Law. 8 T h i s measure was recommended in 1912 and was the basic law controlling accident a n d sickness policies until the U n i f o r m Individual Accident and Sickness Policy Provisions Law was recommended in 1950. T h e 1912 law is still effective in five states 9 and the District of Columbia. T h e provisions of this law, while following the general pattern of the provisions of the 1950 law, are not as beneficial to the policyholder nor are they as realistic or flexible to changes in coverages or developments in the business. I n seven other states 10 there is law having to do with accident a n d sickness policy provisions which does not specifically follow either of the above u n i f o r m measures. However, policies drafted in accord with those measures can be used in these states. 11 A n o t h e r device recommended by the N.A.I.C., which is administrative rather t h a n legislative, is the Official G u i d e for the Filing a n d Approval of Accident and H e a l t h Policies. 12 Originally d r a f t e d in 1943, the Official G u i d e was revised a n d expanded in 1945 and 1947. T h e basic purpose of this document was to eliminate conflicting rulings concerning interpretations of the 1912 Standard Provisions Law. But the Official Guide goes f u r t h e r than that by establishing rules with respect to the following: Policies with unusual exclusions, limitations, clearly labeled "This is a Limited Policy—Read Protection of the policyholder where medical ment to house is an eligibility requirement for Prohibition of "reimbursement" type benefits. Prohibition of the "identification" benefit.

or reductions must be it Carefully." attendance or confinebenefits.

8 A copy of this recommended measure is contained in Appendix A and an analysis of the provisions thereof in Chapter VI. B These states are: Kentucky, Minnesota, Oklahoma, South Carolina and West Virginia. 10 These states are: Arizona, Louisiana, Massachusetts, Missouri, Montana, Oregon and Utah. it In the Provinces of Canada a different set of policy provisions is required. A copy of those provisions as customarily required in Canada appears in Appendix E. A copy of this recommended measure is contained in Appendix F.

REGULATION

237

A requirement that the conditions of renewal of the policy shall be set forth. Prohibition of the "strict compliance" clause. Protection of the rights of the policyholder if coverage is excluded while in military or naval service. Prohibition of the "chronic" disease exclusion. Provision that if a rider or endorsement reduces or eliminates coverage, a signed acceptance of the policyholder is required.

Still another administrative measure recommended by the N.A.I.C. is the Statement of Principles, recommended in 1948.18 These Principles are concerned with the following matters: Number of policy forms. Clarity of policy language. Scope of coverage to be substantial. Definition of "limited" policies. Use of policy titles and descriptions. Reasonable policy exclusions. Use of elective provisions and multiple indemnities. Use of qualifying and waiting periods. Use of confinement provisions.

A final administrative procedure recommended by the N.A.I.C. in 1952 concerns the renewability and cancellation provisions of the policy. 14 This recommendation requires that the provision of the policy pertaining to its renewal or nonrenewal shall be placed on the face of the policy and clearly captioned. It also clarifies the placement and caption of the cancellation provision and requires that if this provision is not contained on the face of the policy, reference thereto shall be made on the face. In addition to these various measures recommended by the N.A.I.C., there is an appreciable body of law and regulation initiated locally in specific states and having to do with the contract. It would serve little purpose to document these many and varied requirements. In the main they establish separate requirements for weekly premium "industrial" policies, schedule type policies, family group policies, credit insurance policies, surgical schedules, the payment of maternity benefits, payments of benefits where simultaneous death of insured and beneficiary take place, excep13 A copy is contained in Appendix G. n A copy of this recommended measure is contained in Appendix H.

238

A C C I D E N T AND SICKNESS

INSURANCE

tions of a certain amount of policy proceeds from attachment, the use of binding receipts, definition of "noncancellable" insurance, and prohibition of "policy fees." T w o such local measures warrant mention. T h e first is a law in Missouri which invalidates the policy provision that excludes loss resulting from suicide while insane. T h e second is a law in California known as a "minimum benefits law," 1 5 enacted in 1949, and concerned mainly with the following: Real economic value of policy benefits to the insured. Multiple rates of payment. Periods during which payment is to be made. Discontinuance of the "in force" status of the policy. Loss of time indemnity for periods greater than two years. T o t a l confining disability benefits. Reductions of original benefits because of age of insured. Limitation of policy coverage to specified diseases.

Following enactment of this law, the California Insurance Department found it necessary to issue a lengthy set of rules which served to amplify the law. Subsequently it became necessary to issue two interpretative bulletins the purpose of which was to clarify the rules. It is, as yet, difficult to evaluate the real benefit which these measures have produced on behalf of the policyholders in California, but it should be noted that the N.A.I.C. in 1948 appointed a subcommittee to give consideration to such a "minimum benefits" measure. T h i s subcommittee, after some deliberation, withheld action pending developments in California, and in 1952 was discharged, its only recommendation being the Statement of Principles to which detailed reference has previously been made. It is evident from all the above that policies of accident and sickness insurance are subject to a great and varied body of law and regulation which is not only of broad, general scope but at the same time specific with respect to a great many of the details of policy provisions. Although the approach taken is in many instances varied, the basic purpose is always the same—protection of the policyholder. 15 C h a p t e r 1486 of the C a l i f o r n i a Laws of 1949.

239

REGULATION Practices Peculiar to Accident and Sickness

Insurance

In addition to regulation of the accident and sickness contract, there is considerable law having to do with the practices of companies in the accident and sickness insurance field. T h e majority of these practices are not specifically limited to accident and sickness insurance and have been previously discussed. T h e law having to do specifically with practices in the accident and sickness insurance field deals chiefly with the following subjects: Misrepresentations and warranties of the policyholder. Concealment of information in the application and its materiality. Alterations in the application for insurance. Notification of premiums due under noncancellable insurance. 1 6 Advance notice of cancellation by the company. 1 7

In addition, the Statement of Principles previously mentioned establishes sixteen principles for the preparation of advertising and solicitation material. Generally, these endeavor to assure the use of fair, truly representative solicitation methods. Specifically, the principles deal with the following types of advertising: Free inspection of policy. Equal prominence of large and small benefits. Reduced benefits at certain ages. Listing of diseases covered. Reference to " N o medical examination required." References to " g e n e r o u s " or " l i b e r a l " benefits, "complete p r o t e c t i o n , " and "full coverage." Exaggerations with respect to time in which claims are paid. Coverage of pre-existing conditions. Reference to exceptions and reductions of coverage.

In this area of regulation there is again, as in the regulation of the contract, clear evidence of devices aimed at the protection of the policyholder from unconscionable practices. Surveillance

of Rates and Loss Ratios

Accident and sickness insurance is not a rate regulated line in the sense that casualty and fire insurance rates are regulated. Conis Illinois—15 days notice; Maine—10 days notice; Massachusetts—10 days notice; New York—15 days notice. Iowa—30 days notice.

240

ACCIDENT AND SICKNESS INSURANCE

sequenily, there is opinion, in the absence of court decisions, that in the field of accident and sickness insurance, rates made by concerted agreement among companies are subject to attack under the Federal antitrust laws. There is, however, some appreciable surveillance of accident and sickness rates as well as surveillance of the loss ratios developed in writing this form of insurance through the power of approval of policy forms. T h e laws of thirty-two states and the District of Columbia require that accident and sickness rates and classifications shall be filed with the Commissioner. One purpose of this requirement is that rates and classifications shall be filed with an impartial public official in event dispute arises over the applicability of any prorating provisions in the contract. In Pennsylvania a law provides that no policy of individual or family group accident and sickness insurance shall be issued until the policy, classifications and rates have been approved by the Commissioner. No standards for such approval of classifications or rates are established in the law and approval is presumed thirty days after filing unless the company is notified to the contrary. T h e laws of Florida and Texas require the approval of credit accident and sickness insurance rates by the Commissioner. North Carolina has a similar requirement by ruling of the Commissioner. T h e laws of seventeen states 18 provide that the approval of a policy of individual or family group accident and sickness insurance shall be withdrawn "if the benefits provided therein are unreasonable in relation to the premium charged." This language is contained in the measure recommended by the N.A.I.C. in 1946 of which mention has been made. 19 No standards for judging the "unreasonable" relation of benefits to premiums are established by the law. In five states (Michigan, Minnesota, New Mexico, New Jersey, and Pennsylvania) companies are required by ruling, at the time of filing a policy for approval, to accompany the filing with the estimated loss experience under such form. No standards for the acceptance or refusal to accept such filings have been established. In 1945 the N.A.I.C. expressed "the desirability of getting in18 T h e s e states are: Arizona, Delaware, Florida, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Washington and Wisconsin. 19 See Appendix D.

REGULATION

241

formation from the companies as to their loss ratios on the various lines of health and accident insurance to permit the Commissioners to learn what lines produce extremely low loss ratios." It was thereupon recommended "that each Commissioner ask the companies in his state to file with him (yearly) a record of their loss ratios on each line of accident and health insurance written by them." T h i s recommendation had its origin in the Zone 4 states. T h e recommendation refers to "line" of insurance. In 1948 the N.A.I.C. recommended a form20 (which has since been amended several times) for the filing of such loss ratios. T h i s form is supplementary to the A n n u a l Statement filed yearly by the company. However, this form requires the filing of loss ratios by "policy f o r m " rather than by "lines" of insurance originally recomm e n d e d . N o standards are established for the surveillance of these loss ratio filings nor is any action recommended with respect thereto. Filing of the form is required annually in a majority of the states u n d e r the rule-making power of the Commissioner. T h e above facts present a pattern which makes it evident that a l t h o u g h accident and sickness insurance is not a "rate regulated" line, there is, nonetheless, appreciable surveillance of the rates charged a n d the loss ratios experienced in accident a n d sickness insurance. T h e serious a n d honest differences of o p i n i o n surr o u n d i n g certain of the measures to which reference has been m a d e in this section will be discussed later in the following chapter. Special Consideration

of Group

Insurance

Most of what has been said heretofore about the regulation of accident a n d sickness insurance specifically has been limited to the many a n d varied types of insurance issued to individuals or to family groups. G r o u p accident and sickness insurance is, for the most part, dealt with separately in the insurance laws of the various states and in rulings of the Insurance Commissioner. O n e reason for this is the sympathetic approach taken by the legislatures to the p u b l i c value accruing from the coverage of large groups of persons f o r protection against the financial hazards of accident a n d sickness. Another reason is that since the g r o u p insurance contract is m a d e with an employer or a labor union, generally w i t h 20 A copy of this form, as last amended in 1952, is contained in Appendix I.

242

A C C I D E N T A N D SICKNESS I N S U R A N C E

legal counsel available, the same degree of protection of the policyholder is not needed as with policies sold to individuals. T h e n again, accident a n d sickness insurance has developed to an appreciable extent only in the last twenty years. T h e then long established p a t t e r n for the regulation of individual accident and sickness policies was largely impractical for group accident a n d sickness insurance needs. Hence, a separate pattern for g r o u p insurance gradually developed. G r o u p accident a n d sickness insurance policies, certificates, forms, a n d rates are subject to much the same requirements with respect to filing with a n d approval by the Commissioner, as has previously been set forth, t h o u g h the laws of the states vary considerably with respect to them. T h e remainder of the law specifically concerned with g r o u p accident a n d sickness insurance falls into two broad areas: (1) a definition of group accident and sickness insurance a n d (2) policy form requirements peculiar to g r o u p accident a n d sickness insurance. T h e general definition of those groups which may be thus insured is specifically defined by law in thirty-five states a n d the District of C o l u m b i a . A l t h o u g h these definitions vary, they are, in the main, the following: Employees of a common employer or of affiliate employers. Associations of employees of common or affiliate employers. Employees of governmental corporations, units, agencies, or departments thereof. Members of a labor union. Other substantially similar groups. Dependents of such employees or members.

A m i n i m u m n u m b e r of persons required for such groups to be eligible for g r o u p accident a n d sickness insurance is generally stated. Usually this n u m b e r is 25, although there has been a recent tendency to reduce this n u m b e r to 10, 5, or 0. Most laws also provide for a percentage of employee participation, usually 75 per cent, if the employees c o n t r i b u t e to the p r e m i u m charge. Other u n d e r w r i t i n g restrictions are contained in certain state laws. In the r e m a i n d e r of the states, where no specific definition is stipulated in the statute, g r o u p accident and sickness insurance is permitted by direct inference from statutory language excluding

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group accident and sickness insurance from other accident and health insurance legislation, or it is permitted by reason of silence in the statutes. Twenty-five states, to varying degrees, have established policy form requirements pertaining particularly to group insurance. In the main, these required provisions are as follows: D e f i n i t i o n o f the c o n t r a c t a n d p r o v i s i o n that all s t a t e m e n t s shall b e r e p r e s e n t a t i o n s a n d not w a r r a n t i e s ( 1 9 states). P r o v i s i o n t h a t certificates s t a t i n g t h e i n s u r a n c e p r o t e c t i o n will b e issued to t h e p o l i c y h o l d e r for delivery to c o v e r e d p e r s o n s (24 states). Provision that new e m p l o y e e s will b e a d d e d (18 states). Provision for r e m i t t a n c e o f p r e m i u m s ( 1 3 states). T i m e l i m i t for notice o f c l a i m (6 states). P r o v i s i o n for forms for p r o o f o f loss (4 states). T i m e l i m i t for p r o o f o f loss (4 states). P a y m e n t o f claims (4 states). P r o v i s i o n f o r physical e x a m i n a t i o n a n d a u t o p s y (7 states). T i m e l i m i t for legal a c t i o n s (6 states).

Twelve states require that the provisions in policies of group insurance shall be the same as the provisions for individual accident and sickness policies to the extent that these are appropriate and applicable to the coverage. T h e r e are other requirements made by particular states which do not form part of any general statutory pattern. These include such matters as readjustment of the rate based on experience, use of a facility of payment clause, age limits, conditions of renewal, and payment of benefits to certain persons. Special Consideration

of Blanket

Insurance

Blanket insurance is another form of accident and sickness insurance which is dealt with separately in the insurance laws. T h i s form of insurance is generally conceived of as a "blanket" of insurance protection over an identifiable group of persons. It differs from group insurance in that the specified persons covered are not identified since they are subject to constant change. Specific provision for the writing of blanket insurance exists in the laws of forty-four states. Its writing is permitted in all states, however, usually by virtue of an exclusion of blanket insurance from the law applicable to individual accident and sickness insur-

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INSURANCE

ance. T h e statutes specifically defining this form of insurance list the following categories o£ persons which may be insured under a policy of blanket insurance: All passengers of a common carrier (18 states). Employees of a common employer for exceptional hazards incident to employment (16 states). Students at an institution of learning (16 states). Members of an athletic team (3 states). Campers at a common camp (2 states). Members of a volunteer fire department (20 states). Members of first aid or ambulance squad or volunteer police organization (9 states). Volunteer workers for non-profit community welfare organization (5 states). Debtors of a creditor (3 states). Any association of persons having a common interest (4 states)

In ten states and the District of Columbia the statutory definition of blanket insurance is the same as the definition of group insurance. In ten states the Commissioner is given discretionary authority to approve "other substantially similar groups" to those spelled out in the law. In three states family group insurance is included under the blanket insurance definition (whereas in other states family group insurance is provided for elsewhere in the law). In most instances no minimum number of persons is required to be covered under a policy of blanket insurance. But in a few states a minimum number, varying from 5 to 50, is required. In fourteen states it is specifically provided that individual certificates need not be issued for persons covered under a blanket contract (as is required in group insurance). In Kansas, however, the law provides that, subject to the discretion of the Commissioner, a "memorandum" of the coverage shall be furnished each insured person. In thirteen states it is specifically provided that individual applications are not required from the covered persons. In Illinois the Commissioner has refused to permit policies to be captioned "blanket insurance" or "blanket coverage." Blanket insurance contracts are subject to much the same requirements as previously mentioned with respect to filing with and approval by the Commissioner. Seventeen states, in addition to requiring this and to defining the group of persons which

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may be covered by blanket insurance, also specifically establish some requirements with respect to the content of blanket policies. In six states it is provided that the policy provisions requirements shall be the same as for policies of group insurance. While the other eleven states spell out the provisions required for blanket insurance, they generally follow the group insurance pattern in being concerned with notice and proof of loss, time limit for paying benefits, time limitation for suit, persons to whom benefits are to be paid, and statement of the entire contract. Special Consideration

of Franchise

Insurance

Franchise insurance is not essentially a different kind of accident and sickness insurance. Rather, it is a method of, or approach to, mass selling. In this form of insurance the customary policies of individual accident and sickness insurance are used to cover groups of employees or members of associations. Consequently, all the regulations of individual accident and sickness insurance are equally applicable with respect to franchise insurance. Franchise insurance is a somewhat recent development and, since it grew without plan or design, its very nomenclature was lacking in clarity and no clear definition of this form of insurance existed. In 1946 the N.A.I.C. recommended a definition 21 of franchise insurance which provides that such insurance may be issued to five or more employees of a common employer or ten or more members of a trade, labor, or professional association where such persons are issued the same form of individual policy, varying only as to amounts and kind of coverage, and where the premiums are paid to the company by or through the employer, association, or other designated person. Eleven states have enacted this uniform definition and one state has made it applicable by ruling. Seven other states have enacted variations of this definition, the variations generally pertaining to the minimum number of persons eligible for franchise insurance. Thirteen additional states and the District of Columbia permit rate differentials for franchise insurance (as compared with individual insurance); two states prohibit such differentials (Montana and West Virginia). In eleven other states franchise insurance forms are ap21 T h e N.A.I.C. Uniform Definition of Franchise Insurance is contained in Appendix J .

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INSURANCE

p r o v e d without statutory enactment and in the absence of any statutory p r o h i b i t i o n . A p p r o v a l is not required in A l a b a m a a n d Tennessee. T h e r e is very little regulation specifically aimed at franchise insurance. In Minnesota and O k l a h o m a it is prohibited to call policies of franchise insurance " n o n c a n c e l l a b l e " or " g u a r a n t e e d r e n e w a b l e . " In Maryland such policies must provide for conversion without evidence of insurability should the insured person leave the covered g r o u p .

CHAPTER XIV

REGULATION OF ACCIDENT AND SICKNESS INSURANCE By

III.

J.

F.

FOLLMANN,

(Continued) JR.

S O M E T R E N D S AND S P E C I A L P R O B L E M S IN T H E O F A C C I D E N T AND SICKNESS

REGULATION

INSURANCE

T h e preceding chapter has outlined in some detail the vast body of both general and specific regulation applicable to companies writing accident and sickness insurance. T h e trend in recent years has been toward a marked increase in such regulation. T h a t trend is, in broad aspect, due to the times in which we live. Insurance has expanded with the rapid growth and development of our nation and its resources. Increasing regulation has followed in the wake of this expansion. In the field of accident and sickness insurance, now a century old, the great period of growth has been in the last fifteen years—roughly 600 per cent—and today more than 600 insurers of all types are writing the coverage. It is to be expected, then, that much of the regulatory pattern has developed in this same period. T h i s rapid growth might suggest an element of haste, with resultant lack of well thought out processes, in the development of the regulatory pattern. T h i s has not been true in all instances, but it has served to point out certain problems with respect to the regulation of accident and sickness insurance. Four of these are: A tendency towards over-regulation. A tendency towards nonrealistic regulation. T h e proposition of the "reasonableness" of benefits in relation to premiums. A frequent failure to recognize the merit of uniformity in accident and sickness regulation. 247

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Over-Regulation Certainly the preceding facts concerning the regulation of accid e n t a n d sickness insurance could give rise to a quite n a t u r a l speculation as to w h e t h e r or not this field of insurance is overregulated. T h e u n i f o r m measures recommended by the N a t i o n a l Association of Insurance Commissioners in the past ten years alone are cause for such query. Further cause for concern lies in the fact that in each of the recent legislative sessions the legislatures of the various states have introduced for consideration somet h i n g like 175 bills concerned solely with accident and sickness insurance, in a d d i t i o n to some 150 other measures which would directly affect accident a n d sickness as well as other forms of insurance. T h e n , too, there have been a vast n u m b e r of formal a n d informal rules m a d e in recent years by Commissioners individually which pertain solely to accident and sickness insurance. T h e result of this recent trend has been to create, and at times q u i t e severely, a confusion a n d uncertainty as to the regulation of this f o r m of insurance. T h a t , in turn, hampers development within the business. Companies are often hesitant to develop new a n d improved policy forms because of the extreme and erratic difficulties occasioned in obtaining approval. T h e a t t i t u d e of companies that are considering entering the accident a n d sickness insurance field is affected by such difficulties. All this tends to retard g r o w t h a n d progress. W h e n careful scrutiny is given these hundreds of measures— those already on the statute books as well as those proposed—the conclusion is inevitable that more careful consideration should be given in the f u t u r e before any additional accident and sickness regulatory measures are devised. For example, five of the measures recommended by the N.A.I.C. in very recent years are concerned with the content of the insurance contract alone. Four of these are broad a n d complex measures a n d all are in addition to specific laws a n d rulings in each of the states. Certainly if sufficient study h a d been given the subject, one adequate u n i f o r m measure could have been f o u n d . Moreover, these proposals, in the main, would seem to negate the cause for the many bills considered yearly by the several state legislatures.

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This does not mean that the Insurance Commissioners are without their problems in being responsible for the regulation of accident and sickness insurance. T h e practices of some insurers seem to give cause for concern. But endless laws and rulings are not the real solution to the problem. In fact, the essence of the difficulties would appear to be the same now as it was before the many measures presently effective were devised. A recently reported study by the New York Insurance Department is revealing since it shows that less than one-third of the complaints received are directed at accident and sickness insurance. When the large volume of this form of insurance is considered, it is apparent from the study that the facts are in direct contradiction to the oft-repeated charge that accident and sickness insurance causes more difficulty for the Insurance Commissioner than all other forms of insurance combined. T h e Commissioner can perform a valuable service here, not only in handling grievances on the part of citizens in his state, but in studying such grievances carefully as to source and nature. In this manner the Commissioner can prevent broad, and often unfair, criticism and regulation affecting all insurers in favor of specific action going directly and effectively to the source of difficulty with the particular insurers concerned. Commissioner Maloney of California recently stated: O u r statistics r e v e a l t h a t b e t w e e n 25 a n d 30 p e r c e n t of all c o m p l a i n t s o n all f o r m s of i n s u r a n c e a r e filed a g a i n s t five d i s a b i l i t y i n s u r e r s w h o s e w r i t i n g s a r e c o n f i n e d a l m o s t exclusively t o t h e d i s a b i l i t y field. . . . T h e greatest s i n g l e c a u s e f o r c o m p l a i n t is t h e p o l i c y p r o v i s i o n p e r t a i n i n g t o p r e - e x i s t i n g c o n d i t i o n s . . . . W e s e l d o m h a v e t h i s t y p e of c o m p l a i n t against c o m p a n i e s w h o w r i t e a sizable v o l u m e of g e n e r a l c a s u a l t y i n s u r a n c e , w h e r e a s as I h a v e p r e v i o u s l y s t a t e d it is t h e p r i m a r y c a u s e of c o m p l a i n t s a g a i n s t some of t h e c o m p a n i e s s p e c i a l i z i n g i n t h e w r i t i n g of d i s a b i l i t y i n s u r a n c e . . . . I p r o p o s e t o aggressively seek o u t t h o s e parasitic c o m p a n i e s w h i c h a d o p t c l a i m p r a c t i c e s i n i m i c a l to t h e best interests a n d f u t u r e w e l f a r e of t h e i n s u r a n c e b u s i n e s s i n t h i s s t a t e . 1

It is the opinion of many that this is the proper approach to be taken by state regulatory officials rather than seeking legislation or rule making devices applicable to all insurers, the vast majority of which are innocent. Not only would it eliminate the unnecesl Address before the Los Angeles Life and Accident Claims Association at Loj Angeles Athletic Club, September 22, 1952.

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sary restriction of action on the p a r t of ethical insurers, but it would go immediately to the core of the problem in such a m a n n e r as should provide swift and effective remedy. Studies conducted in recent years in Illinois, Michigan, and Pennsylvania of accid e n t and sickness insurance difficulties will bear out the conclusions of Commissioner Maloney. So also will surveys made by the Better Business Bureau. T h e public has a clear responsibility, too. Not all claimants are honest nor do they all approach the making of the insurance contract with a clear sense of ethics. Commissioner M u r p h y of Delaware, in a recent address, pointed out that "nine out of ten accident and sickness policyholders who claim they have been gypped have actually gypped themselves by having made false statements when applying for the policy or in having withheld the full facts in connection with health history." "Every person," the Commissioner said, "should endeavor to realize that when he signs an application for insurance, he is just as responsible for the honesty of his statement as an insurance company is in living u p to the policy contract." T h e public also has a responsibility when the claim is made. It is evident beyond any doubt that in a depressed economic period the n u m b e r and severity of accident and sickness claims increases appreciably. T h i s is clear evidence that in disability insurance the policyholder is an i m p o r t a n t factor in controlling his own claims. Increased public familiarity with insurance produces a similar result. O n e of the worst abuses in the disability field is, of course, malingering. It is often difficult or impossible to prove in individual cases. Equally difficult to prove are abuses by certain members of the public having an important relationship to accid e n t and sickness insurance, namely, doctors and hospital administrators. These abuses i n j u r e not only the insurance company but the policyholder as well, since any abuse can produce but one result—a higher p r e m i u m cost for that form of insurance. T h e public official might give this over-all factor more consideration t h a n is often the case. In 1946 the Bureau of Accident a n d Health Underwriters made the following statement before the N.A.I.C.:

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Various i n s u r a n c e d e p a r t m e n t s have n o t e d t h e large n u m b e r of comp l a i n t s c o m i n g t o t h e m relative to accident a n d sickness c l a i m settlem e n t s . W e believe t h a t an analysis of these c o m p l a i n t s in a n y d e p a r t m e n t , i n c l u d i n g a c o m p a r i s o n of t h e n u m b e r of c o m p l a i n t s against each i n s u r e r w i t h t h e v o l u m e of t h a t insurer's business, will show (1) t h a t most insurers h a v e few c o m p l a i n t s m a d e against t h e m , a n d (2) t h a t t h e m a j o r i t y of t h e c o m p l a i n t s are against insurers h a v i n g in force a very small p a r t of t h e total business. If this is shown to be true, t h e p r o b l e m becomes o n e of m a k i n g a few c o m p a n i e s c o n f o r m to t h e s t a n d a r d s which most insurers n o w set f o r themselves. T h e most effective way to deal w i t h this p r o b l e m m a y b e t h r o u g h p u b l i c i t y . Every C o m m i s s i o n e r p r o b a b l y has t h e r i g h t now, if he desires, to m a k e such a n analysis a n d publicize t h e result. H o w e v e r , t h e possibility of repercussions, either legal o r political, m a k e a Commissioner h e s i t a t e to d o so. C o n s i d e r a t i o n might b e given to a s t a t u t o r y provision r e q u i r i n g t h e Comissioner to m a k e a n a n n u a l analysis of c o m p l a i n t s filed w i t h h i m a n d p u b l i s h t h e result. I n s t e a d of, or in a d d i t i o n to, p u b l i c a t i o n , the C o m m i s s i o n e r m i g h t b e a u t h o r i z e d to give a w a r n i n g to a n y c o m p a n y f o u n d to have an a b n o r m a l l y h i g h perc e n t a g e of c o m p l a i n t s filed against it, a n d if t h e same c o n d i t i o n persists for a year or two years (as specified in t h e statute) a f t e r t h e w a r n i n g , to i m p o s e a p e n a l t y by fine, revocation of license, or b o t h . 2

No action was ever taken by the N.A.I.C. with respect to this recommendation. There are two company associations in the insurance field whose responsibility lies solely with accident and sickness insurance: the Bureau of Accident and Health Underwriters and the Health and Accident Underwriters Conference. These associations represent the interests of their constituent companies before state legislatures and regulatory officials. In this capacity they stand ready for consultation with either legislators or Commissioners, and such consultation is openly encouraged. While on occasion these associations are consulted and have proven, in a number of instances, extremely helpful to regulatory officials in solving their problems, it would benefit everyone concerned if such consultation and technical assistance were much more frequently sought. It is reasonably certain that the result would prove to be much more effective regulation going to the core of 2 Report to the Accident and Health Committee of the National Association of Insurance Commissioners by the Bureau of Accident and Health Underwriters, April, 1946.

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whatever the problem might be and with far less hampering complexity of operation.

Nonrealistic

Regulation

Closely allied with the tendency towards over-regulation is the problem of nonrealistic regulation. T h i s takes several forms. One is the type of law or rule which establishes cumbersome and expensive requirements applicable to all insurers and yet which does not, or perhaps can not, accomplish its purpose. Such regulation obviously serves no purpose. T h e r e are many examples of such regulation but perhaps the most currently outstanding one is the law known as the "minimum benefits" law in California, previously referred to. T h e stated intent of this measure was to assure a minimum of benefits in all accident and sickness policies. T h e resultant law was complex and difficult to understand. A complex set of rules became necessary to supplement the law. Subsequently two lengthy interpretative bulletins were needed to throw light upon the action of the law and the rules. W h e n a measure requires so much clarification, including, as in this instance, a deferment of the effective date of the law, its wisdom must per se be subjected to serious question. Now, a few years later, with companies forced to construct special policies for use in California, it is extremely questionable how much benefit has accrued to the people of California f r o m the effort. It is significant that a subcommittee of the N.A.I.C. appointed to consider "minim u m benefit" measures reported, after noting the California development, no legislative recommendation and eventually, in 1952, recommended its own discharge. Meanwhile, a complex, relatively useless law remains on the statute books of California. A n o t h e r form of nonrealistic regulation is that which clearly exemplifies a lack of knowledge of the basic principles underlying accident and sickness insurance. Again, many examples can readily be found. This year a law was considered in North Carolina which would have made all individual and family group policies of accident and sickness insurance progressively noncancellable and automatically renewable upon payment of premium even beyond the period when noncancellable insurance as it is sold today would cease. Although this law had some unique facets, the broad principles of depriving the company of the right to

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refuse to renew a contract is one which has been evidenced in various forms of proposed measures in recent years. Such measures overlook the fact that noncaucellable insurance, because of the increased hazard, requires a higher premium than that presently charged for the types of policies affected. Hence, such laws could affect adversely the financial structure of the company. T h e y (i.e. such measures) are also questionable from the standpoint of sound public policy, and equity to other policyholders, since they would compel a company to continue to insure a risk which has developed injurious moral habits Furthermore, if the companies are compelled to cease writing cancellable accident and sickness insurance in a particulai case, and this would be so in all such instances, the best interests of the people are hardly served by such nonrealistic regulation. Still another form is exemplified when regulation between the states becomes clearly contradictory. Since accident and sickness insurance generally is written with a national scope, making no differentiation in coverage or rate as between one community and another, there is no practical or realistic justification for contradictory measures. Yet this does happen. An example is in the rules applicable to the surgical schedule of the policy. Michigan requires that a surgical schedule must provide for payment for nonscheduled surgical procedures and that such payment must be in relation to the scheduled amounts and cannot be for a fixed amount of money. Massachusetts does not require payment for non-scheduled procedures but does require that if provision for such payment is made it must be stated as a fixed amount of money. T h e s e two requirements are, without good reason, in direct conflict. T h e r e is no difference between accident and sickness insurance in Massachusetts and in Michigan. In addition to these types of nonrealistic regulation, there is the continual cropping up of spasmodic measures in individual states which harass company operation, and which too often tail to recognize that where legitimate problems exist with respect to the regulation of accident and sickness insurance they are not peculiar to any one state but are national in scope, and hence are logically subject to consideration by the N.A.I.C. W h a t has been said here is not intended as a condemnation of state regulation nor an over-critical view of the legislatures or the

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Commissioners. Even though measures occasionally occur as a result of strong feeling, biased thought, or even vindictiveness, for the most part the regulatory process is sincerely motivated in the interest of the policyholders. Valid a n d honorable motivation is not enough, however. If regulation is to be sound and is to fulfill its purpose, high motivation must be supplemented by sound knowledge, careful analysis of the problem, t h o u g h t f u l consideration of all the facts, and impartial consultation with all interested parties. "Reasonableness"

of Benefits in Relation

to

Premiums

Another recent trend in the regulation of individual accident a n d sickness insurance is towards surveillance of rates and loss ratios. Previous mention has been made of the present degree of surveillance of such rates and loss ratios by the Insurance Commissioners. T w o of the measures referred to in that section were (1) the law giving the Commissioner authority to withdraw approval of a policy "if the benefits provided therein are unreasonable in relation to the p r e m i u m charged," and (2) the requirement that loss ratios for each policy form shall be filed annually with the Commissioner. It has been noted that in neither of these measures are standards established by which the Commissioner might pass j u d g m e n t on these filings. T h e s e two measures are discussed simultaneously since, while the requirement for the filing of loss ratios developed independently, there is today a tendency on the part of some regulatory officials to link it with the law authorizing disapproval of policies when the benefits are unreasonable in relation to the premiums. T h e tendency in these quarters would appear to be that of using the loss ratio filings as a "statistical" basis for the j u d g m e n t of the "reasonableness" of benefits in relation to premiums. In some q u a r t e r s it has been f u r t h e r maintained that the administration of this legislation will require companies to supply complete statistical information together with the exact p r e m i u m structure, including every component, for every policy form submitted for approval. In giving consideration to the administration of this law, its basic purposes should not be lost from sight. T h e law in question was developed in the hectic sessions when various committees were a t t e m p t i n g to deal with the problems

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raised for state supervision following the enactment of P u b l i c L a w 15. T h e regulation of the accident a n d sickness business was only one of a large n u m b e r of far reaching problems which arose in all lines of the insurance business. T h e All-Industry C o m m i t t e e R e p o r t in December 1946 included a request to defer action on the accident and sickness regulatory problem until December 1947, it being realized that an extremely complex situation was being h a n d l e d without the requisite a m o u n t of study and consideration. Possibly because of the c o m p u l s i o n of Public L a w 15, the Commissioners' representatives felt that no such p o s t p o n e m e n t could be permitted. T h i s was the atmosphere from which the present law emerged a n d it is u n d e r s t a n d a b l e that the law, as d r a f t e d , lacks the precision necessary to determine clearly its intent. T h e published reports of the N.A.I.C. committee meetings which considered the subject of regulation of accident a n d sickness insurance indicate the thinking at that time. It was concluded that accident and sickness insurance should not be the subject of rate regulation of the fire a n d casualty type, because of the complexities of the business and the fact that it is transacted by so many different types of carriers. It was also felt that free competition is desirable in such a rapidly developing field. T h e m i n u t e s of the committee m e e t i n g in December 1946, in referring to the provision which says the Commissioner can d i s a p p r o v e a policy form if the benefits are u n r e a s o n a b l e in relation to the p r e m i u m charged, state that: T h i s provision was i n c o r p o r a t e d in the bill to p r o v i d e a C o m m i s s i o n e r with an effective m e t h o d of d e a l i n g with those c o m p a n i e s which h a v e persisted in writing policies p r o v i d i n g benefits which are u n r e a s o n a b l e in relation to the p r e m i u m charged. U n d e r this bill a C o m m i s s i o n e r will b e a b l e to p r o h i b i t the use of policies which are f r a u d u l e n t o r manifestly u n f a i r to the p u b l i c . It will b e n o t e d t h a t t h i s bill p r o v i d e s a m u c h less d e t a i l e d r e g u l a t o r y m a c h i n e r y t h a n t h a t p r o v i d e d in t h e m o d e l Fire a n d C a s u a l t y r a t i n g bills. . . .3

T h e intent is clearly d e t e r m i n a b l e from the minutes of the Commissioners' c o m m i t t e e a n d can be summarized as follows: 3 Minutes of the December 1946 meeting of the Joint Committees on Rates and Regulatory Measures a n d Federal Legislation of the National Association of Insurance Commissioners.

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1. It was not i n t e n d e d to make individual accident and sickness insurance subject to strict rate regulation. 2. It was i n t e n d e d to enable the Commissioner to deal with those c o m p a n i e s which have persisted in w r i t i n g policies providing benefits which are unreasonable in relation to the p r e m i u m charged. In this connection, reference is to policies t h a t are f r a u d u l e n t or manifestly u n f a i r to the public. 3. T h e reference to f r a u d u l e n t policies or policies manifestly u n f a i r to t h e public indicated clearly that the draftsmen intended to give a Commissioner the police power necessary to deal with individual situations that could be so characterized. T h e C o m m i s s i o n e r s ' report f u r t h e r stated w i t h respect to this m e a s u r e that it "does n o t require affirmative a p p r o v a l in a d v a n c e of f o r m s a n d rates. T h e m u l t i p l i c i t y of f o r m s i n the a c c i d e n t a n d h e a l t h business, c o m b i n e d w i t h c e r t a i n o t h e r p e c u l i a r i t i e s of t h e business, s e e m e d to m a k e s u c h a r e q u i r e m e n t i m p r a c t i c a l at this t i m e . T h i s p r o p o s a l i m p o s e s n o b u r d e n s o m e a d m i n i s t r a t i v e details for d e a l i n g w i t h p o l i c y contracts w h i c h o n their face are fair a n d r e a s o n a b l e ; o n the o t h e r h a n d , it d o e s p r o v i d e p o l i c e p o w e r to deal w i t h those p o l i c i e s w h e r e , b e c a u s e of i n a d e q u a c y of c o v e r a g e or excessiveness of rate, or b o t h , t h e result is u n c o n s c i o n a b l e a n d n o t i n t h e p u b l i c interest." In t h e so-called " K l i n e R e p o r t , " p r e s e n t e d to t h e N . A . I . C . by t h e S u p e r i n t e n d e n t of I n s u r a n c e of N e w York in 1949, f u r t h e r l i g h t is t h r o w n o n t h e i n t e n d e d p u r p o s e of this measure: T h o s e reports show that the committee explored the idea of controlling this problem by means of rate regulatory legislation p a t t e r n e d along t h e lines of the fire a n d m a r i n e a n d the casualty a n d surety rate regulatory bills. T h i s suggestion, however, was finally rejected by the committee. I n arriving at this decision the committee was largely influenced by certain peculiarities of the accident and health business. It was recognized t h a t the rate structure in t h e accident a n d health business is primarily competitive, whereas m a n y of the fire a n d casualty rate structures are non-competitive a n d consequently require more detailed supervision. U n l i k e the fire a n d casualty business, standard forms are n o t customary in the accident and h e a l t h business; on the contrary, t h e r e are literally thousands of forms a n d endorsements in use. T h e r e is a n o t h e r o p e r a t i o n a l difference which had an effect u p o n the committee. In the fire and casualty lines most rates are local, that is, they are geared to the experience in individual states a n d even territorially within states. Many of the national a n d interstate rating plans involve modifications of local rate structures. I n the accident a n d health busi-

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ness, however, the same forms and rates are freely used on a countrywide basis, a system which does not lend itself readily to established concepts of regulating local rate structures. In fact, there is a similarity between the operations of the accident and health companies and the life companies in so far as the use of countrywide forms and rates is concerned. Some people have construed as a form of rate regulation the provision authorizing the Commissioner to withdraw approval of a policy if he finds that the benefits therein are unreasonable in relation to the premium charged. From what has been said above it seems manifest that although this bill provides the broadest of regulatory powers, it is not a "rate regulatory" bill in the same sense that these words are used to describe the detailed regulation found in the All-Industry Commissioners Fire and Casualty and Surety Rate Regulatory Bills or in New York's rating law. It was not intended to be. T h e drafters felt that in most cases competition would require companies to provide reasonable forms of coverage at reasonable prices. On the other hand, it was recognized that competition did not always lead to the issuance of policies which were desirable from the standpoint of the public. It was felt that a Commissioner should be provided with the tools to cope with situations of this type when they arose. T h e s e considerations led to the adoption of the language under discussion. T h e thinking of the committee paralleled Congressional thought which earlier had recognized the salutary effects of competition but also had recognized that laws are required to cope with unrestrained or unduly reduced competition when found to be adverse to the public interest. 4 N o n e of t h e discussion indicated that the law w o u l d r e q u i r e a review of the p r e m i u m r a t e s t r u c t u r e for every policy submission. T h e subject has never been given the study that w o u l d be req u i r e d for so c o m p l e x a p r o b l e m . In those jurisdictions where pressure is being b r o u g h t to req u i r e c o m p a n i e s to file c o m p l e t e statistical i n f o r m a t i o n with e a c h policy, it may well be that the a d m i n i s t r a t i v e heads of the d e p a r t m e n t d o not realize the e x t e n t of the responsibility w h i c h they w o u l d be assuming. T h e u n c e r t a i n n a t u r e of a c c i d e n t a n d sickness i n s u r a n c e statistics m a y n o t be fully recognized. T h e statistics in this business do n o t parallel the s m o o t h steady flow of m o r t a l i t y statistics. It is a business subject to violent

fluctuations

4 " R e g u l a t i o n of M a i l O r d e r Accident and H e a l t h I n s u r a n c e , " by G e o r g e H . K l i n e , s u b m i t t e d to t h e A n n u a l Meeting of t h e N a t i o n a l Association of I n s u r a n c e C o m m i s s i o n e r s at Seattle, W a s h i n g t o n , J u n e 1949, by R o b e r t E . D i n e e n , S u p t . o f I n s u r a n c e , S l a t e o f New Y o r k .

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a n d the responsibility for rate a d j u s t m e n t to meet these changes m u s t rest w i t h the c o m p a n y . From the s t a n d p o i n t of the enforcem e n t of the law in q u e s t i o n , any insurance d e p a r t m e n t m i g h t well be g u i d e d by the standards of benefit in relation to p r e m i u m w h i c h have been established in free c o m p e t i t i o n . O n the other hand, the industry must concede that state supervisory officials have an o b l i g a t i o n to administer the statute for the b e t t e r m e n t of the business a n d that they are e n t i t l e d to the c o o p e r a t i o n of responsible c o m p a n i e s to o b t a i n that objective. Dr. C. A. Kulp, Professor of Insurance at the University of Pennsylvania, in g i v i n g consideration to this general subject before the Bureau of A c c i d e n t a n d H e a l t h Underwriters in 1949, stated in part: O n the one side is a hazard that varies considerably in average cost f r o m year to year and particularly from one extreme of the experience cycle to the other. But joined with this is the all-important fact that this contract for the great majority of insured persons is renewed year after year at the same premium. . . . It is important in this respect to note that the relationship between the cycle of business conditions and the cycle of underwriting experience is undeniable but incalculable. . . . It is not possible to determine with any precision either the lag or the amplitude of the swing of accident and health experience. T h e materials available for analysis, particularly loss and underwriting ratios, are even in the hands of experts of very little help. . . . T h e moral is not that loss and underwriting ratios are to be ignored but that the greatest caution is required in translating them into standards for judging the adequacy and the reasonableness of premiums. . . . How is one to allow for the tremendous backlog of potential claims? . . . Expansion of business has been accompanied and in part accomplished by a widespread liberalization of policy provisions and a general relaxation of underwriting controls without corresponding increase of premium. T h e result is the creation of an important and even dangerous source of deferred and hidden liability, not reflected in loss ratio figures when times are good and jobs are better than benefits but b o u n d to show u p in the n u m b e r and size of claims when the tide turns. . . . O n e may deplore the lack of responsibility of companies that have so soon forgotten the lessons in 1929. . . . T w o important conclusions remain. O n e is that the profitable underwriting results of the lush years d o not prove very much about the reasonableness or the adequacy of the premium level. T h e other is that the business can hardly expect to go on through year after year of high underwriting profits and expect the public or the Commissioners to patiently wait and see. . . . T h e

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p r o b l e m is o n e essentially of assuring that, for a period r e g a r d e d as reasonable for all interests, t h e r e be a reasonable conformity between p r e m i u m a n d insurance costs. . . . N o b o d y believes that the whole solution to your problem lies in t h e a d o p t i o n of new techniques o r formulae. . . . T h e answer lies not so m u c h in mechanics as in a t t i t u d e . . . . T h e best h o p e of your business for public u n d e r s t a n d i n g a n d in t u r n public s u p p o r t lies in your ability to convince t h e average m a n t h a t your contracts are fairly d r a w n , that you pay claims as gladly as you collect premiums, that your administrative a n d selling costs are reasonable a n d that differences in p r e m i u m s for policyholder groups are justified by differences in cost. . . . 5 A c c i d e n t a n d sickness i n s u r a n c e is a h i g h l y c o m p e t i t i v e business. In 1947 t h e t h e n S u p e r i n t e n d e n t of I n s u r a n c e of N e w York stated: "If ever there was a c o m p e t i t i v e rate structure it is i n t h e a c c i d e n t a n d h e a l t h b u s i n e s s . I h a p p e n to t h i n k that n o b u r e a u crat c a n d o as g o o d a j o b as c o m p e t i t i o n can i n p r o d u c i n g a rate structure." I n 1951 t h e N e w York S u p e r i n t e n d e n t s t a t e d i n his a n n u a l report: T h e n a t u r e of the accident a n d health business is such that individuals have an insurable interest in protecting themselves against an almost infinite r a n g e of contingencies. As a consequence, literally t h o u s a n d s of policies have been devised, generally for use on a countrywide basis, which provide an extensive r a n g e of coverage together with an equally diverse c o m b i n a t i o n of benefits. T h i s development has been a healthy one. It m e a n s that insurance protection can be and has been tailored to meet this wide variety of h u m a n needs. 6 In fields o t h e r t h a n i n s u r a n c e w h e r e t h e d e t e r m i n a t i o n of price is left to c o m p e t i t i v e forces, there is r e g u l a t i o n of t h e q u a l i t y of p r o d u c t a n d u n f a i r sales m e t h o d s . A s p r e v i o u s l y s h o w n , t h i s t y p e of r e g u l a t i o n by the states exists for a c c i d e n t a n d sickness insura n c e a n d in a greater d e g r e e t h a n w i t h respect to m o s t

other

businesses. Uniformity A final p r o b l e m w i t h respect to t h e r e g u l a t i o n of a c c i d e n t a n d sickness i n s u r a n c e is that of r e a s o n a b l e u n i f o r m i t y of t h e regulatory p a t t e r n a m o n g the several states. 5 "Accident and Health Must Take the Long Look,"—an address delivered at Annual Meeting of the Bureau of Accident and Health Underwriters, Highland Park, Illinois, October 12, 1949. 8 Annual Report of the Superintendent of Insurance of New York State, 1951.

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Uniformity in the regulation of accident and sickness insurance is imperative to the continued healthy growth of that business. T h i s is true from many standpoints. T o begin with, the element of fixed location of the risk, inherent in the insurance of property, is absent in the accident and sickness field. Since it is insurance upon the person of the policyholder, the risk insured frequently moves permanently across state lines. Such movement of persons is inherent in our American manner of living and, in fact, increases constantly. Every day any large insurer receives several such changes of address to record. Yet the policyholder is exactly the same risk whether he moves from Illinois to California or from New Jersey to Ohio. And as he moves he takes with him his policy of insurance. If, however, in moving about, he finds his insurance policy subject to a wide variety of laws, with the consequent variance in legal opinion, he will become confused and eventually may well become completely dissatisfied with his insurance. T h e advantage of uniform judicial opinion resulting from uniformity in the regulatory pattern certainly speaks for itself. Fewer cases have to be taken to the courts for interpretation since the degree of common understanding of the contract is increased in direct proportion to the degree of uniformity existing in the statutory code and in the decisions of the courts. This is of benefit to both policyholder and company alike. Certainly it benefits those charged with the administration of the insurance laws. But uniformity of legal opinion is impossible in the absence of uniformity in the basic regulatory statutes. Another serious consequence of the lack of uniformity in state regulation is that of retarding development and improvement in the business. As has previously been stated, there have been times in recent years when insurers have hesitated to make improvements in their policies—improvements which they would really like to make and which would be to the distinct benefit of the policyholder—because of the problems arising out of varied requirements in many of the states. They have been forced in many instances to prefer "doing business as usual," rather than improving the policy coverage, simply because of the expenditure of time and money involved in having the improved policy approved. In other instances the increased coverage has been granted to policyholders in certain states to the exclusion of those in some

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other states because of statutory a n d regulatory peculiarities in the latter states with which the companies have been unwilling to cope. I n most such cases it is not the n a t u r e of the law or regulation which produces this result, b u t simply the fact that the particular law or regulation is in conflict with the basic u n i f o r m p a t t e r n , at times to the degree of r e q u i r i n g that something be d o n e in one jurisdiction which is directly p r o h i b i t e d in a n o t h e r . Fortunately, the trend in the past few years has been distinctly away f r o m such disunity, thanks to the efforts of many high-minded persons who have come to realize that it can prove a m a j o r threat to state regulation. From the s t a n d p o i n t of the operations of the insuring companies, there is a f u r t h e r reason why u n i f o r m i t y is essential, namely, the fact that it makes possible more economy of operation. W h e n regulatory requirements a m o n g the states vary to a considerable degree, often conflicting with a n d contradicting one another, an appreciable and additional expense factor is developed within the home office a n d field force of each insurer. T h i s increased cost factor must eventually be reflected in the cost of insurance to the policyholder. T o d a y there is m u c h consideration given to the problem of decreasing the cost of p r o d u c t i o n of insurance. T h i s can be accomplished if the states in their regulatory power will cooperate with each other to achieve certain principles of uniformity. In recent years the N.A.I.C. has given consideration to various forms of interstate compacts which, in this respect, would result in a national office or a Zone or regional office approving policies for all states entering into such compact. T h e majority of the Commissioners and the industry are of the o p i n i o n that this would be impractical a n d u n w o r k a b l e . It m i g h t well be asked: W o u l d not this principle of u n i f o r m i t y be in direct contradiction to the principle of states' rights? Have not the legislators a n d administrators in each state the right to act as they think best on behalf of their citizens? I n d e e d they have. So long as there is state supervision, n o one can deny that this principle exists, not only as a right but as a duty. But two qualifying factors are a p p a r e n t . T h e first is that if state regulation a n d control of the accident a n d sickness business is to be m a i n t a i n e d as charged by the Congress in P u b l i c Law 15, a reasonable degree

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of u n i f o r m i t y a m o n g the states must be achieved and certainly in the basic statutory patterns. T h e second factor is that many times a state legislative or administrative body, t h i n k i n g to act on behalf of its citizens, a n d taking a u n i q u e position which deviates from any u n i f o r m pattern, actually acts to the d e t r i m e n t of its citizens. Examples of this have already been cited. It is not u n c o m m o n in the legislature of any state to have measures introduced which are aimed at a particular act of injustice observed by or brought to the attention of a sincere m e m b e r of the legislature. Burdensome legislation should not be inflicted u p o n an entire industry because of such isolated grievances. In these cases it must be borne in mind that accident a n d sickness insurance is a nation-wide industry and, hence, that it is difficult to conceive how there might arise "local" problems within such an industry. T h i s being the case, it would a p p e a r advisable for any such state to consult with other states t h r o u g h the long established and eminent channels of the N a t i o n a l Association of Insurance Commissioners. If it then appears that the p r o b l e m is one of general and real concern, that body should take whatever steps appear necessary. If, on the other h a n d , the grievance in question appears to be an isolated one, the administrator of the state involved would certainly have means available to treat with it, a n d without giving cause for additional, u n i q u e or n o n u n i f o r m legislation. T h e police powers of the state administrator are very broad and within the b r e a d t h of these powers he can certainly find the solution to such isolated infractions.

APPENDIX A T H E 1912 U N I F O R M S T A N D A R D PROVISIONS L A W N.A.I.C. Section 1. O n a n d after the first day of January, 1914, no policy of insurance against loss or damage from the sickness, or the bodily injury or death of the insured by accident shall be issued or delivered to any person in this state until a copy of the form thereof and of the classification of risks and the premium rates pertaining thereto have been filed with the Commissioner of Insurance; nor shall it be so issued or delivered until the expiration of thirty days after it has been so filed unless the said Commissioner shall sooner give his written approval thereto. If the said Commissioner shall notify, in writing, the company, corporation, association, society or other insurer which has filed such form that it does not comply with the requirements of law, specifying the reasons for his opinion, it shall be unlawful thereafter for any such insurer to issue any policy in such form. T h e action of the said Commissioner in this regard shall be subject to review by any court of competent jurisdiction, provided, however, that nothing in this act shall be so construed as to give jurisdiction to any court not already having jurisdiction. Section 2. No such policy shall be so issued or delivered (1) unless the entire money and other considerations therefor are expressed in the policy; nor (2) unless the time at which the insurance t h e r e u n d e r takes effect and terminates is stated in a portion of the policy preceding its execution by the insurer; nor (3) if the policy p u r p o r t s to insure more than one person; nor (4) unless every printed portion thereof and of any endorsements or attached papers shall be plainly printed in type of which the face shall be not smaller than ten point; nor (5) unless a brief description thereof be printed on its first page a n d on its filing back in type of which the face shall be not smaller than fourteen point; nor (6) unless the exceptions of the policy be printed with the same prominence as the benefits to which they apply, provided, however, that any portion of such policy which purports, by reason of the circumstances u n d e r which a loss is incurred, to reduce any indemnity promised therein to an a m o u n t less than that provided for the same loss occurring under ordinary circumstances, shall be printed in bold face type and with greater prominence than any other portion of the text of the policy. Section 3. Every such policy so issued shall contain certain standard provisions, which shall be in the words and in the order hereinafter set forth and be preceded in every policy by the caption, "Standard Provisions." In each such standard provision wherever the word "insurer" 26J

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is used, t h e r e shall b e s u b s t i t u t e d t h e r e f o r " c o m p a n y " o r " c o r p o r a t i o n " o r " a s s o c i a t i o n " o r " s o c i e t y " o r such o t h e r word as will p r o p e r l y design a t e t h e insurer. S a i d s t a n d a r d p r o v i s i o n s shall b e : (1) A s t a n d a r d provision r e l a t i v e to t h e c o n t r a c t w h i c h m a y b e in e i t h e r o f the f o l l o w i n g two forms: F o r m (A) to be used in policies w h i c h d o not p r o v i d e for r e d u c t i o n o f i n d e m n i t y o n a c c o u n t o f c h a n g e o f o c c u p a t i o n , a n d F o r m ( B ) to b e used in policies which d o so p r o v i d e . I f F o r m ( B ) is used a n d the policy p r o v i d e s i n d e m n i t y against loss f r o m sickness, t h e words " o r c o n t r a c t s s i c k n e s s " may be inserted t h e r e i n i m m e d i a t e l y a f t e r t h e words " i n the e v e n t t h a t the insured is i n j u r e d " : (A): 1. T h i s policy includes the e n d o r s e m e n t s a n d a t t a c h e d p a p e r s if any, a n d c o n t a i n s t h e e n t i r e c o n t r a c t o f i n s u r a n c e . N o r e d u c t i o n shall b e m a d e in any i n d e m n i t y h e r e i n p r o v i d e d by reason of c h a n g e in the o c c u p a t i o n of t h e i n s u r e d o r by reason o f his d o i n g any act o r t h i n g p e r t a i n i n g to any o t h e r o c c u p a t i o n . ( B ) : 1. T h i s policy includes t h e e n d o r s e m e n t s a n d a t t a c h e d p a p e r s if any, a n d c o n t a i n s t h e e n t i r e c o n t r a c t o f i n s u r a n c e e x c e p t as it m a y be m o d i f i e d by t h e insurer's classification o f risks a n d p r e m i u m rates in the e v e n t t h a t t h e insured is i n j u r e d after h a v i n g c h a n g e d his o c c u p a t i o n t o o n e classified by the i n s u r e r as m o r e hazardous t h a n that stated in t h e policy, o r w h i l e h e is d o i n g any act o r t h i n g p e r t a i n i n g to any o c c u p a t i o n so classified, e x c e p t o r d i n a r y duties a b o u t his r e s i d e n c e o r w h i l e e n g a g e d in r e c r e a t i o n , in which e v e n t the insurer will pay o n l y such p o r t i o n o f t h e i n d e m n i t i e s provided in t h e policy as t h e p r e m i u m p a i d w o u l d h a v e p u r c h a s e d at the r a t e b u t w i t h i n the l i m i t s so fixed by t h e i n s u r e r f o r such m o r e hazardous o c c u p a t i o n . I f t h e law o f t h e state in which t h e i n s u r e d resides at t h e t i m e this p o l i c y is issued r e q u i r e s that p r i o r to its issue a s t a t e m e n t o f t h e p r e m i u m r a t e s a n d classification o f risks p e r t a i n i n g t o it shall b e filed w i t h the state official h a v i n g supervision of i n s u r a n c e in such state t h e n the p r e m i u m rates a n d classification o f risks m e n t i o n e d in this policy shall m e a n o n l y such as have b e e n last filed by t h e insurer in a c c o r d a n c e with such law, b u t if such filing is n o t r e q u i r e d by such law t h e n they shall m e a n t h e insurer's p r e m i u m rates a n d classification of risks last m a d e effective by it in such state p r i o r to the o c c u r r e n c e o f t h e loss for which t h e i n s u r e r is l i a b l e . (2) A s t a n d a r d provision relative to c h a n g e s in t h e c o n t r a c t , which shall b e in the f o l l o w i n g f o r m : 2 . N o s t a t e m e n t m a d e by t h e a p p l i c a n t for i n s u r a n c e not i n c l u d e d h e r e i n shall avoid t h e policy o r be used in any legal p r o c e e d i n g hereu n d e r . N o a g e n t has a u t h o r i t y to c h a n g e this policy o r to waive a n y o f its provisions. N o c h a n g e in this policy shall be valid unless a p p r o v e d b y a n e x e c u t i v e officer o f the i n s u r e r a n d such a p p r o v a l be e n d o r s e d hereon. (3) A s t a n d a r d p r o v i s i o n r e l a t i v e to r e i n s t a t e m e n t o f policy a f t e r l a p s e w h i c h may b e in e i t h e r o f the t h r e e f o l l o w i n g f o r m s : F o r m (A) to

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be used in policies which insure only against loss from accident; Form (B) to be used in policies which insure only against loss from sickness; and Form (C) to be used in policies which insure against loss from both accident and sickness. (A): 3. If default be made in the payment of the agreed premium for this policy, the subsequent acceptance of a premium by the insurer or by any of its duly authorized agents shall reinstate the policy, but only to cover loss resulting from accidental injury thereafter sustained. (B): 3. If default be made in the payment of the agreed premium for this policy, the subsequent acceptance of a premium by the insurer or by any of its duly authorized agents shall reinstate the policy but only to cover such sickness as may begin more than ten days after the date of such acceptance. (C): 3. If default be made in the payment of the agreed premium for this policy, the subsequent acceptance of a premium by the insurer or by any of its duly authorized agents shall reinstate the policy but only to cover accidental i n j u r y thereafter sustained and such sickness as may begin more than ten days after the date of such acceptance. (4) A standard provision relative to time of notice of claim which may be in either of the three following forms: Form (A) to be used in policies which insure only against loss from accident; Form (B) to be used in policies which insure only against loss from sickness; and Form (C) to be used in policies which insure against loss from both accident and sickness. If Form (A) or Form (C) is used the insurer may at its option add thereto the following sentence, " I n event of accidental death immediate notice thereof must be given to the insurer." (A): 4. W r i t t e n notice of injury on which claim may be based must be given to the insurer within twenty days after the date of the accident causing such injury. (B): 4. Written notice of sickness on which claim may be based must be given to the insurer within ten days after the commencement of the disability from such sickness. (C): 4. Written notice of i n j u r y or of sickness on which claim may be based must be given to the insurer within twenty days after the date of the accident causing such injury or within ten days after the commencement of disability from such sickness. (5) A standard provision relative to sufficiency of notice of claim which shall be in the following form and in which the insurer shall insert in the blank space such office and its location as it may desire to designate for such purpose of notice: 5. Such notice given by or in behalf of the insured or beneficiary, as the case may be, to the insurer at or to any authorized agent of the insurer, with particulars sufficient to identify the insured, shall b e deemed to be notice to the insurer. Failure to give notice within the time provided in this policy shall not invalidate any claim if it shall be shown not to have been reasonably

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possible to give such notice and that notice was given as soon as was reasonably possible. (i6) A standard provision relative to furnishing forms for the convenience of the insured in submitting proof of loss as follows: 6. T h e insurer upon receipt of such notice, will furnish to the claimant such forms as are usually furnished by it for filing proofs of loss. If such forms are not so furnished within fifteen days after the receipt of such notice the claimant shall be deemed to have complied with the requirements of this policy as to proof of loss upon submitting within the time fixed in the policy for filing proofs of loss, written proof covering the occurrence, character and extent of the loss for which claim is made. (7) A standard provision relative to filing proof of loss which shall be in such one of the following forms as may be appropriate to the indemnities provided: (A): 7. Affirmative proof of loss must be furnished to the insurer at its said office within ninety days after the date of the loss for which claim is made. (B): 7. Affirmative proof of loss must be furnished to the insurer at its said office within ninety days after the termination of the period of disability for which the company is liable. (C): 7. Affirmative proof of loss must be furnished to the insurer at its said office in case of claim for loss of time from disability within ninety days after the termination of the period for which the insurer is liable, and in case of claim for any other loss, within ninety days after the date of such loss. (8) A standard provision relative to examination of the person of the insured and relative to autopsy which shall be in the following form: 8. T h e insurer shall have the right and opportunity to examine the person of the insured when and so often as it may reasonably require during the pendency of claim hereunder, and also the right and opportunity to make an autopsy in case of death where it is not forbidden by law. (9) A standard provision relative to the time within which payments other than those for loss of time on account of disability shall be made, which provision may be in either of the following two forms and which may be omitted from any policy providing only indemnity for loss of time on account of disability. T h e insurer shall insert in the blank space either the word "immediately" or appropriate language to designate such period of time, not more than sixty days, as it may desire; Form (A) to be used in policies which do not provide indemnity for loss of time on account of disability and Form (B) to be used in policies which do so provide. (A): 9. All indemnities provided in this policy will be paid after receipt of due proof.

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(B): 9. All i n d e m n i t i e s p r o v i d e d in t h i s policy f o r loss o t h e r t h a n t h a t of t i m e o n a c c o u n t of d i s a b i l i t y will b e p a i d a f t e r r e c e i p t of d u e p r o o f . (10) A s t a n d a r d p r o v i s i o n r e l a t i v e t o p e r i o d i c a l p a y m e n t s of i n d e m n i t y f o r loss of t i m e o n a c c o u n t of disability, w h i c h p r o v i s i o n shall b e in t h e f o l l o w i n g f o r m , a n d w h i c h m a y b e o m i t t e d f r o m a n y p o l i c y n o t p r o v i d i n g f o r such i n d e m n i t y . T h e i n s u r e r shall insert in t h e first b l a n k space of t h e f o r m , a p p r o p r i a t e l a n g u a g e t o d e s i g n a t e t h e p r o p o r t i o n of a c c r u e d i n d e m n i t y it m a y d e s i r e to pay, w h i c h p r o p o r t i o n m a y b e all o r a n y p a r t n o t less t h a n o n e - h a l f , a n d in t h e s e c o n d b l a n k space shall i n s e r t a n y p e r i o d of t i m e n o t e x c e e d i n g sixty days: 10. U p o n r e q u e s t of t h e i n s u r e d a n d s u b j e c t to d u e p r o o f of loss a c c r u e d i n d e m n i t y f o r loss of t i m e o n a c c o u n t of d i s a b i l i t y will b e p a i d at t h e e x p i r a t i o n of each d u r i n g t h e c o n t i n u a n c e of t h e p e r i o d f o r w h i c h t h e i n s u r e r is l i a b l e , a n d a n y b a l a n c e r e m a i n i n g u n p a i d a t t h e t e r m i n a t i o n of s u c h p e r i o d will b e p a i d i m m e d i a t e l y u p o n r e c e i p t of d u e p r o o f . (11) A s t a n d a r d p r o v i s i o n r e l a t i v e to i n d e m n i t y p a y m e n t s w h i c h m a y b e in e i t h e r of t h e t w o f o l l o w i n g f o r m s : F o r m (A) t o b e u s e d in policies w h i c h d e s i g n a t e a b e n e f i c i a r y a n d F o r m (B) to b e u s e d in policies w h i c h d o n o t d e s i g n a t e a n y b e n e f i c i a r y o t h e r t h a n t h e i n s u r e d : (A): 11. I n d e m n i t y f o r loss of life of t h e i n s u r e d is p a y a b l e t o t h e b e n e f i c i a r y if s u r v i v i n g t h e i n s u r e d , a n d o t h e r w i s e to t h e e s t a t e of t h e i n s u r e d . All o t h e r i n d e m n i t i e s of this policy a r e p a y a b l e to t h e i n s u r e d . (B): 11. All t h e i n d e m n i t i e s of this policy a r e p a y a b l e to t h e insured. (12) A s t a n d a r d p r o v i s i o n p r o v i d i n g f o r c a n c e l l a t i o n of t h e policy at t h e i n s t a n c e of t h e i n s u r e d w h i c h shall b e in t h e f o l l o w i n g f o r m : 12. If t h e i n s u r e d shall a t a n y t i m e c h a n g e his o c c u p a t i o n t o o n e classified by t h e i n s u r e r as less h a z a r d o u s t h a n t h a t s t a t e d in t h e policy, t h e i n s u r e r , u p o n w r i t t e n r e q u e s t of t h e i n s u r e d , a n d s u r r e n d e r of t h e policy, will cancel t h e s a m e a n d will r e t u r n t o t h e i n s u r e d t h e u n e a r n e d premium. (13) A s t a n d a r d p r o v i s i o n r e l a t i v e t o t h e r i g h t s of t h e b e n e f i c i a r y u n d e r t h e policy w h i c h shall b e in t h e f o l l o w i n g f o r m a n d w h i c h m a y be o m i t t e d f r o m any policy not designating a beneficiary: 13. C o n s e n t of t h e b e n e f i c i a r y shall n o t b e r e q u i s i t e to s u r r e n d e r o r a s s i g n m e n t of this policy, o r to c h a n g e of b e n e f i c i a r y , o r to a n y o t h e r c h a n g e s in t h e policy. (14) A standard provision limiting the time within which suit may b e b r o u g h t u p o n t h e p o l i c y as follows: 14. N o a c t i o n at law o r i n e q u i t y shall b e b r o u g h t t o r e c o v e r o n this policy p r i o r t o t h e e x p i r a t i o n of sixty days a f t e r proof of loss h a s b e e n filed in a c c o r d a n c e w i t h t h e r e q u i r e m e n t s of t h i s policy, n o r shall such

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action b e b r o u g h t at all unless b r o u g h t within two years f r o m t h e e x p i r a t i o n of the time within which proof of loss is required by t h e policy. (/5) A s t a n d a r d provision relative to time limitations of the policy as follows: 15. If any time limitation of this policy with respect to giving notice of claim or f u r n i s h i n g proof of loss is less t h a n that permitted by t h e law of t h e state in which the insured resides at the time this policy is issued, such limitation is hereby e x t e n d e d to agree with the m i n i m u m period p e r m i t t e d by such law. Section 4. N o such policy shall be so issued or delivered which contains any provision (1) relative to cancellation at the instance of the insurer; or, (2) limiting t h e a m o u n t of indemnity to a sum less t h a n the a m o u n t stated in the policy a n d for which the p r e m i u m has been paid; or, (3) p r o v i d i n g f o r the d e d u c t i o n of any p r e m i u m f r o m the a m o u n t p a i d in settlement of claim; or, (4) relative to other insurance by the same insurer; or, (5) relative to the age limits of the policy; unless such provisions which are hereby designated as optional standard provisions, shall be in t h e words and in the o r d e r in which they are h e r e i n a f t e r set f o r t h , b u t t h e insurer may at its o p t i o n omit from the policy any such o p t i o n a l s t a n d a r d provision. Such optional standard provisions if inserted in t h e policy shall immediately succeed the standard provisions n a m e d in section three of this act. (/) A n o p t i o n a l s t a n d a r d provision relative to cancellation of the policy at t h e instance of the insurer as follows: 16. T h e insurer may cancel this policy at any time by w r i t t e n notice delivered to the insured or mailed to his last address as shown by t h e records of t h e insurer together with cash or the insurer's check for t h e u n e a r n e d p o r t i o n of the p r e m i u m s actually paid by the insured, a n d such cancellation shall be w i t h o u t prejudice to any claim origin a t i n g p r i o r thereto. (2) An o p t i o n a l s t a n d a r d provision relative to r e d u c t i o n of the a m o u n t of i n d e m n i t y to a sum less t h a n that stated in the policy as follows: 17. If t h e insured shall carry with a n o t h e r company, corporation, association o r society o t h e r insurance covering the same loss w i t h o u t giving w r i t t e n notice to the insurer, t h e n in that case the insurer shall be liable only for such portion of t h e indemnity promised as t h e said i n d e m n i t y bears to the total a m o u n t of like indemnity in all policies covering such loss, and for the r e t u r n of such part of the p r e m i u m paid as shall exceed the pro rata for the i n d e m n i t y thus d e t e r m i n e d . (J) A n o p t i o n a l standard provision relative to deduction of p r e m i u m u p o n settlement of claim as follows: 18. U p o n the p a y m e n t of claim h e r e u n d e r any p r e m i u m t h e n d u e

APPENDIX A

269

and unpaid or covered by any note or written order may be deducted therefrom. (4) An optional standard provision relative to other insurance by the same insurer which shall be in such one of the following forms as may be appropriate to the indemnities provided, and in the blank spaces of which the insurer shall insert such upward limits of indemnity as are specified by the insurer's classification of risks, filed as required by this act. (A): 19. If a like policy or policies, previously issued by the insurer to the insured be in force concurrently herewith, making the aggregate indemnity in excess of $ the excess insurance shall be void and all premiums paid for such excess shall be returned to the insured. (B): 19. If a like policy or policies, previously issued by the insurer to the insured be in force concurrently herewith, making the aggregate indemnity for loss of time on account of disability in excess of $ weekly, the excess insurance shall be void and all premiums paid for such excess shall be returned to the insured. (C): 19. If a like policy or policies, previously issued by the insurer to the insured be in force concurrently herewith, making the aggregate indemnity for loss other than that of time on account of disability in excess of $ or the aggregate indemnity for loss of time on account of disability in excess of $ weekly, the excess insurance of either kind shall be void and all premiums paid for such excess shall be returned to the insured. (5) An optional standard provision relative to the age limits of the policy which shall be in the following form and in the blank spaces of which the insurer shall insert such number of years as it may elect: 20. T h e insurance under this policy shall not cover any person under the age of years nor over the age of years. Any premium paid to the insurer for any period not covered by this policy will be returned upon request. Section 5. No such policy shall be so issued or delivered if it contains any provision contradictory, in whole or part, of any of the provisions hereinbefore in this act designated as "Standard Provisions" or as "Optional Standard Provisions"; nor shall any endorsements or attached papers vary, alter, extend, be used as a substitute for, or in any way conflict with any of the said "Standard Provisions" or the said "Optional Standard Provisions"; nor shall such policy be so issued or delivered if it contains any provision purporting to make any portion of the charter, constitution or by-laws of the insurer a part of the policy unless such portion of the charter, constitution or by-laws shall be set forth in full in the policy, but this prohibition shall not be deemed to apply to any statement of rates or classification of risks filed with the commissioner of insurance in accordance with the provisions of this act.

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Section 6. T h e falsity of any statement in the application for any policy covered by this act shall not bar the right to recovery t h e r e u n d e r unless such false statement was m a d e with actual intent to deceive or unless it materially affected either the acceptance of t h e risk or the hazard assumed by the insurer. Section 7. T h e a c k n o w l e d g m e n t by any insurer of t h e receipt of notice given u n d e r any policy covered by this act, or the f u r n i s h i n g of forms for filing proofs of loss, or the acceptance of such proofs, or the investigation of any claim t h e r e u n d e r shall not operate as a waiver of any of the rights of the insurer in defense of any claim arising u n d e r such policy. Section 8. N o alteration of any written application for insurance by erasure, insertion or otherwise, shall be made by any person other t h a n the a p p l i c a n t w i t h o u t his written consent, and the making of any such alteration w i t h o u t t h e consent of the applicant shall be a misdemeanor. If such alteration shall be m a d e by any officer of the insurer, or by any employee of the insurer with the insurer's knowledge or consent, t h e n such act shall be d e e m e d to have been performed by the insurer thereafter issuing the policy u p o n such altered application. Section 9. A policy issued in violation of this act shall be held valid b u t shall be construed as p r o v i d e d in this act and when any provision in such a policy is in conflict with any provision of this act the rights, duties a n d obligations of the insurer, the policyholder a n d the beneficiary shall be governed by the provisions of this act. Section 10. T h e policies of insurance against accidental bodily i n j u r y or sickness issued by an insurer not organized u n d e r the laws of this state may c o n t a i n , w h e n issued in this state, any provision which the law of the state, territory o r district of the U n i t e d States u n d e r which t h e insurer is organized, prescribes for insertion in such policies, a n d t h e policies of insurance against accidental bodily i n j u r y or sickness issued by an insurer organized u n d e r the laws of this state may contain, when issued or delivered in any o t h e r state, territory, district or country, any provision r e q u i r e d by t h e laws of the state, territory, district or country in which the same are issued, a n y t h i n g in this act to the contrary n o t w i t h s t a n d i n g . Section I I . D i s c r i m i n a t i o n between individuals of the same class in the a m o u n t of p r e m i u m s or rates charged for any policy of insurance covered by this act, or in the benefits payable thereon, or in any of the terms or conditions of such policy, or in any other m a n n e r whatsoever is prohibited. Section 12. (1) N o t h i n g in this act, however, shall apply to or affect any policy of liability or w o r k m e n ' s compensation insurance or any general or b l a n k e t policy of insurance issued to any municipal corporation or d e p a r t m e n t thereof, or to any corporation, copartnership, asso-

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271

ciation o r individual employer, police or fire d e p a r t m e n t , underwriters' corps, salvage b u r e a u , or like associations o r organizations, where the officers, members or employees or classes or d e p a r t m e n t s thereof are insured for their individual benefit against specified accidental bodily i n j u r i e s or sickness while exposed to the hazards of the occupation or otherwise in consideration of a p r e m i u m i n t e n d e d to cover the risks of all the persons insured u n d e r such policy. (2) N o t h i n g in this act shall apply to or in any way affect contracts s u p p l e m e n t a l to contracts of life or e n d o w m e n t insurance where such s u p p l e m e n t a l contracts contain n o provisions except such as o p e r a t e to safeguard such insurance against lapse o r to provide a special surr e n d e r value t h e r e f o r in t h e event that the insured shall be totally a n d p e r m a n e n t l y disabled by reason of accidental bodily i n j u r y or by sickness; provided that no such s u p p l e m e n t a l contract shall be issued or delivered to any person in this state unless a n d until a copy of the f o r m thereof has been s u b m i t t e d to a n d a p p r o v e d by t h e Commissioner of Insurance, u n d e r such reasonable rules a n d regulations as he shall m a k e c o n c e r n i n g t h e provisions in such contracts a n d their submission to a n d a p p r o v a l by him. (3) N o t h i n g in this act shall apply to or in any way affect f r a t e r n a l benefit societies. (4) T h e provisions of this act c o n t a i n e d in clause (5) of Section 2 a n d clauses 2, 3, 8 a n d 12 of Section 3 may be o m i t t e d f r o m railroad ticket policies sold only at railroad stations, or at railroad ticket offices by railroad employees. Section 13. Any company, c o r p o r a t i o n , association, society or other insurer or any officer or agent thereof, which o r who issues or delivers to any person in this state any policy in wilful violation of the provisions of this act shall be p u n i s h e d by a fine of not m o r e t h a n dollars for each offense, and the Commissioner of I n s u r a n c e may revoke the license of any company, c o r p o r a t i o n , association, society or o t h e r insurer of a n o t h e r state o r country, or of the agent thereof, which or w h o wilfully violates any provision of this act. Section 14. All acts or parts of acts inconsistent with this act are hereby repealed. Note—If a " S t a n d a r d Provisions" Law has already b e e n enacted, Section 14 should read: Section 14. T h e act of this State entitled approved a n d all acts or p a r t s of acts inconsistent with this act are hereby repealed. Section 15. T h i s act shall take effect o n the first day of October, 1913. Any policy covered by this act, the f o r m of which has received the a p p r o v a l of the Commissioner of I n s u r a n c e may be issued or delivered in this State o n a n d after the said date.

APPENDIX B T H E 1950 UNIFORM INDIVIDUAL ACCIDENT AND SICKNESS POLICY PROVISIONS LAW N.A.I.C. Section 1. D E F I N I T I O N O F A C C I D E N T AND SICKNESS I N S U R A N C E P O L I C Y . T h e term "policy of accident and sickness insurance" as used herein includes any policy or contract covering the kind or kinds of insurance described in (insert here the section of law authorizing accident and sickness insurance). (Note: If the insurance law of the state in which this draft is proposed for enactment does not have a section specifically authorizing the various types of insurance which may be written, this section should be modified to define accident and sickness insurance as "insurance against loss resulting from sickness or from bodily injury or death by accident, or both.") Section 2 . F O R M O F P O L I C Y . (A) No policy of accident and sickness insurance shall be delivered or issued for delivery to any person in this state unless: (1) the entire money and other considerations therefor are expressed therein; and (2) the time at which the insurance takes effect and terminates is expressed therein; and (3) it purports to insure only one person, except that a policy may insure, originally or by subsequent amendment, upon the application of an adult member of a family who shall be deemed the policyholder, any two or more eligible members of that family, including husband, wife, dependent children or any children under a specified age which shall not exceed nineteen years and any other person dependent upon the policyholder; and (Note: In states having community property systems derived from the civil law it is suggested that in the foregoing subparagraph the words "an adult member" be replaced with "the head.") (4) the style, arrangement and over-all appearance of the policy give no undue prominence to any portion of the text, and unless every printed portion of the text of the policy and of any endorsements or attached papers is plainly printed in light-faced type of a style in general use, the size of which shall be uniform and not less than ten-point with a lower-case unspaced alphabet length not less than one hundred and twenty-point (the "text" shall include all printed matter except the name and address of the insurer, name or title of the policy, the brief description if any, and captions and subcaptions); and 272

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273

(5) the exceptions and reductions of indemnity are set forth in the policy and, except those which are set forth in section 3 of this act, are printed, at the insurer's option, either included with the benefit provision to which they apply, or under an appropriate caption such as " E X C E P T I O N S , " or " E X C E P T I O N S AND REDUCTIONS," provided that if an exception or reduction specifically applies only to a particular benefit of the policy, a statement of such exception or reduction shall be included with the benefit provision to which it applies; and (6) each such form, including riders and endorsements, shall be identified by a form n u m b e r in the lower left-hand corner of the first page thereof; and (7) it contains no provision p u r p o r t i n g to make any portion of the charter, rules, constitution, or by-laws of the insurer a part of the policy unless such portion is set forth in full in the policy, except in the case of the incorporation of, or reference to, a statement of rates or classification of risks, or short-rate table filed with the (Commissioner). (B) If any policy is issued by an insurer domiciled in this state for delivery to a person residing in another state, and if the official having responsibility for the administration of the insurance laws of such other state shall have advised the (Commissioner) that any such policy is not subject to approval or disapproval by such official, the (Commissioner) may by r u l i n g require that such policy meet the standards set forth in subsection (A) of this section and in section 3. Section 3 . (A) Required.

A C C I D E N T AND SICKNESS P O L I C Y PROVISIONS.

Provisions

Except as provided in paragraph (C) of this section each such policy delivered or issued for delivery to any person in this state shall contain the provisions specified in this subsection in the words in which the same appear in this section; provided, however, that the insurer may, at its option, substitute for one or more of such provisions corresponding provisions of different wording approved by the (Commissioner) which are in each instance not less favorable in any respect to the insured or the beneficiary. Such provisions shall be preceded individually by the caption appearing in this subsection or, at the option of the insurer, by such appropriate individual or group captions or subcaptions as the (Commissioner) may approve. (1) A provision as follows: Entire Contract; Changes: T h i s policy, including the endorsements and the attached papers, if any, constitutes the entire contract of insurance. N o change in this policy shall be valid until approved by an executive officer of the insurer and unless such approval be endorsed hereon or attached hereto. No agent has authority to change this policy or to waive any of its provisions. (Note: When enacted in states which prohibit amendment of a policy piece form by means other than attached printed rider upon a separate of paper the new law should contain (but not as a required policy pro-

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vision) an added section defining "endorsement" in such to make the new law consistent with current statutes.)

a manner

as

(2) A provision as follows: T i m e Limit on Certain Defenses: (a) After three years from the date of issue of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy shall be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of such three year period. ( T h e f o r e g o i n g policy provision shall not l>e so construed as to affect any legal r e q u i r e m e n t for a v o i d a n c e of a policy o r denial of a claim d u r i n g such i n i t i a l t h r e e year p e r i o d , n o r to limit t h e a p p l i c a t i o n of section 3 (B), (1), (2), (3), (4) and (5) in t h e event of m i s s t a t e m e n t with respect to age or occupation or o t h e r i n s u r a n c e . ) (A policy w h i c h t h e i n s u r e d has t h e right to c o n t i n u e in force s u b j e c t to its terms by t h e timely p a y m e n t of p r e m i u m (1) until at least age 50 or, (2) in the case of a policy issued a f t e r a g e 44, for at least five years from its d a t e of issue, may c o n t a i n in lieu of t h e foregoing t h e following provision (from which t h e clause in p a r e n t h e s e s may be o m i t t e d at t h e insurer's o p t i o n ) u n d e r t h e caption • I N C O N T E S T A B L E " :

After this policy has been in force for a period of three years during the lifetime of the insured (excluding any period during which the insured is disabled), it shall become incontestable as to the statements contained in the application.) (b) No claim for loss incurred or disability (as defined in the policy) commencing after three years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the effective date of coverage of this policy. (3) A provision as follows: Grace Period: A grace period of (insert a number not less than "7" for weekly premium policies, "10" for monthly premium policies and "31" for all other policies) days will be granted for the payment of each premium falling due after the first premium, during which grace period the policy shall continue in force. (A policv which c o n t a i n s a c a n c e l l a t i o n provision may add, at t h e end of the above provision,

subject to the right of the insurer to cancel in accordance with the cancellation provision hereof. A policy in which t h e i n s u r e r reserves t h e right to refuse any renewal shall have, at t h e b e g i n n i n g of t h e above provision,

Unless not less than five days prior to the premium due date the insurer has delivered to the insured or has mailed to his last address as shown by the records of the insurer written notice of its intention not

APPENDIX B

275

to renew this policy beyond the period for which the premium has been accepted,). (4) A provision as follows: Reinstatement: If any renewal premium be not paid within the time granted the insured for payment, a subsequent acceptance of premium by the insurer or by any agent duly authorized by the insurer to accept such premium, without requiring in connection therewith an application for reinstatement, shall reinstate the policy; provided, however, that if the insurer or such agent requires an application for reinstatement and issues a conditional receipt for the premium tendered, the policy will be reinstated upon approval of such application by the insurer or, lacking such approval, upon the forty-fifth day following the date of such conditional receipt unless the insurer has previously notified the insured in writing of its disapproval of such application. T h e reinstated policy shall cover only loss resulting from such accidental injury as may be sustained after the date of reinstatement and loss due to such sickness as may begin more than ten days after such date. In all other respects the insured and insurer shall have the same rights thereunder as they had under the policy immediately before the due date of the defaulted premium, subject to any provisions endorsed hereon or attached hereto in connection with the reinstatement. Any premium accepted in connection with a reinstatement shall be applied to a period for which premium has not been previously paid, but not to any period more than sixty days prior to the date of reinstatement. (The last sentence of the above provision may be omitted from any policy which the insured has the right to continue in force subject to its terms by the timely payment of premiums (1) until at least age 50 or, (2) in the case of a policy issued after age 44, for at least five years from its date of issue.) (5)

A p r o v i s i o n as f o l l o w s :

Notice o f Claim: Written notice of claim must be given to the insurer within twenty days after the occurrence or commencement of any loss covered by the policy, or as soon thereafter as is reasonably possible. Notice given by or on behalf of the insured or the beneficiary to the insurer at (insert the location of such office as the insurer may designate for the purpose), or to any authorized agent of the insurer, with information sufficient to identify the insured, shall be deemed notice to the insurer. (In a policy providing a loss-of-time l>enefit which may be payable for at least two years, an insurer ina\ at its option insert the following between the first and second sentences of the al>ove provision: Subject to the qualifications set forth below, if the insured suffers loss of time on account of disability for which indemnity may be payable for at least two years, he shall, at least once in every six months after having given notice of claim, give to the insurer notice of continuance of said disability, except in the event of legal incapacity. T h e

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period of six months following any filing of proof by the insured or any payment by the insurer on account of such claim or any denial of liability in whole or in part by the insurer shall be excluded in applying this provision. Delay in the giving of such notice shall not impair the insured's right to any indemnity which would otherwise have accrued during the period of six months preceding the date on which such notice is actually given.) (6) A provision as follows: Claim Forms: T h e insurer, upon receipt of a notice of claim, will furnish to the claimant such forms as are usually furnished by it for filing proofs of loss. If such forms are not furnished within fifteen days after the giving of such notice the claimant shall be deemed to have complied with the requirements of this policy as to proof of loss upon submitting, within the time fixed in the policy for filing proofs of loss, written proof covering the occurrence, the character and the extent of the loss for which claim is made. (7) A provision as follows: Proofs of Loss: Written proof of loss must be furnished to the insurer at its said office in case of claim for loss for which this policy provides any periodic payment contingent upon continuing loss within ninety days after the termination of the period for which the insurer is liable and in case of claim for any other loss within ninety days after the date of such loss. Failure to furnish such proof within the time required shall not invalidate nor reduce any claim if it was not reasonably possible to give proof within such time, provided such proof is furnished as soon as reasonably possible and in no event, except in the absence of legal capacity, later than one year from the time proof is otherwise required. (8) A provision as follows: T i m e of Payment of Claims: Indemnities payable under this policy for any loss other than loss for which this policy provides any periodic payment will be paid immediately upon receipt of due written proof of such loss. Subject to due written proof of loss, all accrued indemnities for loss for which this policy provides periodic payment will be paid (insert period for payment which must not be less frequently than monthly) and any balance remaining unpaid upon the termination of liability will be paid immediately upon receipt of due written proof. (9) A provision as follows: Payment of Claims: Indemnity for loss of life will be pavable in accordance with the beneficiary designation and the provisions respecting such payment which may be prescribed herein and effective at the time of payment. If no such designation or provision is then effective, such indemnity shall be payable to the estate of the insured. Any other

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accrued indemnities unpaid at the insured's death may, at the option of the insurer, be paid either to such beneficiary or to such estate. All other indemnities will be payable to the insured. ( T h e following provisions, or e i t h e r of t h e m , may b e i n c l u d e d w i t h f o r e g o i n g provision at t h e o p t i o n of t h e insurer:

the

If any indemnity of this policy shall be payable to the estate of the insured, or to an insured or beneficiary who is a minor or otherwise not competent to give a valid release, the insurer may pay such indemnity, up to an amount not exceeding $ (insert an amount which shall not exceed $1000), to any relative by blood or connection by marriage of the insured or beneficiary who is deemed by the insurer to be equitably entitled thereto. Any payment made by the insurer in good faith pursuant to this provision shall fully discharge the insurer to the extent of such payment. Subject to any written direction of the insured in the application or otherwise all or a portion of any indemnities provided by this policy on account of hospital, nursing, medical, or surgical services may, at the insurer's option and unless the insured requests otherwise in writing not later than the time of filing proofs of such loss, be paid directly to the hospital or person rendering such services; but it is not required that the service be rendered by a particular hospital or person.) (10) A provision as follows: Physical Examinations and Autopsy: T h e insurer at its own expense shall have the right and opportunity to examine the person of the insured when and as often as it may reasonably require during the pendency of a claim hereunder and to make an autopsy in case of death where it is not forbidden by law. (11) A provision as follows: Legal Actions: No action at law or in equity shall be brought to recover on this policy prior to the expiration of sixty days after written proof of loss has been furnished in accordance with the requirements of this policy. No such action shall be brought after the expiration of three years after the time written proof of loss is required to be furnished. (12) A provision as follows: Change of Beneficiary: Unless the insured makes an irrevocable designation of beneficiary, the right to change of beneficiary is reserved to the insured and the consent of the beneficiary or beneficiaries shall not be requisite to surrender or assignment of this policy or to any change of beneficiary or beneficiaries, or to any other changes in this policy. (The first clause of this provision, relating to the irrevocable designation of beneficiary, may be omitted at the insurer's option.)

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(B) Other Provisions Except as provided in paragraph (C) of this section, no such policy delivered or issued for delivery to any person in this state shall contain provisions respecting the matters set forth below unless such provisions are in the words in which the same appear in this section; provided, however, that the insurer may, at its option, use in lieu of any such provision a corresponding provision of different wording approved by the (Commissioner) which is not less favorable in any respect to the insured or the beneficiary. Any such provision contained in the policy shall be preceded individually by the appropriate caption appearing in this subsection or, at the option of the insurer, by such appropriate individual or g r o u p captions or subcaptions as the (Commissioner) may approve. (1) A provision as follows: C h a n g e of Occupation: If the insured be injured or contract sickness after having changed his occupation to one classified by the insurer as more hazardous than that stated in this policy or while doing for compensation anything pertaining to an occupation so classified, the insurer will pay only such portion of the indemnities provided in this policy as the premium paid would have purchased at the rates and within the limits fixed by the insurer for such more hazardous occupation. If the insured changes his occupation to one classified by the insurer as less hazardous than that stated in this policy, the insurer, upon receipt of proof of such change of occupation, will reduce the premium rate accordingly, and will return the excess pro-rata unearned premium from the date of change of occupation or from the policy anniversary date immediately preceding receipt of such proof, whichever is the more recent. In applying this provision, the classification of occupational risk and the premium rates shall be such as have been last filed by the insurer prior to the occurrence of the loss for which the insurer is liable or prior to date of proof of change in occupation with the state official having supervision of insurance in the state where the insured resided at the time this policy was issued; but if such filing was not required, then the classification of occupational risk and the premium rates shall be those last made effective by the insurer in such state prior to the occurrence of the loss or prior to the date of proof of change in occupation. (2) A provision as follows: Misstatement of Age: If the age of the insured has been misstated, all amounts payable under this policy shall be such as the premium paid would have purchased at the correct age. (3) A provision as follows: Other Insurance in T h i s Insurer: If an accident or sickness or accident and sickness policy or policies previously issued by the insurer to the insured be in force concurrently herewith, making the aggregate

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279

indemnity for (insert type of coverage or coverages) in excess of $ (insert maximum limit of indemnity or indemnities) t h e excess i n s u r a n c e shall b e void a n d all p r e m i u m s p a i d f o r such excess shall b e r e t u r n e d to t h e i n s u r e d o r t o his estate. O r , in lieu t h e r e o f : I n s u r a n c e effective at a n y o n e t i m e o n t h e i n s u r e d u n d e r a like policy or policies in this i n s u r e r is l i m i t e d to t h e o n e s u c h policy elected by t h e i n s u r e d , his bcneficiary o r his estate, as t h e case m a y be, a n d t h e i n s u r e r will r e t u r n all p r e m i u m s p a i d f o r all o t h e r such policies. (4) A p r o v i s i o n as follows: Insurance with Other Insurers: If t h e r e b e o t h e r valid coverage, n o t w i t h this i n s u r e r , p r o v i d i n g benefits f o r t h e s a m e loss o n a p r o v i s i o n of service basis o r on a n e x p e n s e i n c u r r e d basis a n d of w h i c h this i n s u r e r has n o t b e e n given w r i t t e n n o t i c e p r i o r to t h e o c c u r r e n c e o r c o m m e n c e m e n t of loss, t h e o n l y liability u n d e r a n y e x p e n s e i n c u r r e d coverage of this policy shall b e f o r such p r o p o r t i o n of t h e loss as t h e a m o u n t w h i c h w o u l d o t h e r w i s e h a v e b e e n p a y a b l e h e r e u n d e r p l u s t h e total of t h e like a m o u n t s u n d e r all such o t h e r valid coverages for t h e s a m e loss of w h i c h t h i s i n s u r e r h a d n o t i c e b e a r s to t h e t o t a l like a m o u n t s u n d e r all valid coverages f o r such loss, a n d f o r t h e r e t u r n of such p o r t i o n of t h e p r e m i u m s p a i d as shall exceed t h e p r o - r a t a p o r t i o n f o r t h e a m o u n t so d e t e r m i n e d . For t h e p u r p o s e of a p p l y i n g this p r o v i s i o n w h e n o t h e r coverage is o n a p r o v i s i o n of service basis, t h e "like a m o u n t " of such o t h e r coverage shall b e t a k e n as t h e a m o u n t w h i c h t h e services r e n d e r e d w o u l d h a v e cost in t h e a b s e n c e of such coverage. (If the foregoing policy provision is included in a policy which also contains the next following policy provision (here shall be added to the caption of the foregoing provision the phrase "—EXPENSE I N C U R R E D BENEFITS." T h e insurer may, at its option, include in this provision a definition of "other valid coverage," approved as to form by the (Commissioner), which definition shall be limited in subject matter to coverage provided by organizations subject to regulation by insurance law or by insurance authorities of this or any other state of the United States or any province of Canada, and by hospital or medical service organizations, and to any other coverage the inclusion of which may be approved by the (Commissioner). In the absence of such definition such term shall not include group insurance, automobile medical payments insurance, or coverage provided by hospital or medical service organizations or by union welfare plans or employer or employee benefit organizations. For the purpose of applying the foregoing policy provision with respect to any insured, any amount of benefit provided for such insured pursuant to any compulsory benefit statute (including any workmen's compensation or employer's liability statute) whether provided by a governmental agency or otherwise shall in all cases be deemed to be "other valid coverage" of which the insurer has had notice. In applying the foregoing policy provision no third party liability coverage shall be included as "other valid coverage.") (5) A provision as follows: Insurance with Other Insurers: If t h e r e b e o t h e r valid coverage, n o t w i t h t h i s i n s u r e r , p r o v i d i n g b e n e f i t s f o r t h e s a m e loss o n o t h e r t h a n an

280

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SICKNESS

INSURANCE

e x p e n s e i n c u r r e d basis a n d o f which this insurer has not b e e n given w r i t t e n n o t i c e p r i o r to the o c c u r r e n c e o r c o m m e n c e m e n t o f loss, the o n l y liability for such benefits u n d e r this policy shall be for such proportion o f the i n d e m n i t i e s otherwise provided h e r e u n d e r for such loss as the like i n d e m n i t i e s of which the insurer h a d notice (including the i n d e m n i t i e s u n d e r this policy) bear to t h e total a m o u n t o f all like i n d e m n i t i e s for such loss, a n d for the r e t u r n of such portion of the p r e m i u m paid as shall exceed the pro-rata p o r t i o n for the i n d e m n i t i e s thus d e t e r m i n e d . (If the foregoing policy provision is included in a policy which also contains t h e next preceding policy provision there shall be added to the caption of the foregoing provision the phrase " — O T H E R B E N E F I T S . " T h e insurer may, at its o p t i o n , include in this provision a definition of " o t h e r valid coverage," approved as to form by the ( C o m m i s s i o n e r ) , which definition shall be limited in subject matter to coverage provided by organizations subject to regulation by insurance law or by insurance authorities of this or any o t h e r state of the U n i t e d States or any province of Canada, and to any o t h e r coverage t h e inclusion of which may be approved by the (Commissioner). In the absence of such definition such term shall not include group insurance, or benefits provided by union welfare plans or by employer or employee benefit organizations. For the purpose of applying the foregoing policy provision with respect to any insured, any a m o u n t of benefit provided for such insured pursuant to any compulsory benefit statute (including any workmen's compensation or employer's liability statute) w h e t h e r provided by a governmental agency or otherwise shall in all cases be deemed to be " o t h e r valid coverage" of which the insurer has had notice. In applying the foregoing policy provision no third party liability coverage shall be included as " o t h e r valid coverage.")

(6) A provision as follows: R e l a t i o n o f E a r n i n g s to I n s u r a n c e : I f t h e total m o n t h l y a m o u n t of loss of time benefits promised for the same loss u n d e r all valid loss of t i m e coverage u p o n the insured, w h e t h e r payable o n a weekly or m o n t h l y basis, shall exceed the m o n t h l y earnings of the insured at the t i m e disability c o m m e n c e d o r his average m o n t h l y earnings f o r the p e r i o d of two years immediately preceding a disability for which claim is made, w h i c h e v e r is the greater, the insurer will be liable o n l y for such p r o p o r t i o n a t e a m o u n t of such benefits u n d e r this policy as the a m o u n t of such m o n t h l y earnings or such average m o n t h l y earnings of the insured bears to the total a m o u n t of m o n t h l y benefits for the same loss u n d e r all such coverage u p o n the insured at the t i m e such disability c o m m e n c e s a n d for the r e t u r n of such part of the p r e m i u m s paid d u r i n g such two years as shall e x c e e d the pro-rata a m o u n t of the p r e m i u m s for t h e benefits actually paid h e r e u n d e r ; but this shall not o p e r a t e to r e d u c e the total m o n t h l y a m o u n t of benefits payable u n d e r all such coverage u p o n the insured below the sum of two h u n d r e d dollars or the sum o f the m o n t h l y benefits specified in such coverages, whichever is the lesser, nor shall it o p e r a t e to reduce benefits o t h e r than those payable for loss of time.

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281

(TIhe foregoing policy provision may be inserted only in a policy which the insurred has the right to continue in force subject to its terms by the timely payrment of premiums (1) until at least age 50 or, (2) in the case of a policy isiuetd after age 44, for at least five years from its date of issue. The insurer may, at its option, include in this provision a definition of "valid loss of time coverrage," approved as to form by the (Commissioner), which definition shall be liimited in subject matter to coverage provided by governmental agencies or by organizations subject to regulation by insurance law or by insurance authorities of this or any other state of the United States or any province of Canaida, or to any other coverage the inclusion of which may be approved by the (iCommissioner) or any combination of such coverages. In the absence of such definition such term shall not include any coverage provided for such insured pursuant to any compulsory benefit statute (including any workmen's compensation or employer's liability statute), or benefits provided by union welfaire plans or by employer or employee benefit organizations.) (7)) A provision as follows: U m p a i d P r e m i u m : U p o n the payment of a claim u n d e r this policy, any premium then d u e and u n p a i d or covered by any note or written orde:r may be deducted therefrom. (8") A provision as follows: Cancellation: T h e insurer may cancel this policy at any time by writtren notice delivered to the insured, or mailed to his last address as s h o w n by the records of the insurer, stating when, not less than five days thereafter, such cancellation shall be effective; and after the policy has b e e n continued beyond its original term the insured may cancel this policy at any time by written notice delivered or mailed to the insurer, effective upon receipt or o n such later date as may be specified in such notice. In the event of cancellation, the insurer will r e t u r n promptly the u n e a r n e d portion of any premium paid. If the insured cancels, the e a r n e d premium shall be computed by the use of the short-rate table last filed with the state official having supervision of insurance in the state where the insured resided when the policy was issued. If the insurer cancels, the earned p r e m i u m shall be computed pro-rata. Cancellation shall be without prejudice to any claim originating prior to the effective date of cancellation. (Note: In some states by statute termination of the in force status of the policy alone may not prejudice any claim for loss arising during and out of a disability which commenced while the policy was in force. consistent with The language here is susceptible of an interpretation such statutes.) (9) A provision as follows: Conformity with State Statutes: Any provision of this policy which, o n its effective date, is in conflict with the statutes of the state in which the insured resides on such date is hereby a m e n d e d to conform to the m i n i m u m requirements of such statutes. (10) A provision as follows: Illegal Occupation: T h e insurer shall not be liable for any loss to which a contributing cause was the insured's commission of or a t t e m p t

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A C C I D E N T A N D SICKNESS I N S U R A N C E

to commit a felony or to which a c o n t r i b u t i n g cause was the insured's b e i n g engaged in an illegal occupation. (11) A provision as follows: Intoxicants and Narcotics: T h e insurer shall n o t be liable for any loss sustained or contracted in consequence of t h e insured's being intoxicated or u n d e r the influence of any narcotic unless administered on the advice of a physician. (Note: Paragraphs (10) and (11) are suggested for states which desire such provisions.) (C) Inapplicable or Inconsistent Provisions If any provision of this section is in whole or in part inapplicable to or inconsistent with the coverage provided by a particular form of policy the insurer, with the approval of the (Commissioner), shall o m i t f r o m such policy any inapplicable provision or p a r t of a provision, a n d shall modify any inconsistent provision or p a r t of the provision in such m a n n e r as to make the provision as contained in the policy consistent w i t h the coverage provided by the policy. (D) Order of Certain Policy Provisions T h e provisions which are the subject of subsections (A) a n d (B) of this section, or any corresponding provisions which are used in lieu thereof in accordance with such subsections, shall be p r i n t e d in the consecutive order of the provisions in such subsections or, at t h e o p t i o n of t h e insurer, any such provision may a p p e a r as a unit in any part of t h e policy, with o t h e r provisions to which it may be logically related, provided the resulting policy shall not be in whole or in p a r t unintelligible, u n c e r t a i n , ambiguous, abstruse, or likely to mislead a person to w h o m the policy is offered, delivered or issued. (E) Third Party Ovonership T h e word "insured," as used in this act, shall not be construed as p r e v e n t i n g a person other t h a n the insured with a p r o p e r insurable interest f r o m m a k i n g application for and o w n i n g a policy covering t h e insured or f r o m being entitled u n d e r such a policy to any indemnities, benefits a n d rights provided therein. (F) Requirements of Other Jurisdictions (1) Any policy of a foreign or alien insurer, w h e n delivered or issued for delivery to any person in this state, may contain any provision which is not less favorable to the insured or the beneficiary t h a n the provisions of this act and which is prescribed or r e q u i r e d by t h e law of t h e state u n d e r which the insurer is organized. (2) Any policy of a domestic insurer may, w h e n issued for delivery in any o t h e r state or country, contain any provision p e r m i t t e d or r e q u i r e d by t h e laws of such o t h e r state or country. (G) Filing Procedure T h e (Commissioner) may make such reasonable rules a n d regulations concerning t h e procedure f o r the filing or submission of policies subject

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to this act as are necessary, p r o p e r or advisable to the administration of this act. T h i s provision shall not abridge any other authority g r a n t e d the (Commissioner) by law. Section

4.

C O N F O R M I N G T O STATUTF..

(A) Other Policy Provisions N o policy provision which is not subject to section 3 of this act shall m a k e a policy, or any p o r t i o n thereof, less favorable in any respect to the insured or the beneficiary than the provisions thereof which are subject to this act. (B) Policy Conflicting with This Act A policy delivered or issued for delivery to any person in this state in violation of this act shall be held valid but shall be construed as p r o v i d e d in this act. W h e n any provision in a policy subject to this act is in conflict with any provision of this act, the rights, duties a n d obligations of the insurer, the insured a n d the beneficiary shall be governed by t h e provisions of this act. Section 5 . A P P L I C A T I O N . (A) T h e insured shall not be b o u n d by any statement m a d e in an a p p l i c a t i o n for a policy unless a copy of such application is attached to or endorsed on t h e policy when issued as a part thereof. If any such policy delivered or issued for delivery to any person in this state shall be reinstated or renewed, and the insured or the beneficiary or assignee of such policy shall m a k e written request to the insurer for a copy of the application, if any, for such reinstatement or renewal, the insurer shall within fifteen days after the receipt of such request at its h o m e office or any b r a n c h office of the insurer, deliver or mail to the person m a k i n g such request, a copy of such application. If such copy shall not be so delivered or mailed, the insurer shall be precluded f r o m introd u c i n g such application as evidence in any action or proceeding based u p o n or involving such policy or its reinstatement or renewal. (B) N o alteration of any written application for any such policy shall be m a d e by any person other t h a n the applicant w i t h o u t his written consent, except that insertions may be m a d e by the insurer, for administrative purposes only, in such m a n n e r as to indicate clearly that such insertions are not to be ascribed to the applicant. (C) T h e falsity of any statement in the application for any policy covered by this act may not bar the right to recovery t h e r e u n d e r unless such false statement materially affected either the acceptance of the risk or the hazard assumed by the insurer. (Note: Section 5, or any subsection thereof, is suggested for use in states which have no comparable statutes relating to the application.) Section 6 . N O T I C E , W A I V E R . T h e a c k n o w l e d g m e n t by any insurer of the receipt of notice given u n d e r any policy covered by this act, or the f u r n i s h i n g of forms for filing proofs of loss, or t h e acceptance of such proofs, or the investigation

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of any claim thereunder shall not operate as a waiver of any of the rights of the insurer in defense of any claim arising under such policy. Section 7 . A G E L I M I T . If any such policy contains a provision establishing, as an age limit or otherwise, a date after which the coverage provided by the policy will not be effective, and if such date falls within a period for which premium is accepted by the insurer or if the insurer accepts a premium after such date, the coverage provided by the policy will continue in force subject to any right of cancellation until the end of the period for which premium has been accepted. In the event the age of the insured has been misstated and if, according to the correct age of the insured, the coverage provided by the policy would not have become effective, or would have ceased prior to the acceptance of such premium or premiums, then the liability of the insurer shall be limited to the refund, upon request, of all premiums paid for the period not covered by the policy. Section 8 . N O N - A P P L I C A T I O N T O C E R T A I N P O L I C I E S . Nothing in this act shall apply to or affect (1) any policy of workmen's compensation insurance or any policy of liability insurance with or without supplementary expense coverage therein; or (2) any policy or contract of reinsurance; or (3) any blanket or group policy of insurance; or (4) life insurance, endowment or annuity contracts, or contracts supplemental thereto which contain only such provisions relating to accident and sickness insurance as (a) provide additional benefits in case of death or dismemberment or loss of sight by accident, or as (b) operate to safeguard such contracts against lapse, or to give a special surrender value or special benefit or an annuity in the event that the insured or annuitant shall become totally and permanently disabled, as defined by the contract or supplemental contract. (Note: This provision may, if desired, be modified in individual states so as to be consistent with current statutes of such states.) Section 9 . V I O L A T I O N . Any person, partnership or corporation willfully violating any provision of this act or order of the (Commissioner) made in accordance with this act, shall forfeit to the people of the state a sum not to exceed $ for each such violation, which may be recovered by a civil action. T h e (Commissioner) may also suspend or revoke the license of an insurer or agent for any such willful violation. (Note: This provision is to be used only in those states which do not have similar legislation now in effect.) Section 1 0 . J U D I C I A L R E V I E W . Any order or decision of the (Commissioner) under this act shall be subject to review by appeal (writ of certiorari) to the Court at the instance of any party in interest. T h e filing of the appeal (petition for such writ) shall operate as a stay of any such order or

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285

decision until t h e C o u r t directs otherwise. T h e C o u r t may review all the facts and, in disposing of t h e issue before it, may modify, affirm o r reverse the o r d e r o r decision of the (Commissioner) in whole o r in p a r t . (Note: This provision is to be used only in those states which do not have similar legislation now in effect.) Section 1 1 . R E P E A L O F I N C O N S I S T E N T A C T S . (Note: This section should contain suitable language to repeal acts or parts of acts presently enacted and inconsistent with this act. The repealing section should contain an appropriate exception with regard to section 12 of this act.) Section 1 2 . E F F E C T I V E D A T E O F A C T . T h i s act shall take effect on the day of 19 A policy, rider or endorsement, which could have been lawfully used o r delivered or issued for delivery to any person in this state immediately before the effective date of this act may be used o r delivered or issued for delivery to any such person d u r i n g five years after t h e effective date of this act without being subject to t h e provisions of sections 2, 3, or 4 of this act.

APPENDIX C FEDERAL T R A D E COMMISSION Washington T r a d e Practice Rules R E L A T I N G T O T H E ADVERTISING AND SALES P R O M O T I O N OF MAIL O R D E R INSURANCE Promulgated February 3, 1950 S T A T E M E N T BY T H E C O M M I S S I O N : T r a d e practice rules relating to the advertising and sales promotion of Mail Order Insurance, as hereinafter set forth, are promulgated by the Federal T r a d e Commission under the trade practice conference procedure. Primary objectives of the rules are the prevention of deception of purchasers as to coverage and benefits afforded by insurance sold and offered for sale by industry members and the maintenance of fair competitive conditions in the industry. T h e rules are to be applied to such end and to the exclusion of any acts or practices which suppress competition or which otherwise restrain trade. T h e industry for which the rules have been established is that comprised of the persons, firms, corporations, and organizations engaged in the sale and offering for sale of insurance outside the State of their domicile, through the mails or other interstate communications or facilities and without the employment in connection therewith of any agent licensed in the State where the sale of the insurance is promoted or in which delivery of the policy of the insurance is to be made. T h e rules are applicable to the advertising and sales promotion of all kinds of insurance sold or offered for sale in such manner and under such circumstances. T h e establishment and promulgation of said rules by the Commission is not, however, to be understood as delimiting the jurisdiction of the Commission with respect to the business of insurance u n d e r the Clayton and Federal T r a d e Commission Acts as such Acts are affected by Public Law 1 5 - 7 9 t h Congress, as amended. T h e trade practice conference proceedings under which the rules have been approved were instituted upon application from members of the industry. A general industry conference was held in Chicago, Illinois, at which proposals for rules were received and given consideration. T h e r e a f t e r , a d r a f t of proposed rules in appropriate form was m a d e available by the Commission u p o n public notice whereby all interested or affected parties were afforded o p p o r t u n i t y to present their views, including such pertinent information, suggestions, or objections as they 286

APPENDIX

C

287

m i g h t d e s i r e to offer, a n d t o b e h e a r d i n t h e p r e m i s e s . F o l l o w i n g s u c h p u b l i c h e a r i n g , w h i c h w a s h e l d in W a s h i n g t o n , D . C., all m a t t e r s pres e n t e d o r otherwise received in the p r o c e e d i n g s were duly Thereafter,

a n d in c o n s i d e r a t i o n

of the entire matter,

considered. final

w a s t a k e n b y t h e C o m m i s s i o n w h e r e b y it a p p r o v e d t h e t r a d e rules hereinafter appearing. Such

rules

become operative

action practice

thirty

(30)

days a f t e r date of p r o m u l g a t i o n .

T H F.

RULES

GROUP I T h e u n f a i r trade practices e m b r a c e d in the G r o u p I rules h e r e i n c o n s i d e r e d to b e u n f a i r m e t h o d s o f c o m p e t i t i o n ,

unfair or

are

deceptive

acts o r practices, or o t h e r illegal practices, p r o h i b i t e d u n d e r laws administered by the Federal T r a d e Commission; and appropriate

proceedings

in t h e p u b l i c i n t e r e s t will b e t a k e n b y t h e C o m m i s s i o n to p r e v e n t

the

use, b y a n y p e r s o n , p a r t n e r s h i p , c o r p o r a t i o n , o r o t h e r o r g a n i z a t i o n subj e c t t o its j u r i s d i c t i o n , o f s u c h u n l a w f u l p r a c t i c e s in c o m m e r c e .

Important.

MEANING O F " A D V E R T I S E M E N T " AS USED IN T H E S E R U L E S .

AS u s e d in t h e s e r u l e s , t h e t e r m " a d v e r t i s e m e n t " s h a l l b e u n d e r s t o o d as m e a n i n g a n y n o t i c e o r p r e s e n t a t i o n w h i c h is used, d i r e c t l y o r i n d i r e c t l y , i n t h e s o l i c i t a t i o n o r p r o m o t i o n o f t h e sale ( i n c l u d i n g r e n e w a l s a n d r e i n s t a t e m e n t s ) of insurance, whether such notice o r

presentation

b e d i s s e m i n a t e d t h r o u g h t h e use o f t h e m a i l , t h e r a d i o , o r o t h e r m e d i a . T h e t e r m shall b e u n d e r s t o o d as e m b r a c i n g all n e w s p a p e r

and

odical advertisements, radio broadcasts, letters,1 testimonials,

peri-

endorse-

m e n t s , a n d all o t h e r r e p r e s e n t a t i o n s o r c o m m u n i c a t i o n s w h i c h a r e used, directly or indirectly, in the solicitation

or promotion

of t h e sale

of

insurance.

Rule

1—DECEPTION ( G E N E R A L ) .

I t is a n u n f a i r t r a d e p r a c t i c e f o r a n i n d u s t r y m e m b e r to use, o r c a u s e to b e used, a n y a d v e r t i s e m e n t w h i c h h a s t h e c a p a c i t y a n d t e n d e n c y effect o f misleading o r d e c e i v i n g purchasers or prospective

or

purchasers

o f i n s u r a n c e in a n y r e s p e c t , w h e t h e r as to losses o r c a u s e s o f loss i n s u r e d , t h e b e n e f i t s p a y a b l e , p r e m i u m s to b e p a i d , o r o t h e r w i s e .

Rule 2—MISLEADING (a)

DESCRIPTIONS OF POLICIES, BENEFITS, OR COVERAGES.

I t is a n u n f a i r t r a d e p r a c t i c e f o r a n i n d u s t r y m e m b e r t o use, o r

c a u s e t o b e used, a n y a d v e r t i s e m e n t i n w h i c h r e f e r e n c e is m a d e to a n y i T h e word " l e t t e r s " as here used is not to be understood as embracing such letters o r post cards which, though mentioning the general kind of insurance (e.g., " L i f e , " " A c c i d e n t , " " H o s p i t a l i z a t i o n , " etc.), give no information as to losses, causes of losses, benefits, or premiums or rates, and serve the purpose of merely inviting inquiries or a show of interest on the part of the recipients; nor as embracing such o t h e r letters, post cards, or communications to an insured which relate to insurance previously purchased by him and in effect, or to t h e premiums which are or may become due on such policies.

288

A C C I D E N T A N D SICKNESS I N S U R A N C E

insurance policy, insurance benefit, or insurance coverage, by use of a descriptive term which has the capacity a n d tendency or effect of misleading or deceiving purchasers or prospective purchasers with respect to coverage, losses, or causes of loss, benefits payable, or otherwise. (b) T h e following are examples of the type of descriptive terms i n h i b i t e d by this rule: (1) Use of the term "all," "complete," or " f u l l " as descriptive of insurance coverage of a policy when such coverage is subject to an exception and is not in fact full and complete; a n d (2) Use of the terms "hospitalization," "accident," or "life" as descriptive of an insurance policy which provides benefits for only unusual or u n i q u e accidents, sicknesses, or causes of death; provided, however, that such terms may be used as descriptive of such policies when in immediate c o n j u n c t i o n therewith there is clear indication that the benefits are limited to such unusual or u n i q u e accidents, sicknesses, or causes of death (e.g., "Lukemia Hospitalization," "Death by Drowning," etc.). Rule

3—DECEPTIVE

CONCEALMENT

OF

EXCEPTIONS,

LIMITATIONS,

AND

REDUCTIONS IN POLICIES.

It is an u n f a i r trade practice for an industry m e m b e r to use, or cause to be used, any advertisement in which representation is made, directly or indirectly, that a loss or cause of loss will be covered or that a benefit will be payable when such coverage o r benefit is subject to unusual exceptions, limitations, o r reductions, a n d nondeceptive 2 disclosure thereof is not m a d e in the advertisement. A m o n g the exceptions, limitations, or reductions which are required to be disclosed by the foregoing p a r a g r a p h of this r u l e are the following: (a) Confinement of coverage to diseases common to both sexes; (b) Limitation of coverage to diseases common to but o n e sex when the insurance policies are being offered for sale to the opposite sex; (c) R e q u i r e m e n t of g a i n f u l employment o n the part of the insured as a prerequisite to payments of benefits; (d) Reduction of benefits by reason of the absence of g a i n f u l employm e n t o n the part of the insured; (e) N o n p a y m e n t or reduction of benefits by reason of the applicability of workmen's compensation laws with respect to a loss or cause of loss covered or p u r p o r t e d to be covered by an insurance policy. Rule 4 — " N O N - M E D I C A L " POLICIES. It is an u n f a i r trade practice for an industry m e m b e r to use, or cause to be used, any advertisement containing any representation or implication— 2 The term "nondeceptive" as here used shall be construed as requiring that the disclosure be conspicuous and in close conjunction with the statement of benefits or other matter to which it relates and not be presented in an ambiguous fashion, or be minimized, rendered obscure, or so placed as likely to be unnoticed by a prospective insured, or intermingled with the context of the advertising or representation so as to be confusing or misleading.

APPENDIX C

289

(1) T h a t a policy will b e issued w i t h o u t medical e x a m i n a t i o n of the insured; or (2) T h a t t h e c o n d i t i o n of t h e h e a l t h of t h e i n s u r e d at t h e t i m e of issuance of t h e policy will n o t affect t h e liability of t h e i n s u r e r thereunder; or (3) T h a t t h e i n s u r e r will n o t , as a claims practice, r e q u i r e proof of good h e a l t h of t h e i n s u r e d at t h e t i m e of t h e issuance of t h e policy, w h e n such is n o t t h e fact. U n d e r t h e f o r e g o i n g , w h e n policies a r e advertised as b e i n g issued w i t h o u t medical e x a m i n a t i o n (or as " n o n - m e d i c a l " policies) a n d a n i n s u r e r u n d e r t h e policy r e q u i r e s proof of t h e g o o d physical a n d / o r m e n t a l c o n d i t i o n of t h e i n s u r e d at t h e t i m e of t h e issuance of t h e policy as a p r e r e q u i s i t e t o t h e p a y m e n t of a n y b e n e f i t o r b e n e f i t s w h i c h m a y accrue t h e r e u n d e r , such fact shall b e disclosed in a n o n d e c e p t i v e 3 m a n n e r in t h e a d v e r t i s e m e n t . Rule

5 — D I F F E R E N T BENEFITS FOR THE S A M E L o s s .

I t is a n u n f a i r t r a d e p r a c t i c e f o r a n i n d u s t r y m e m b e r t o m a k e m e n t i o n in a n y a d v e r t i s e m e n t of a n y b e n e f i t s p r o v i d e d by a policy w h e n lesser benefits a r e p a y a b l e f o r t h e same loss u n d e r d i f f e r e n t c o n d i t i o n s u n l e s s (a) such lesser benefits a r e shown i n c o n j u n c t i o n a n d w i t h e q u a l p r o m i n e n c e , o r (b) t h e r e is n o n d e c e p t i v e 3 disclosure as to t h e condit i o n s u n d e r w h i c h t h e advertised benefits a r e a f f o r d e d . Rule

6—MISUSE OF THE W O R D " A L L " AS A P P L I E D TO BENEFITS AFFORDED.

I t is a n u n f a i r t r a d e p r a c t i c e t o use, o r cause to b e used, any advertisement which contains any representation or implication that the i n s u r a n c e a d v e r t i s e d will p r o v i d e f o r p a y m e n t of all costs, hospitalizat i o n o r medical e x p e n s e , o r will r e p l a c e all i n c o m e lost by reason of d e a t h , illness, h o s p i t a l i z a t i o n , o r m e d i c a l a t t e n t i o n , w h e n in t r u t h a n d in fact t h e i n s u r e r will n o t be o b l i g a t e d t o i n d e m n i f y t h e i n s u r e d o r his beneficiary f o r all possible costs o r lost i n c o m e t h a t m a y result f r o m t h e cause of loss t o w h i c h t h e r e p r e s e n t a t i o n relates. Rule

7—BENEFITS,

LOSSES, AND CAUSES OF

Loss

NOT

APPLICABLE

TO

A L L ACES.

I t is a n u n f a i r t r a d e practice f o r a n y i n d u s t r y m e m b e r to use, o r cause to be used, a n a d v e r t i s e m e n t in w h i c h m e n t i o n is m a d e of a benefit, loss, o r cause of loss, w h e n t h e t e r m s of t h e policy limit t h e same to a n y c e r t a i n age g r o u p , w i t h o u t n o n d e c e p t i v e 3 disclosure of such fact. Rule

8—SICKNESSES COVERED BY H E A L T H POLICIES.

I t is a n u n f a i r t r a d e practice f o r any i n d u s t r y m e m b e r t o use, o r cause to b e used, a n y a d v e r t i s e m e n t of a h e a l t h policy c o n t a i n i n g m e n t i o n o r r e f e r e n c e t o a cause of loss, sickness, o r physical c o n d i t i o n w h i c h rarely, if ever, is f o u n d in t h e age g r o u p s covered by t h e t e r m s of t h e policy, o r w h i c h rarely, if ever, w o u l d o c c u r b e c a u s e of restrictive provisions 3 See footnote, page 288.

290

A C C I D E N T A N D SICKNESS INSURANCE

in t h e policy (as for e x a m p l e , w h o o p i n g cough a n d chicken-pox in t h e case of policies issued only to p e r s o n s m o r e t h a n 17 years of age; a n d leprosy o r b u b o n i c p l a g u e in t h e case of policies issued o n l y to p e r s o n s r e s i d e n t in t h e U n i t e d States a n d C a n a d a ) , unless n o n d e c e p t i v e 4 disclosure is m a d e in t h e a d v e r t i s e m e n t of t h e u n l i k e l i h o o d of t h e assured i n c u r r i n g a n i n s u r e d loss. Rule

9—HEALTH

POLICIES—MISUSE

OF

SYNONYMOUS

NAMES

FOR

THE

S A M E SICKNESS OR PHYSICAL CONDITION.

It is a n u n f a i r t r a d e practice for a n y i n d u s t r y m e m b e r to use, or cause to b e used, a n y a d v e r t i s e m e n t in w h i c h m e n t i o n is m a d e of t h e s a m e disease o r physical c o n d i t i o n by d i f f e r e n t n a m e s which a r e of identical m e a n i n g a n d to t h e r e b y create t h e impression t h a t b r o a d e r coverage will b e a f f o r d e d t h a n is in fact t h e case. Rule

1 0 — H E A L T H OR ACCIDENT POLICIES—MEDICAL ATTENTION OR C O N FINEMENT.

W h e n p a y m e n t of benefits for a n y loss r e f e r r e d to in a n a d v e r t i s e m e n t is, u n d e r t h e t e r m s of t h e policy advertised, m a d e d e p e n d e n t o n c e r t a i n r e s u l t i n g disabilities or c o n f i n e m e n t of t h e insured, or u p o n proof or r e c e i p t of m e d i c a l a t t e n t i o n o r h o s p i t a l i z a t i o n , t h e f a i l u r e to m a k e n o n d e c e p t i v e 4 disclosure of such c o n d i t i o n s in t h e a d v e r t i s e m e n t is a n u n f a i r t r a d e practice. Rule

11—LIMITATION

IN

I ' I M E OR IN A M O U N T OF BENEFITS

PAYABLE.

It is a n u n f a i r t r a d e practice for a n y i n d u s t r y m e m b e r to use a n y a d v e r t i s e m e n t in w h i c h r e p r e s e n t a t i o n is m a d e as to weekly, m o n t h l y , o r o t h e r p e r i o d i c benefits b e i n g p a y a b l e u n d e r a policy w i t h o u t n o n d e c e p t i v e 4 disclosure in t h e a d v e r t i s e m e n t of t h e l i m i t a t i o n of t i m e o v e r w h i c h benefits will be p a i d or of t h e n u m b e r of p a y m e n t s or t o t a l a m o u n t thereof w h i c h will be m a d e if, by t h e terms of t h e policy, paym e n t of benefits for any loss or aggregate of losses is limited in t i m e , n u m b e r , o r total a m o u n t . Rule

12—ALLOCATION OF BENEFITS U N D E R A " F A M I L Y G R O U P "

POLICY.

It is a n u n f a i r t r a d e practice f o r a n i n d u s t r y m e m b e r to use a n y a d v e r t i s e m e n t in which m e n t i o n is m a d e of a benefit p a y a b l e u n d e r a " F a m i l y G r o u p " policy w h e n t h e f u l l a m o u n t of such benefit is n o t p a y a b l e u p o n t h e d e a t h of o n l y o n e m e m b e r of t h e family a n d n o n d e c e p t i v e 4 disclosure of such fact is n o t m a d e in the a d v e r t i s e m e n t . Rule

1 3 — T I M E LAPSE OR LAC CONTAINED IN THE POLICY.

It is a n u n f a i r t r a d e practice f o r a n y i n d u s t r y m e m b e r to use or cause to b e used a n y a d v e r t i s e m e n t r e g a r d i n g losses insured or benefits paya b l e u n d e r a policy w h e n , by t h e t e r m s of the policy, t h e r e exists a t i m e lapse or lag e i t h e r b e t w e e n t h e d a t e of t h e issuance of t h e policy a n d t h e time t h a t losses are assured, o r b e t w e e n t h e d a t e of losses i n c u r r e d 4

See footnote, page 288.

APPENDIX C

291

and the time that benefits accrue, unless nondeceptive 5 disclosure of such time lapse or lag is made in the advertisement. Rule

1 4 — M I S R E P R E S E N T I N G THE A M O U N T OF B E N E F I T S P A I D U N D E R P O L I CIES ISSUED.

It is an unfair trade practice for an industry member to make any representation in any advertisement relating to the amount of benefits which has been paid to holders of policies issued by the member which has the capacity and tendency or cffect of deceiving purchasers or prospective purchasers. Pursuant to the foregoing no representation shall be made by an industry member as to any amount of benefits paid under policies issued by him which creates the impression that the amount stated is a total of benefits paid on claims arising under a certain type of insurance when the amount stated includes amounts paid on claims arising out of other types of policies. Rule

15—DECEPTIVE

U S E OR IMITATION

OF CORPORATE

NAMES,

TRADE

N A M E S , OR T R A D E - M A R K S OF C O M P E T I T O R S .

It is an unfair trade practice for any industry member to use, or cause to be used, any advertisement in which the corporate name, trade name, or trade-mark of a competitor is so used, imitated, or simulated as to have the capacity and tendency or effect of deceiving purchasers or prospective purchasers of insurance as to the identity of the insurer or the true nature or character of the insurance advertised. Rule

16—MISREPRESENTING SAVINGS E F F E C T E D BY SELLING M E T H O D S .

It is an unfair trade practice for any industry member to use, or cause to be used, any advertisement in which it is represented, directly or indirectly, that an industry member's insurance can be, and is being, offered for sale at a lesser cost to the insured than other similar insurance of competitors because of the method employed by the industry member in effecting the sale or servicing thereof, unless— (1) T h e cost of such insurance to the insured is in fact less than that charged by competitors for similar insurance; and (2) Such saving is attributable to the method of sale and servicing of insurance employed by the industry member. Rule

1 7 — C L A I M OF A P P R O V A L BY FEDERAL OR STATE AGENCY.

It is an unfair trade practice for an industry member to represent or infer in any advertisement that any insurer, or any policy or an advertisement thereof, has been approved or endorsed by the Federal T r a d e Commission, Post Office Department, or any other federal agency. It is also an unfair trade practice to represent or imply in any advertisement that a policy, or the advertising or the financial condition of an insurer, has been approved, or examined and found to be satisfactory, by any or a particular State or State insurance department, when such is not the fact. 3 See footnote, page 288.

292 Rule

ACCIDENT AND SICKNESS INSURANCE 18—MISREPRESENTATIONS

IN

ADVERTISEMENTS

IMPROPER

THOUGH

P O L I C Y B E A V A I L A B L E FOR INSPECTION B Y P R O S P E C T I V E INSURED.

It is an unfair trade practice to use a misleading or deceptive statement in any advertisement even though the policy of insurance referred to in the advertisement is made available to the insured prior to consummation of his purchase thereof. Rule 1 9 — D E C E P T I V E T E S T I M O N I A L S . It is an unfair trade practice for any industry member to promote or attempt to promote the sale of insurance through use of any testimonial or purported testimonial which is false, misleading, or deceptive, or to cause any testimonial or purported testimonial, or any part thereof, to be used in a manner or under any circumstance having the capacity and tendency or effect of misleading or deceiving purchasers or prospective purchasers of insurance into the belief: (a) T h a t the testimonial was given without solicitation or payment therefor, when such is not the fact; or (b) T h a t the testimonial is a bona fide and genuine testimonial given by a person whose name is used in connection therewith, when the testimonial was not given by such person, or when the testimonial was not given with respect to the particular policy or policies to which it purports to relate, or when the testimonial is otherwise inapplicable, misleading, or deceptive. In order to avoid deception in the use of bona fide and genuine testimonials, the complete testimonial should be given wherever practicable, and words, phrases, sentences, or other parts of such testimonial, shall not be separated from their context, or rearranged or otherwise used in such manner as to have the capacity and tendency or effect of misleading or deceiving purchasers or prospective purchasers in any respect. Rule 2 0 — M I S R E P R E S E N T A T I O N O F F I N A N C I A L CONDITION. It is an unfair trade practice for any industry member to promote the sale of insurance through the use of any advertisement which directly or by implication has the capacity and tendency or effect of misleading o r deceiving purchasers or prospective purchasers as to the assets, financial condition, improvement in financial condition, relative standing in the industry in comparison with other insurance companies, or as to other financial standing or condition of such member. Rule 2 1 — C O N T I N G E N T L I A B I L I T Y O F INSURED. I t is an unfair trade practice for any industry member to offer for sale or sell any insurance policy under which there is a possible or contingent liability of purchasers of such policies for sums in excess of stated premiums pursuant to the terms of such policy or by reason of the corporate structure of the insurer, unless nondeceptive* disclosure of such fact is made to the purchaser thereof prior and reasonably proximate to the consummation of the sale of the policy. 6 See footnote, page 288.

APPENDIX C Rule

22—MISREPRESENTING T H A T

293

P O L I C I E S A R E C O N F I N E D , OR A R E

CIALLY ADVANTAGEOUS, TO A S P E C I A L

ESPE-

GROUP.

(a) It is an u n f a i r trade practice for any industry member to use, o r cause to be used, any advertisement in which there is a direct o r indirect representation to the effect that the policy or policies offered for sale are of a special character or are especially advantageous to t h e insured, or that a policy or policies are being offered to a special class or group only, when such is not the fact. (b) It is an u n f a i r trade practice for any member of the industry to use advertisements which, directly or by implication, have the capacity and tendency or effect of causing purchasers or prospective purchasers to believe that such concern was organized by or is confined to any particular group or class of persons, when such is not the fact.

Rule

23—DECEPTIVE "SALESMEN

WANTED"

ADVERTISEMENTS.

(a) It is an u n f a i r trade practice for an industry member to use any advertisement containing representations to the effect that he wishes to employ or make sales commission arrangements with persons for the sale of the industry member's insurance when, as a prerequisite to any such employment or arrangement, the industry member requires, or intends to require, the purchase of an insurance policy of the industry member and nondeceptive 7 disclosure of such fact is not made in the advertisement. (b) In connection with the promotion of the sale of insurance, it is an unfair trade practice for any member of the industry to use or cause to be used any advertisement which directly or by implication is false, misleading, or deceptive concerning— (1) the salary, commission, income, earnings, or other remuneration which agents, canvassers, solicitors, or sales representatives receive or may receive; o r (2) the chances or opportunities for such remuneration.

Rule

2 4 — A I D I N G OR ABETTING U S E OF U N F A I R T R A D E

PRACTICES.

It is an unfair trade practice for any person, firm, or corporation to aid, abet, coerce, or induce another, directly or indirectly, to use or promote the use of any unfair trade practice specified in these rules. Promulgated by the Federal T r a d e Commission February 3, 1950. D.

f See footnote, page 288.

C. D A N I E L ,

Secretary.

APPENDIX D T H E ALL-INDUSTRY—N.A.I.C. ACCIDENT A N D H E A L T H R E G U L A T O R Y LAW A. No policy of insurance against loss or expense from the sickness, or from the bodily injury or death by accident of the insured shall be issued or delivered to any person in this State nor shall any application, rider or endorsement be used in connection therewith until a copy of the form thereof and of the classification of risks and the p r e m i u m rates, or, in the case of cooperatives or assessment companies the estimated cost pertaining thereto have been filed with the Commissioner of Insurance. B. N o such policy shall be issued, nor shall any application, rider or endorsement be used in connection therewith, until the expiration of 30 days after it has been so filed unless the Commissioner shall sooner give his written approval thereto. C. T h e Commissioner may within 30 days after the filing of any such form, disapprove such form (1) if the benefits provided therein are unreasonable in relation to the premium charged, or (2) if it contains a provision or provisions which are unjust, unfair, inequitable, misleading, deceptive or encourage misrepresentation of such policy. If the Commissioner shall notify the insurer which has filed any such form that it does not comply with the provisions of this section or sections (insert here appropriate references to the Standard Provision Section and any other relevant sections) it shall be unlawful thereafter for such insurer to issue such form or use it in connection with any policy. In such notice the Commissioner shall specify the reasons for his disapproval and state that a hearing will be granted within twenty days after request in writing by the insurer. D. T h e Commissioner may at any time, after a hearing of which not less than 20 days written notice shall have been given to the insurer, withdraw his approval of any such form on any of the grounds stated in this section. It shall be unlawful for the insurer to issue such f o r m or use it in connection with any policy after the effective date of such withdrawal of approval. T h e notice of any hearing called under this paragraph shall specify the matters to be considered at such hearing a n d any decision affirming disapproval or directing withdrawal of approval under this section shall be in writing and shall specify the reasons therefor. E. Any order or decision of the Commissioner u n d e r this section shall be subject to review by appeal (writ of certiorari) to the Court at the instance of any party in interest. In the case of disapproval or withdrawal of approval of a form previ294

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295

ously in use the court shall d e t e r m i n e whether the filing of t h e a p p e a l (petition for such writ) shall operate as a stay of any such o r d e r o r decision. T h e court may, in disposing of the issue before it, modify, affirm or reverse the order or decision of the Commissioner in whole or in part. Explanatory Note: Subsection " E " should be omitted in any State which has a specific general provision for appeal f r o m the review of decisions of the Commissioner of Insurance. T h e above bill is r e c o m m e n d e d for e n a c t m e n t in each state in such a m a n n e r as to be applicable to all individual accident and h e a l t h insurance policies irrespective of the type of insurer by which issued. It is not i n t e n d e d to be applicable to workmen's compensation insurance, accidental d e a t h or disability benefits issued s u p p l e m e n t a r y to life insurance or a n n u i t y contracts, medical expense benefits u n d e r liability policies or to g r o u p accident a n d health insurance. December, 1946.

APPENDIX E CANADIAN S T A T U T O R Y PROVISIONS (1) This policy, including the endorsements and attached papers, if any, contains the entire contract of insurance except as it may be modified by the insurer's classification of risks and premium rates as provided by condition (3). (2) All statements made by the insured upon the application for this policy shall, in the absence of fraud, be deemed representations and not warranties, and no such statement shall be used in defense of a claim under this policy unless it is contained in the written application for the policy and unless a copy of the application, or such part thereof as is material to the contract, is endorsed upon or attached to the policy when issued. (3) If a bodily injury or any sickness insured against happens to the insured while engaged temporarily or permanently in an occupation classified as more hazardous than that stated herein to be the occupation of the insured, the liability under this policy shall be limited to such amount as the premium paid would have purchased for the more hazardous occupation according to the limits, classification of risks and premium rates of the insured, provided that the performance of ordinary duties about his residence or while engaged in recreation shall not be regarded as a change of occupation by the insured. (4) If the insured shall, at any time, change his occupation either temporarily or permanently to an occupation classified by the insurer as less hazardous than that stated in the policy to be the occupation of the insured, the insurer shall upon written request of the insured and surrender of this policy, issue a policy for the unexpired term at the lower rate of premium applicable to such less hazardous occupation and the insurer shall return to the insured the amount by which the unearned premiums on the original policy exceeds the premium charge at such lower rate for the unexpired term. (5) Unless otherwise specifically stated in this policy, the insurer is not liable for any loss occasioned by sickness contracted by the insured within fifteen days from noon standard time of the day on which the policy comes into force. (6) If the accident or sickness benefits for loss of time secured hereunder, together with the accident or sickness benefits payable under other contracts of insurance upon the person of the insured, make up an aggregate indemnity in excess of the money value of the time of the insured, the insurer shall be liable only for such proportion of the benefits stated in this policy as the money value of the time of the insured bears to the aggregate of the benefits payable under all such 296

APPENDIX E

297

contracts on the person of the insured, and the excess premium, if any, paid by the insured shall be returned to him by the insurer. (7) Any written notice to the insurer may be delivered at or sent by registered post to the chief agency or head office of the insurer in the Province or delivered or sent to any authorized agent of the insurer therein. (8) Any written notice may be given to the insured by letter personally delivered to him or by registered letter addressed to him at his last post office address notified to the insurer, or where not notified and the address is not known, addressed to him at the agency, if any, at which the application was received. (9) T h e insurance may be terminated by the insurer at any time by giving to the insured ten days' notice of cancellation by registered mail or five days' notice of cancellation personally delivered to the insured and refunding in either case the excess of paid premium beyond the pro rata premium for the expired time. (10) T h e insurance may be terminated by the insured at any time by giving written notice of termination to the insurer, in which case the insurer shall, upon surrender of this policy, refund the excess of paid premium beyond the customary short rate for the expired term. (11) In the case of termination of the insurance by the insurer, repayment of the excess premium may be made in money, by post office order, postal note or cheque payable at par, certified by a chartered bank doing business in the Province. If the notice is given by registered letter, such repayment shall accompany the notice, and, in such case, the ten days mentioned in condition (9) shall commence to run from the day following the receipt of a registered letter at the post office to which it is addressed. (12) Any person entitled to make a claim under this policy shall: (a) give notice of claim in writing to the insurer not later than thirty days from the date of the accident or from the date of the commencement of disability from sickness; provided that failure to give notice shall not invalidate the claim if it is shown that it was not reasonably possible to give notice within such time, and that notice was given as soon as was reasonably possible; (b) furnish to the insurer such proof of claim as is reasonably possible in the circumstances of the happening of the accident or sickness and the loss occasioned thereby, within ninety days after the happening of the accident, or, in the case of sickness, within ninety days after the date of commencement of the period of disability from sickness for which the insurer is liable; (c) if so required by the insurer, furnish a certificate from a licensed medical practitioner as to the cause and nature of the accident or sickness for which the claim is made and as to duration of the disability caused thereby. (13) T h e insurer shall, upon receiving notice of accident or sickness, furnish to the claimant such forms as are usually furnished by them

298

A C C I D E N T A N D SICKNESS INSURANCE

f o r proofs of claim, a n d if such forms are n o t so f u r n i s h e d within fifteen days after receipt of such notice, the claimant shall be d e e m e d t o have complied with the r e q u i r e m e n t s of the policy as to proof of claim, if he submits within the time fixed in this policy, for filing such proofs, a written statement of the h a p p e n i n g and character of the accident or sickness a n d of t h e extent of t h e loss for which the claim was made. (14) T h e insurer shall have the right, a n d the claimant shall afford to t h e insurer an o p p o r t u n i t y , to e x a m i n e t h e person of the insured w h e n a n d as o f t e n as it may reasonably require while the claim hereu n d e r is p e n d i n g and also, in the case of death of the insured, to m a k e an autopsy subject to any law of the Province relating to autopsies. (15) Any claim m a d e u n d e r this policy by a claimant other t h a n the beneficiary n a m e d in the policy shall be subject to proof of the interest of t h e claimant. (16) Notice of claim may be given a n d proofs of claim may be m a d e by the agent of the insured, or of the beneficiary in case of the absence of t h e insured or beneficiary, or in case of inability of the insured or the beneficiary to give the notice or m a k e the proof, such absence or inability being satisfactorily accounted for; or in the like case, or if the insured refuses to d o so, by a person to w h o m any part of the insurance money is payable. (17) All moneys payable u n d e r this policy for loss o t h e r t h a n that of time on account of disability shall be p a i d within sixty days after t h e receipt of proofs of claim. (18) T h e indemnity for loss of time on account of disability shall be paid within thirty days after proof of claim and, as long as the insurer remains liable for the disability at the expiration of every succeeding sixty days; provided that the insurer may, in case the disability continues, require proof thereof for each such period of sixty days, which proof shall be f u r n i s h e d within ninety days after the t e r m i n a t i o n of each period in respect of which the claim is made. (19) W h e r e moneys are payable u n d e r this policy u p o n the d e a t h of the insured by accident, the assured may f r o m time to time designate a beneficiary, a p p o i n t , a p p r o p r i a t e or a p p o r t i o n such moneys a n d alter or revoke any prior designation, a p p o i n t m e n t , a p p r o p r i a t i o n or apportionment. (20) T h e insurer shall not be d e e m e d to have waived any condition of this policy either in whole or in p a r t unless the waiver is clearly expressed in writing, signed by the insurer. (21) Any action or proceeding against the insurer for the recovery of any claim u n d e r this policy shall be commenced within o n e year a f t e r the cause of action arose. •

•

•

If the policy does not insure against accident, the words of conditions

APPENDIX E

299

n u m b e r s (3), (6), (12) and (13) relating to accident a n d underscored may be omitted f r o m the policy. If the policy does not insure against sickness, condition n u m b e r (5), and also the words of conditions n u m b e r s (3), (6), (12) and (13) relating to sickness a n d underscored, may be omitted f r o m the policy. If the policy provides that the contract may not be t e r m i n a t e d by the insurer at any time, the conditions n u m b e r s (9), (10) and (11) may be omitted f r o m the policy. If the perils insured against are so limited that any condition o t h e r t h a n those e n u m e r a t e d in this section or any part of such a condition has no application to the contract, the insurer may with the a p p r o v a l of the Attorney General omit such conditions or part of a condition from the policy. If an entire condition is o m i t t e d p u r s u a n t to this section, there shall be inserted a f t e r the condition n u m b e r the following words within brackets: " ( T h i s condition is not applicable to this policy a n d is o m i t t e d p u r s u a n t to Statute)." W h e r e a policy of accident insurance is issued in the form of a ticket through the agency of a t r a n s p o r t a t i o n corporation, the statutory conditions set o u t in Section _ need not be p r i n t e d on the ticket if such policy contains the following notice p r i n t e d in conspicuous type: " T h i s policy is subject to the statutory conditions respecting contracts of accident insurance." If an insurer desires to vary, omit or add to the statutory conditions or any of them except as provided in Sections _ and _ , there shall be printed in conspicuous type n o t less in size t h a n ten point a n d in red ink, immediately after such conditions, the proposed variations or additions or a reference to the omissions with these introductory words: Variations a n d Conditions: N o person carrying on the business of financing the sale or purchase of automobiles, a n d no a u t o m o b i l e dealer, insurance agent o r broker, and n o officer or employee of any such person dealer, agent or broker, shall act as agent of the a p p l i c a n t : " T h i s policy is issued o n the above statutory conditions with t h e following variations, omissions a n d additions which are by virtue of the law of this Province in force so far only as they shall be held to be just a n d reasonable to be exacted by the insurer." N o variation, omission or a d d i t i o n except as provided in Sections _ a n d _ shall be b i n d i n g u p o n t h e insured unless the foregoing provisions of this section have been complied with, a n d any variation, omission or addition shall be so b i n d i n g only in so far as it is held by t h e C o u r t before which a question relating thereto is tried, to be just a n d reasonable. N o red ink shall be used o n t h e face of a policy except the n a m e , address a n d emblem of the insurer and the policy n u m b e r , a n d f o r the purposes m e n t i o n e d in this Act.

300

A C C I D E N T A N D SICKNESS

INSURANCE

I n any case where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or as to any m a t t e r or t h i n g to be d o n e o r o m i t t e d by t h e insured after the m a t u r i t y of the contract, a n d a c o n s e q u e n t f o r f e i t u r e or avoidance of t h e insurance in whole or in part, and the Court deems it inequitable t h a t the insurance should be forfeited or avoided on that g r o u n d , the C o u r t may relieve against t h e f o r f e i t u r e or avoidance o n such terms a» it may deem just.

APPENDIX F T H E OFFICIAL GUIDE N.A.I.C. Third

Edition—Effective

January

1,1947

T h e purpose of the Guide is twofold: It sets the pattern for Insurers in the preparation of personal accident and health insurance policies, and through more uniform practices it expedites the work of the supervising Insurance Departments. It interprets and deals with non-statutory basic requirements. It cannot possibly cover all problems arising in connection with policy forms, but it does serve to establish a greater degree of uniformity for the common benefit of the Insurers, the Insurance Departments, and the public. T h e first obligation of an Insurer is to make certain that the policy, rider or endorsement has been drafted in compliance with the statutes of the state in which approval is sought. All states accept policies containing "Standard Provisions" but in some states a corrective rider or endorsement is necessary to change some of the Standard Provisions to comply with the statutes of the individual state. It is important that each Insurer be familiar with the statutory requirements of the individual states. 1.

Filing of Forms When policy forms, riders or endorsements are printed and complete, they should be formally filed as follows: A. Unless otherwise required by individual states, two copies of all such forms shall be submitted in blank with copy of the application applying thereto, if such application is to be made a part of the contract. If the printed policy does not clearly indicate the place for the name of the insured, time the policy becomes effective, and the benefits, the departments may require such policies to be completed as for issuance. B. Each form must bear an identifying form number in the lower left hand corner of the first page. No other confusing data should appear in such space. C. It is suggested that each Insurer submit filing letter in duplicate, one copy to be retained by the Department, the other to be used for acknowledgment or approval purposes and returned to the Insurer. D. T h e filing letter should contain the following information: (1) Name of form and identifying form number. (2) If the submission is a new form, so state. (3) If the form is intended to supersede another, give the form number of the form replaced. 301

302

ACCIDENT AND SICKNESS INSURANCE

(4) State whether or not the form has been approved by the Department of the home state or specify that the form is not to be used in the home state. G U I D E FOR R E V I E W O F CONTRACTS

(This G u i d e is applicable to the approval of accident and health policies issued to individuals and to family expense contracts, when not subject to group or blanket accident and sickness statutes.) 1. 2.

Title of Policy T i t l e of policy, if any, must not be misleading.

Brief Description A. A brief description fairly inclusive of what is to be f o u n d in the policy must be printed at the top or bottom of the first page of the policy a n d on its filing back in identical words. B. T h e description should contain limiting words as for instance, either "as herein limited a n d provided" or "to the extent herein provided." C. Should be set forth in eighteen point type. (Some states accept fourteen point type.) D. Must agree with the insuring clause, i.e., "accidental bodily injury," " i n j u r y sustained through accidental means," etc. E. T h e word " u n l i m i t e d " must not be used in the brief description. F. T h e word "non-cancellable" shall not be used unless the policy is both non-cancellable a n d guaranteed renewable to age G. If the policy does not cover accident or sickness arising out of or sustained in the course of the Insured's occupation, the word "nonoccupational" shall a p p e a r in the brief description, unless a rider signed by the Insured excluding occupational coverage is attached. H . T h e description or a separate statement printed in at least fourteen point type at the foot of the first page and on the filing back should refer to the policy's renewal or cancellation conditions in the following m a n n e r : (1) Where the policy contains Standard Provision 16, begin with the words " T h i s policy is cancellable by the company." (2) Where the policy is non-cancellable and guaranteed renewable, begin with the words " T h i s policy is non-cancellable and guaranteed renewable to age " (8) Where the policy is non-cancellable but renewable at the option of the company, use the words " T h i s policy is renewable at the option of the company only." (4) W h e r e individual policies are issued to members of an association with Standard Provision 16 omitted, and permitting the company to refuse to renew an individual policy only where it refuses to renew all policies issued to members of the same association, begin with the words " T h i s policy is renewable at the option of the company as stated in " (Refer to a p p r o p r i a t e provision of policy.)

APPENDIX F

303

3.

Limited Policies A. A limited policy is one that contains unusual exclusions, limitations, reductions, or conditions of such a restrictive nature that the payments of benefits u n d e r such policy are limited in frequency or in amounts. All limited policies shall be so identified by having the words " T H I S IS A L I M I T E D P O L I C Y - R E A D I T C A R E F U L L Y " imprinted diagonally across the face of the policy a n d the filing back in contrasting color from the text of the policy a n d in outline type not smaller than eighteen point. W h e n appropriate, these words may be varied by the Insurer in a m a n n e r to indicate the type of policy; as for example, " T H I S POLICY IS L I M I T E D T O A U T O M O B I L E A C C I D E N T S READ I T CAREFULLY." B. If any limited policy provides coverage d u e to the wrecking or disablement of or material damage to any automobile, elevator or other conveyance in which the Insured is a passenger at the time of the accident, such words must be defined (in the text of the policy, or by rider, or endorsement) substantially as damage which necessitates repair in order to place the conveyance in as good condition as it was before the accident. 4.

Name of Insurer Each policy must bear the corporate n a m e a n d address (city a n d state) of the Insurer by which it is issued on the face a n d filing back. T h e name of the agent, broker or underwriter, if permitted by the Insurer, shall a p p e a r with less prominence than the n a m e of the Insurer. 5.

Time Policy Takes Effect and Terminates A policy must clearly express the time at which the insurance thereu n d e r takes effect a n d terminates.

6.

Premiums A. T h e entire consideration for which policy is issued must be expressed in the policy. B. No policy shall contain any provision which professes to establish the effective date of a p r e m i u m payment as other t h a n the date when such payment is m a d e to any authorized agent or deposited in the U. S. Mail. 7.

Standard Time If reference is m a d e to any standard of time by which to determine the term of the policy, such reference must be to the standard time at the place where the Insured resides.

8.

Grace Period If policy provides a grace period for the p a y m e n t of premium, the coverage during that period cannot be made contingent u p o n payment of the premium before the expiration of the grace period. 9.

Benefits (Indemnities) A. If in contracts providing specified benefits for dismemberment, death or surgical operations, the Insurer limits its liability to one such

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ACCIDENT AND SICKNESS INSURANCE

loss as a result of the same accident, hospitalization or illness, a provision shall be included entitling the Insured to receive the largest amount so specified. B . If an exception or reduction specifically applies only to a particular part of the policy, a statement of such exception or reduction should be included in that particular part to which it applies, otherwise it should be printed in the exception or reduction clause in bold face type. C. In case the Insured or Beneficiary shall have the right to elect alternative benefits, the time for malting such election shall not be shorter than the time allowed for the giving of notice of injury or sickness. 10.

Requirement of Medical Attendance If benefit payments under any provision of a policy are to begin or are to be related to the first visit of a physician or the date of the first medical attendance, such stipulation shall appear in the Benefit Clause to which it applies. Payment of benefits may be limited to such time as the Insured is under the care of a physician or practitioner but shall not be conditioned upon any specified frequency of visits or attendance by a physician or practitioner. 11.

Confining or Non-Confining Illnesses or Injuries Policies may provide larger benefits during such time as the insured is confined wholly within doors but the illnesses or injuries on which such payments are based shall be identical for both confining and nonconfining benefits. 12. Reimburse No provision shall contain the words "reimburse" or "reimbursement" or the phrase "the amount actually expended" or require the Insured to furnish a R E C E I P T E D bill as proof of loss. Such a clause may provide that the Insurer will pay the expenses actually incurred within specified limits. 13.

Identification Identification clauses are often misleading, are of very little value to the Insured and should not be approved in any form. 14. Execution by Insurer A policy should contain an attestation clause which should be signed by the proper executive officers of the Insurer. (Facsimile signatures are acceptable if countersignature or other similar authentication is provided for.) Policies issued by alien companies may be over the signature of the United States Manager. 15. Reinstatement Policies shall contain no requirements conflicting with those mentioned in Standard Provision 3 concerning reinstatement after lapse.

A P P E N D I X

F

305

16. Applications A. Applications shall be composed of questions by the Insurer in the form of clear and direct interrogatories permitting answers by the applicant only in the form of direct statements of known facts and shall not contain any questions or representations based on indefinite or ambiguous terms or inconsistent with any Standard Provisions. B. Must not be based upon warranties. C. If part of the consideration for the issuance of a policy is a written application, a copy of application must be attached to or endorsed upon the policy in not less than ten point type. 17. Riders A R i d e r is an instrument signed by one or more officers of the Insurer issuing the same to be attached to and form a part of a policy. Size of type used in all Riders shall comply with policy regulations. If the R i d e r reduces or eliminates coverage of the policy, signed acceptance by the Insured is necessary. 18. Endorsements An Endorsement differs from a R i d e r only in that it is applied to a Policy by means of printing or stamping on the body of the Policy. If the Endorsement reduces or eliminates coverage of the Policy, signed acceptance by the Insured is necessary; however, signed acceptance is not necessary when the Endorsement is made at the time of the original issuance of the policy if notice of the Endorsement is affixed on the face and filing back in contrasting color, in not less than twelve point type. STANDARD

PROVISIONS

A number of the states require the use of Standard Provisions. O t h e r states which do not have a Standard Provisions Law accept and permit the use of Standard Provisions. If a policy form is for use only in a state not having a Standard Provisions Law, the policy need not contain the Standard Provisions. If an Insurer is domiciled in a state which does not have a Standard Provisions Law, such Insurer may use the Standard Provisions of any state in which such Insurer does business. As a matter of reciprocity between states, the few typographical differences between the Standard Provisions required by the several states may be disregarded when the meaning is not changed. Numerals should be used in the designation of the Standard Provisions. Numbers appearing in the text o f the Standard Provisions should be spelled out. Separate captions for individual Standard Provisions should not be used. T h e Standard Provisions used must agree exactly, by language and number, with the Standard Provisions in the law of the state followed. 1.

Standard Provision 1 If the prorating form is used, it is a reducing clause, and the first

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p a r a g r a p h of provision No. 1 must be p r i n t e d in twelve point bold face type, i.e., with m o r e p r o m i n e n c e than the exclusions. 2.

Standard Provision 3 A. Use the first alternative clause in an Accident Policy. B. Use the second alternative clause in a H e a l t h Policy. C. Use the third alternative clause in an Accident and H e a l t h Policy.

3.

Standard Provision 4 A. Use the first alternative clause in an Accident Policy. B. Use the second alternative clause in a H e a l t h Policy. C. Use the third alternative clause in an Accident and H e a l t h Policy. D. If a d e a t h benefit is provided in t h e policy, immediate notice of accidental d e a t h may be required in the language of the law. 4.

Standard Provision 7 A. Use the first alternative clause in policies providing no weekly or m o n t h l y i n d e m n i t y for loss of time. B. Use the second alternative clause in policies providing only weekly or m o n t h l y indemnity for loss of time or hospital expense. C. Use the t h i r d alternative clause in policies providing weekly or m o n t h l y i n d e m n i t y with other benefits. 5.

Standard Provision 9 A. Use t h e first alternative clause in policies providing no weekly or m o n t h l y i n d e m n i t y . B. Use second alternative clause in policies providing other benefits in addition to weekly or monthly indemnity. C. T h i s provision may be omitted in policies providing weekly or m o n t h l y i n d e m n i t y only. D. Insert " i m m e d i a t e " or some period of time not to exceed sixty days in blank space. Standard Provision 10 A. Use this provision only in policies providing a weekly or m o n t h l y i n d e m n i t y . O m i t in o t h e r policies. B. Insert " a l l " or "not less than one-half" in the first blank space, a n d some period of time not to exceed sixty days in the second blank space. ( T i m e limit in New York State is thirty days.)

6.

7.

Standard Provision 11 A. Use first alternative clause in policies paying a death benefit. B. Use second alternative clause in policies without a death benefit.

8.

Standard Provision 13 Use only in policies providing a d e a t h benefit. O P T I O N A L STANDARD

PROVISIONS

T h e O p t i o n a l Standard Provisions begin with No. 16 (cancellation clause) and must follow immediately after and u n d e r the same heading " S t a n d a r d Provisions."

APPENDIX F 1.

307

Optional Standard Provision 17 T h i s is a reducing clause a n d requires twelve p o i n t bold face type.

2.

Optional Standard Provision 19 A. Print in twelve point hold fate type and use the first a l t e r n a t i v e clause in policies providing n o weekly o r m o n t h l y i n d e m n i t y . B . Use second alternative clause in policies providing only weekly o r m o n t h l y indemnity. C. Use the third alternative clause in policies providing both weekly or monthly i n d e m n i t y and principal o r capital sum payments. J.

Optional Standard Provision 20 Any ages may be inserted in blank space. p r i n t e d in bold face ten p o i n t type. GKNKRAL,

MISCELLANEOUS

OR

I his provision should be

ADDITIONAL

PROVISIONS

A. Such provisions, unless a p p e a r i n g on the face of the policy, shall immediately follow the S t a n d a r d Provisions. As the t i m e for b r i n g i n g legal action differs in some states, the following or similar provision should be included: " I f any time l i m i t a t i o n of this Policy with respect to the b r i n g i n g of an action at law o r in equity is less than that permitted by the law of the state in which the Insured resides at the time this Policy is issued, such l i m i t a t i o n is hereby e x t e n d e d to agree with the m i n i m u m period permitted by such law," unless such Policy is a m e n d e d by rider or e n d o r s e m e n t to comply with the law of the particular state. B . A policy, if designed to be renewed or c o n t i n u e d , should include a provision clearly setting forth the c o n d i t i o n s upon which such renewal o r c o n t i n u a n c e may be effected. C. As the Standard Provisions specify the t i m e limit for filing proofs, no contradictory clause should be used to limit the time for presenting reports or c o n t i n u a n c e o f disability, o r doctors' or o t h e r bills which raav be covered bv the policy. D. In any policy which is r e n e w a b l e at the o p t i o n of the Insurer only the renewal provision should use the words " s u b j e c t to the consent of the I n s u r e r " or " o n l y with the consent of the I n s u r e r , " or words of similar import. E. No policy should be approved which c o n t a i n s a "strict comp l i a n c e " clause, as for e x a m p l e : " S t r i c t c o m p l i a n c e on the part o f the Insured a n d beneficiary with all the provisions and a g r e e m e n t s o f this policy, a n d the application signed by the Insured, is a c o n d i t i o n precedent to recovery and any failure in this respect shall forfeit to the Insurer all right to any i n d e m n i t y . " F. Any provision which affects the liability of t h e I n s u r e r because of a misstatement of age shall provide in substance that if the age of the Insured has been misstated, any a m o u n t payable u n d e r this policy shall be such as the p r e m i u m would have purchased at the correct age, except that if the policy would not have been issued o r effective at the

308

ACCIDENT

AND

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correct age under the Insurer's rules on file with the State Official having supervision of insurance, then the policy may be voided. Any premium paid to the Insurer for any period not covered by this policy shall be refunded. EXCEPTIONS AND REDUCTIONS

T h e Standard Provisions Law as adopted by many of the states, contains provisions relative to exceptions and reductions substantially as follows: "Such policy shall not be issued or delivered to any person in this state: • • • • Unless the exceptions of the policy are printed with the same prominence as the benefits to which they apply; or Unless, if any portion of such policy purports, by reason of circumstances under which a loss is incurred, to reduce any indemnity to an amount less than that provided for the same loss occurring under ordinary circumstances, such portion is printed in bold face type and with greater prominence than any other portion of the text of the policy." 1.

Definitions A. An exception is any provision in a policy whereby coverage for a specified hazard is entirely eliminated. In other words, an exception is a statement of a risk not assumed. T h e following are examples of exceptions: "This insurance does not cover hernia: war: outside of the United States" etc. B. A reduction is a provision which takes away some portion, but not all of the coverage of the policy under certain specific conditions. In other words, a risk of loss is assumed by the Insurer but payment upon the occurrence of such loss is limited to some amount or period less than would be otherwise payable had such reduction clause not been used. T h e following are examples of reduction clauses: T h e first sentence of the long form of Standard Provision 1: Optional Standard Provision 17: and 19: "Liability for hernia shall be limited hereunder to one month" (where policy provides indemnities for longer than one month for other conditions). 2.

Use of Exceptions and Reductions It is recommended that the exceptions and reductions in a policy comply with the following: A. An Exception will be considered as being printed with the same prominence as the benefit if it is printed with the same size and style of type as is used in the benefit provision and appears as a part of or immediately following the benefit provision to which it applies. B. If the Exception is not a part of nor does not immediately follow the benefit provisions to which it applies, but appears elsewhere in the policy, then the exception shall be printed with the same point and style of type except such type shall be in bold face.

APPENDIX F

309

C. A Reduction is printed in greater prominence if it is printed in a larger point bold face type than the text of the policy or the exceptions, except that the same size type but in bold face will be satisfactory where it immediately follows the benefit provision to which it applies. D. T h e text of the policy must not be printed in less than ten point type and when ten point type is used, the exceptions must be printed in ten point bold face type and the reductions in twelve point bold face type, except that ten point light face type may be used for stating the benefits and the exceptions, and ten point bold face type for the reductions where they immediately follow the benefit provision to which they apply. E. Uniformity in make-up and typographical appearance of the policy is desirable. Obtaining of greater or lesser prominence by using different styles of type, boxing, indentations, spacing, etc., should not be approved. F. No policy shall exclude coverage for the sickness benefits thereunder on the basis that the Insured has made claim for benefits under Accident insurance. No policy shall exclude coverage for the accident benefits thereunder on the basis that the Insured has made claim for benefits under Sickness insurance. G. If the policy contains an exception of liability for injury arising out of riots, the exception should be confined to cases in which the Insured is participating in the riot. H. Any provision which affects the liability of the Insurer because of any violation of law by the Insured during the term of the policy shall be substantially in the following form: T h e Insurer shall not be liable for death, injury incurred or disease contracted, to which a contributing cause was the Insured's commission of, or attempt to commit, a felony, or to which a contributing cause was the Insured's being engaged in an illegal occupation. 3.

Certain Exceptions A. Causal Connection.—Where a policy contains exceptions that reduce or entirely relieve the Insurer of liability, such exceptions must be so drafted as to reduce or eliminate the Insurer's liability only where there is causal connection between the thing excepted and the loss. T h e principle involved does not apply in exceptions such as "while outside of the United States," "while in military or naval service," etc., and no causal connection need be incorporated in this type of exceptions. B. Covered as Sickness.—If a combination Accident and Health policy states that losses caused by hernia, sunstroke, freezing, or injuries where there are no visible marks, contusions, wounds, etc., shall be considered only under the sickness provisions of the policy, then such provisions constitute reductions. 4.

Military or Naval Service If the policy excepts coverage while the Insured is in military or

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A C C I D E N T A N D SICKNESS

INSURANCE

naval service, the policy must provide for a r e f u n d of pro rata u n e a r n e d p r e m i u m upon request of the Insured for any period the Insured is not covered. However, if coverage is excluded only for loss resulting from military or naval service or war, the r e f u n d provision will not be required. T h i s recommendation shall not apply to policies of noncancellable insurance. J.

Chronic Disease An exception which excludes liability for "chronic" or "organic" disease from a sickness policy will not be permitted. Diseases sought to be excluded from coverage shall be stated with sufficient claritv so as to be readily identifiable. Terms such as "heart disease," "pulmonary disease" or "venereal disease" are ordinarily acceptable. 6.

Occurrence of Loss Cancels Policy A provision that the occurrence of any loss covered by the policy cancels the policy as to losses from injuries thereafter occurring is an exception. 7.

Particular Reductions ( T h e particular reductions herein outlined constitute a partial list for illustrative purposes only a n d they do not include the Standard Provisions reductions.) A. Reduced Benefits for Certain Sicknesses or Accidents.—If a policy pays smaller indemnities or for shorter period of time for certain named diseases or for certain named types of accidents or injuries, than would otherwise be payable, then such provision is a reduction and shall be printed with greater prominence. B. Reduced Benefits Because of Age.—A provision for payment of only a percentage of the full benefits while the insured is under or over certain specified ages is a reduction and shall be treated as provided u n d e r Chapter entitled " G U I D E F O R R E V I E W OF C O N T R A C T S , " subject "9. B E N E F I T S (Indemnities)," paragraph B, but no policy shall be approved for issuance at any original age which does not provide a reasonable period of full coverage prior to the age at which the reduced benefits become effective. C. In Lieu of.—If the policy provides for payment of a specified a m o u n t in lieu of any other payment u n d e r the policy without giving the Insured the right of election, which specified amount might be less than the maximum amount that would otherwise have been payable u n d e r the policy had the "In Lieu of" provision not been included, then such a provision is a reduction a n d must be printed with greater prominence. D. Elective Indemnities—Schedule of Operations, etc.—If specified amounts are printed in the policy as being payable for certain types of injuries or operations, and there is included a provision that the amounts so shown apply if the policy monthly indemnity is for example $100.00 a month, and the specified a m o u n t s are to be reduced in proportion if the monthly indemnity is less than $100.00 per month, then

311

APPENDIX F such provision prominence.

is a reduction

and

must

be

printed

with

greater

8.

Captions Except in the case of (2-A) above, the exceptions and reductions (other than Standard Provisions) should be placed in a paragraph or paragraphs following the coverage provisions and preceding the Standard Provisions and be clearly captioned, i.e.—"Exclusions" or "Exclusions and Reductions" or " N o t Covered" or " R e d u c t i o n s " or "Exceptions" or " R e d u c e d Benefits," etc. Separate paragraphs may be used for exceptions and reductions if each paragraph is appropriately captioned. Exceptions or reductions shall not be included under captions such as "Miscellaneous Provisions" or "Additional Provisions" or " G e n e r a l Provisions." C H A R A C T E R AND S I Z E O F T Y P E O F F O R M S

In many states there are statutory requirements for the size and character of type used in the printing of personal Accident and Health Policy forms. It is recommended that uniformity of typographical appearance be achieved in all states and the following is suggested: 1.

Text of Policy A. Use not less than ten point light face type (the text includes all printing of the policy, riders, endorsements, and applications attached thereto, except name and address of insurer, name and title of policy, brief description, captions and sub-captions, attestation clause, signatures and form numbers). B. R e f e r to Item E, Use of Exceptions and Reductions, on page 9. 1 2.

Name and Address of Optional.

Insurer

3.

Name or Title of Policy Should be less than type size used for name of Insurer.

4.

Brief Description Eighteen point.

5.

Captions and Sub-captions A. Should conform to type size of text of policy but may be all caps, bold face, etc. B. Attestation clause may be of a different character type, if desired. 6.

Exceptions A. W h e r e exceptions are a p a n of or immediately follow the benefits to which they apply, use same size and character as text of policy. B. W h e r e exceptions are not a part of nor do not immediately follow the benefits to which they apply, use bold face type same size as text of benefits. 1

On page 309 of this volume.

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ACCIDENT AND SICKNESS INSURANCE

7.

Reductions A. W h e r e reductions are a part of o r immediately follow t h e benefits to which they apply, use bold face type same size as text of benefits. B. W h e r e reductions are not a p a r t of n o r d o not immediately follow the benefits to which they apply, use bold face type at least o n e size larger than text of benefits. 8.

Standard Provisions T h e Standard Provisions are considered as text of policy and should be p r i n t e d in not less t h a n ten point light face type with the following exceptions: A. T h e first sentence of the long f o r m S t a n d a r d Provision 1 and O p t i o n a l Standard Provisions 17 a n d 19, in which cases bold face type o n e size larger t h a n text of benefits should be used. B. Care should be exercised n o t to use different character or size of type f o r emphasis, other t h a n as above. C. Standard Provision 20 should be in bold face type of the same size as text of t h e policy.

APPENDIX G STATEMENT OF PRINCIPLES—PERSONAL ACCIDENT AND H E A L T H INSURANCE (Approved by the N.A.I.C. December 15, 1948, and recommended by that Association as a guidepost for Insurance Commissioners and Industry) I. Principles for construction of policy forms: a. Number of Policy Forms. Under the influence of constantly changing economic and social conditions the needs of the insurancebuying public vary to a considerable degree. It is highly desirable that the forms of coverage and the types of policies offered should meet those needs, but it is equally desirable that the number of different policies written be kept within practicable limits. No useful purpose is served by making available an infinite variety of policies reflecting only inconsequential differences in coverage. b. Policy Language. Policies should be prepared in clear, direct and unambiguous language. T h e policy must be a clear expression of the insurer's undertaking. c. Insuring Agreements and Exclusions. T h e insuring agreements when read with the exclusions and conditions should constitute an express promise to pay within the limits of the insurer's intended undertaking. Policy exclusions should be given sufficient prominence to assure their recognition. d. Scope of Coverage to Be Substantial. No accident or sickness insurance contract should be issued unless it provides protection against substantial hazards. Policies which insure only against exposures of rare occurrence are seldom justified. Policies which insure against accidents or sickness generally, and which are not clearly limited to certain types of accidents or diseases, should not contain any definitions, restrictions or exclusions which take out of the coverage, or reduce benefits for hazards which custom and experience have determined to be normal insurable risks. Limited policies insuring only against accidents or diseases of a certain type or types should give a broad coverage within the field which they cover. Policies may contain a general limitation of coverage to non-occupational hazards and to hazards for which the insured is not entitled to compensation under any workmen's compensation law. T h e subject matter of this section I-d and the subject matter of Part III are closely related, and should be considered together. e. Limited Policies. T h e term "limited policies" should be used to refer to policies providing coverage only within a specified field. T h e following principles should be applicable to limited policies: 313

314

A C C I D E N T A N D SICKNESS INSURANCE

(1) the policy should express clearly the specified field covered; and (2) the policy should clearly show o n its face and filing back that it is a limited policy; a n d (3) the aggregate of the hazards covered should be of sufficiently freq u e n t occurrence to justify the sale of the policy. f. Titles and Descriptions. An insurer may identify the policy by a name, title, o r symbol of its own choice, b u t the name used should n o t be such as to give a misleading impression of the coverage. T h e word "non-cancellable" may be used in or immediately following the title, b u t only if the policyholder has the right to c o n t i n u e the policy for a specified period of not less than five years or to a specified age not less t h a n fifty a n d not less t h a n five years older t h a n the age of t h e insured at t h e d a t e of issue of the policy. If the word "noncancellable" a p p e a r s in or immediately follows the title, the period d u r i n g which t h e policyholder has t h e right to c o n t i n u e the policy should be shown. Any f u r t h e r description on the face or on the filing back of t h e policy generally serves n o useful purpose and should not be r e q u i r e d . g. Mail Policies. Policies sold by mail should be governed by the same principles a p p l y i n g to all other types of policies. II. Principles a p p l y i n g to p a r t i c u l a r policy provisions and their use: a. Accident Policy Exclusions. Certain types of exclusions are p r o p e r a n d are c o m m o n to all types of general coverage accident policies. Since accident policies are designed to cover only loss resulting f r o m bodily i n j u r i e s caused by an accident, such policies properly may exclude, for e x a m p l e , loss caused or c o n t r i b u t e d to by disease, by h e r n i a , o r by suicide or self-destruction or any a t t e m p t thereat (sane o r insane). Also, because of the unusual hazard not contemplated by the n o r m a l p r e m i u m charge, other examples or p r o p e r exclusions are while in military (land, sea or air) service, war or any act of war, while traveling or flying in any aircraft, or m i n i m u m and m a x i m u m age limits. T h e limited policies such as the usual automobile accident policy may of course include exclusions for risks not covered; for example, while the a u t o m o b i l e is being used in a race or speed test, or while r i d i n g in, or driving, or working on, or a d j u s t i n g an a u t o m o b i l e for c o m p e n s a t i o n or hire. Examples of similar special policies that require a p p r o p r i a t e exclusions include air travel policies, ticket accident policies, policies covering boy scouts in camp, non-occupational policies, policies designed especially for athletes, artists or singers, farmers, nurses, coal miners, railroad employees, aircraft pilots or crew members, and o t h e r special coverage policies where the field covered is clearly defined and varying exclusions are necessary in connection with such policies, but they should not be u n d u l y restrictive. T h e r e are certain types of accident policies that are sold with little or n o u n d e r w r i t i n g , such as policies sold by machines and ticket travel

APPENDIX G

315

accident policies designed for sale t h r o u g h ticket agents in transportation offices, which may properly contain exclusions, such as m i n i m u m a n d m a x i m u m age limits, persons maimed or d e f o r m e d , persons engaged in exceptionally hazardous pursuits a n d similar exclusions. T h e Standard Provisions Law provides for a d d i t i o n a l exclusions relating to violating law a n d intoxicants or narcotics. A n impaired risk may be insured subject to a waiver attached to o r endorsed on the policy excluding i n d e m n i t y for loss caused by or resulting f r o m the i m p a i r m e n t . T h e foregoing examples of policies a n d exclusions are merely illustrative. T h e r e are other p r o p e r coverages a n d exclusions d e p e n d i n g o n the type of policy involved. b. Sickness Policy Exclusions. Policies of sickness insurance are designed to protect only for loss caused by disease d u r i n g the term of the policy a n d properly exclude disease contracted p r i o r to its effective d a t e a n d loss resulting f r o m bodily i n j u r i e s caused by an accident. Because of the unusual hazard not c o n t e m p l a t e d by t h e n o r m a l prem i u m charge, other examples of p r o p e r exclusions are disease contracted d u r i n g or while in military (land, sea or air) service, m i n i m u m a n d m a x i m u m age limits, a n d venereal disease. For t h e same reason policies of sickness insurance designed for issuance to female risks may p r o p e r l y exclude loss d u e to pregnancy, c h i l d b i r t h o r miscarriage or to disease or d e r a n g e m e n t of the female generative organs. T h e r e should be no such general exclusion as " c h r o n i c disease" or "organic disease." Risks who have i m p a i r m e n t s or who have had chronic or r e c u r r e n t diseases may be insured subject to a waiver attached to or endorsed on the policy, excluding i n d e m n i t y for loss caused by or resulting f r o m the particular i m p a i r m e n t or disease. Policies providing hospital, medical, nurse a n d surgical benefits or expense alone or in any c o m b i n a t i o n thereof present special p r o b l e m s as to coverage, exclusions a n d q u a l i f y i n g periods in connection with which the general principles o u t l i n e d in Parts II a n d III of this Statem e n t should be applied. Policies p r o v i d i n g both accident and sickness insurance should be p r e p a r e d in a m a n n e r not inconsistent with the principles above set forth. c. Elective Provisions. Every benefit provision of an accident or sickness policy should constitute an express promise to pay. Policies should not contain provisions of the elective i n d e m n i t y type which m a k e it possible in certain cases for claimants to m a k e elections or fail to make elections that ultimately prove to be against their best interest. d. Multiple Indemnities. W h e r e an accident policy provides ind e m n i t i e s of varying a m o u n t s f o r the same loss for i n j u r y sustained in different types of accidents, such policy is said to provide m u l t i p l e indemnities. Multiple indemnities for loss resulting f r o m i n j u r i e s occurring in other t h a n o r d i n a r y accidents may be p r o v i d e d only where the field in which such special injuries occur is well defined and clearly stated. If a policy provides different a m o u n t s f o r loss u n d e r different

316

ACCIDENT AND SICKNESS INSURANCE

conditions, the larger amount shall not be given more prominence than the smaller amount. e. Qualifying Periods and Waiting Periods. Qualifying (or elimination or probationary) and waiting periods are proper and necessary in some policies as an underwriting precaution to protect the company from diseases or conditions to which the insured has been exposed. Waiting periods likewise are proper both as a means of programming the policyholder's disability insurance with other disability benefits available to him and as a means of reducing the premium charge for such policies. Therefore, and due to the many and varied uses for such periods, no limitations of their use are feasible. f. Disability and Confinement Clauses. An accident policy shall not predicate liability for time indemnity upon any kind of confinement. A sickness policy may predicate liability for time indemnity upon a requirement for house confinement. Weekly premium payment type industrial policies may properly require bed confinement. Policies of accident insurance may provide indemnity at the full rate for total disability and at a reduced rate and term for partial disability. Policies of sickness insurance may provide indemnity at the full rate for confinement and at a reduced rate and term for total disability which does not necessitate such confinement. Companies should pay at the full rate under such policies for substantial confinement where the Insured is necessarily totally disabled and unable to leave the house except for necessary visits to the doctor's office or to hospitals, and policies should so state by providing that confinement shall not be terminated by reason of the transportation of the Insured, at the direction of his doctor, to or from a hospital or the doctor's office for necessary treatment. Policies may require regular treatment by a physician or surgeon but payment shall not be conditioned upon any specified frequency of visits or attendance. T h e beginning of a disability period may not be conditioned upon date of receipt of claim notice by the insurer. III. Principles for the preparation of advertising and solicitation material: 1. Advertising shall truthfully and fairly represent the benefits provided by the policy and shall be designed to avoid the drawing of untrue and misleading conclusions therefrom. 2. Statements or representations of fact shall be true in fact and capable of definite proof. 3. An offer of free inspection of a policy is not a cure for misleading statements in advertising. 4. If a policy provides different benefits as to amount or time for the same loss occurring under different circumstances or from different causes, the smaller benefits payable shall be given the same prominence as the larger benefits.

APPENDIX G

317

5. If reduced benefits are in effect at certain age limitations, the advertising shall so state. 6. N o advertising which c o n t a i n s a list of diseases covered by the policy shall r e p e a t reference to such diseases by t h e use of synonymous terms, nor list diseases which are rarely or never f o u n d in the class of persons covered by the terms of the policy, n o r shall such advertising emphasize p a y m e n t of benefits f o r diseases which occur only infrequently. 7. Statements that agents' commissions are saved shall not be m a d e if o t h e r equivalent acquisition expenses are in fact incurred. 8. T h e phrase " N o Medical E x a m i n a t i o n R e q u i r e d " or similar phrases shall not be used to create the impression t h a t i m p a i r e d risks will be insured. 9. References to "generous benefits" or "liberal benefits" or similar phrases to imply generosity or liberality beyond the terms of the policy contract shall not be made. 10. Such phrases as " c o m p l e t e p r o t e c t i o n , " " f u l l coverage," "all coverage," shall not be used where possible benefits d o n o t sustain their accuracy. 11. Advertising shall c o n t a i n n o exaggerations r e l a t i n g to time within which claims are p a i d (within 24 o r 48 hours, etc.), n o r imply that a company frequently a n d r o u t i n e l y pays specified sums for any tvpe of accident o r sickness w h e n in t r u t h only certain specified accidents are covered. 12. N o advertising shall state or imply that only a specific n u m b e r of policies will be sold or that a time limit is fixed f o r the discontinuance of the sale of the particular policy advertised, unless such statement is literally true. 13. N o advertisement shall state or imply that all costs of hospitalization or medical expense or t h a t all income will be replaced by benefits unless the policy is without limitations or restrictions in any f o r m . 14. N o advertising shall indicate that a policy covers a pre-existing disease unless such is a fact. 15. Advertising which p u r p o r t s to give a full e x p l a n a t i o n of the policy coverage shall refer to t h e fact that t h e policy does contain exceptions a n d reductions or limitations if any. 16. Statistics on a n a t i o n a l basis covering all accidents or all illnesses shall not be used to imply that the policy covers all such accidents a n d illnesses.

APPENDIX

H

A D M I N I S T R A T I V E P R O C E D U R E R E C O M M E N D E D BY N.A.I.C. RELATIVE T O RENEWABILITY AND CANCELLATION PROVISIONS IN T H E APPROVAL O F A C C I D E N T AND H E A L T H P O L I C I E S D R A F T E D IN A C C O R D A N C E W I T H T H E UNIFORM INDIVIDUAL ACCIDENT AND SICKNESS P O L I C Y P R O V I S I O N S L A W T h e U n i f o r m Individual Accident and Sickness Policy Provisions Law, in Section 2 (A) (4), leaves the Brief Description optional with insurers. T h e r e has arisen a question with respect to the applicability of P a r a g r a p h H on page 9 1 of the Third Edition of the Official Guide, c a p t i o n e d "Brief Description," to policies d r a f t e d in compliance with the U n i f o r m Individual Accident a n d Sickness Policy Provisions Law a n d specifically with respect to those policies which are not g u a r a n t e e d renewable to a specified age. T h i s question was presented to the Accid e n t a n d H e a l t h Committee at the meeting of the National Association of I n s u r a n c e Commissioners on J u n e 24, 1952 a n d at the time was taken u n d e r advisement. T h e Accident a n d H e a l t h Committee r e c o m m e n d s substantially the following as an administrative procedure: W h e n a policy other t h a n a non-cancellable policy does not contain either a Brief Description or a separate statement p r i n t e d o n the first page a n d o n the filing back referring to the policy's renewal conditions, a separately captioned provision should a p p e a r on the first page of t h e policy setting f o r t h the conditions u n d e r which the policy may be renewed. T h e following captions for this provision are considered as a m o n g those which would be acceptable: Renewal Subject to Consent of C o m p a n y Renewal Subject to C o m p a n y Consent Renewable at O p t i o n of C o m p a n y T h e e n u m e r a t e d captions are r e c o m m e n d e d without prejudice to t h e right of a company to submit a n o t h e r caption, subject to approval by t h e Commissioner, which it believes is equally clear or more definite as to the subject matter. If the policy is not renewable it shall so state in a separate appropriately captioned provision on the first page. T h i s R e c o m m e n d e d Administrative Procedure would also be inapplicable in those states where the 1912 U n i f o r m Standard Provisions Law is still in effect r e q u i r i n g a Brief Description. In such states Parag r a p h H on page 9 1 of the T h i r d Edition of the Official G u i d e would l On page 302 of this volume.

318

APPENDIX H

319

still be a valid guide to a d m i n i s t r a t o r s in the a p p r o v a l o f a c c i d e n t a n d h e a l t h policies. If the policy c o n t a i n s a C a n c e l l a t i o n provision it must b e s e p a r a t e l y set out a n d c a p t i o n e d " C a n c e l l a t i o n " a n d the e x i s t e n c e o f t h e C a n c e l l a t i o n provision must b e r e f e r r e d to in the r e n e w a l p r o v i s i o n by a specific cross r e f e r e n c e in t h e R e n e w a l provision o n the first p a g e o f t h e policy to t h e C a n c e l l a t i o n provision w i t h i n . T h e t e r m " n o n - c a n c e l l a b l e " as used h e r e i n m e a n s a policy w h i c h t h e insured has t h e right to c o n t i n u e in torce s u b j e c t to its t e r m s by t h e timely p a y m e n t of p r e m i u m (a) until at least age 50 or (b) in t h e case o f a policy issued a f t e r age 4 4 f o r at least five years f r o m its d a t e o f issue.

APPENDIX I N.A.I.C. FORM FOR FILING ACCIDENT AND SICKNESS INSURANCE EXPERIENCE Policy Form No. (8)

Premiums Earned (3) (5)

Name

of Policy If any

Limited or Full Coverage

f8)

Losses Incurred (5)

Class of Coverage (I),

Rate of Commission and Expense Allowance (5) (6)

(2).

(4)

Amount of Policy or Membership Fees or Excess Premium Amounts (5) (7)

(1) Designate Non-Cancellable Forms. (2) Does not apply to double indemnity, waiver of premiums and other disability benefits embodied in life contracts. (3) Include membership or policy fees, if any. (4) Report group business in total on one line. (5) May segregate first year business and renewal business by using two lines for each form (first year business on top line). (6) Where there is a difference in the rate of commission and expense allowance for the initial and subsequent terms, it is suggested that the Company show for each policy form the different rates properly labeled. (7) Company may report amounts to justify unsatisfactory experience by policy form; or omit. (8) Experience under Schedule Form policy to be reported for each combination of coverages issued under the form. Note: Loss experience on forms not currently issued need not be reported separately unless premiums on such policy forms exceed 5 per cent of total premium, excluding premiums for group insurance. 320

APPENDIX J T H E N.A.I.C. U N I F O R M D E F I N I T I O N O F FRANCHISE INSURANCE (Adopted

June

12,

1946)

Accident and health insurance on a franchise plan is hereby declared to be that form of accident and health insurance issued to (1) Five or more employees of any corporation, copartnership or individual employer or any governmental corporation, agency or department thereof, or (2) T e n or more members of any trade or professional association or of a labor union or of any other association having had an active existence for at least two years where such association or union has a constitution or by-laws and is formed in good faith for purposes other than that of obtaining insurance; where such persons, with or without their dependents, are issued the same form of an individual policy varying only as to amounts and kinds of coverage applied for by such persons, under an arrangement whereby the premiums on such policies may be paid to the Insurer periodically by the employer, with or without payroll deductions, or by the association for its members, or by some designated person acting on behalf of such employer or association.

321

APPENDIX K G R O U P F O R M S O F A C C I D E N T A N D SICKNESS I N S U R A N C E Accidental Death and Dismemberment Insurance Full a m o u n t of insurance paid in the event of loss by accidental means of life, both hands, both feet, sight of both eyes, one hand and one foot, one hand and sight of one eye, or one foot and sight of one eye. Onehalf the full a m o u n t of insurance is paid for loss by accidental means of one hand, one foot or sight of one eye. Coverage may be on a 24-hour basis or may be limited to non-occupational accidents. Accident and Sickness Insurance (Weekly Payment) Provides a weekly benefit if an employee is unable to work because of a non-occupational accident or sickness. Sickness benefits begin after a disability waiting period of 3 or more days. Accident benefits may begin on the first day of disability or after the same disability waiting period that applies to sickness. T h e m a x i m u m period d u r i n g which benefits are payable for any one disability is usually either 13 or 26 weeks. Maternity benefits may be included if desired and such benefits are payable for a m a x i m u m of 6 weeks. Hospital Expense Insurance for Employees and Dependents Pays charges for room a n d board, generally u p to 31 or 70 times the room and board daily limit, for a confinement d u e to a non-occupational accident or sickness. Also pays charges for the other hospital services if a room and board charge is made, u p to a limit of 10, 15 or more times the room and board daily limit. Maternity benefits may be included u p to a m a x i m u m of 10 or 15 times the room and board daily limit. Surgical Expense Insurance for Employees and Dependents Pays cost of a surgical operation due to a non-occupational accident or sickness, not exceeding the a m o u n t listed in a schedule of operations. T h e operation must be performed by a licensed physician or surgeon, but not necessarily in a hospital. Obstetrical benefits may be included if desired. Medical Expense Insurance—Total Disability Required (for Employees Only) Pays doctor's fees for house, hospital or office calls u p to a specified m a x i m u m per call if employee is u n a b l e to work because of a nonoccupational accident or sickness. T h e disability waiting period is usually the same as for weekly payment accident a n d sickness insurance or excludes the first few calls. T h e m a x i m u m benefit for any one period 322

APPENDIX K of disability provided.

is normally

$150 or $225. N o m a t e r n i t y

323 benefits are

Hospital Medical Expense Insurance for Employees and Dependents Pays doctor's fees f o r calls m a d e d u r i n g hospital confinement d u e to a non-occupational accident o r sickness. T h e m a x i m u m p a y m e n t is d e t e r m i n e d by m u l t i p l y i n g the daily limit by the n u m b e r of days of c o n f i n e m e n t prior to t h e day of an o p e r a t i o n , u p to a m a x i m u m of 31 or 70 days. Benefits arc not p a i d f o r calls on a n d after t h e day an opera tion is p e r f o r m e d , or d u r i n g c o n f i n e m e n t d u e to pregnancy. Medical Expense Insurance—Non-Disabling—for Employees and Dependents Pays doctor's fees u p to a specified daily limit for house, hospital, or office calls in connection with a non-occupational accident or sickness. T o t a l disability is not r e q u i r e d . Benefits for calls d u e to sickness ordinarily begin with the third or f o u r t h call. In the case of an accident, benefits o r d i n a r i l y begin with the first call b u t the waiting period may be the same as that p r o v i d e d for sickness. T h e r e is a limit of 50 or 70 calls for each person d u r i n g any 12 consecutive m o n t h s . N o provision is m a d e for m a t e r n i t y benefits. Major Medical Expense Insurance for Employees and Dependents Pays a specified p o r t i o n , usually 75 per cent of the eligible expenses d u e to a n o n - o c c u p a t i o n a l accident or sickness, in excess of a deductible r a n g i n g f r o m §100 to $500. Eligible expenses are those incurred for hospital services, surgery, medical care a n d t r e a t m e n t , services of a registered nurse, physiotherapy, medicines, drugs, X-rays, etc. If expenses are incurred for the same accident or sickness over a period exceeding one year, t h e deductible is reimposed each year. T o t a l disability is not required. A lifetime m a x i m u m for each person is established, r a n g i n g f r o m $2,000 to $10,000. M a j o r medical benefits are not p a i d for expenses reimbursed u n d e r o t h e r parts of the g r o u p p l a n , b u t in some cases such expenses are a p p l i e d against the deductible. T h e p l a n described above is the "each illness" type. A n o t h e r type is the "family budget d e d u c t i b l e " plan which is similar to the one described except that t h e deductible, generally $300 each year, is c o m b i n e d for all illnesses of the family, e x c l u d i n g those illnesses costing less t h a n $25. Poliomyelitis Expense Insurance for Employees and Dependents For each case of poliomyelitis, the p l a n provides for t h e payment, u p to a m a x i m u m r a n g i n g f r o m $1,500 to $5,000, of the customary charges made for hospitalization, medical care, treatments, braces, wheel chair, etc., within a 3-year period.

APPENDIX L G R O U P HOSPITAL INSURANCE FORM T o be Presented to the Hospital in Duplicate To: Hospital T h i s is to certify that is insured for the following non-occupational Group Hospital Benefits (in behalf of his dependent ) by (name)

The A. B.

(relationship)

INSURANCE

COMPANY

Benefits for Other Than Maternity Cases Hospital Room and Board (including general nursing services) Actual Hospital charges up to $ for each day of hospitalization u p to days. Other Hospital charges for Hospital care and treatment (excluding charges for nurses and physicians services)

$

Benefits for Maternity Cases Hospital Room and Board (including general nursing service) and other Hospital Services—Actual charges up to J _ OR A. Hospital Room and Board (including general nursing services) $ for each day of hospitalization up to _.days B. Other Hospital charges for Hospital care and treatment (excluding charges for nurses and physicians services)

$

-

T h e Minimum Hour Hospitalization requirement will be met if confinement is required because of a surgical operation, or as a result of accidental bodily injury requiring emergency care, or if a board and room charge is made; otherwise, hospital confinement must be for 18 consecutive hours or longer. (group policyholder) (address)

(phone)

By: (name and title) ABOVE CERTIFICATION VALID FOR O N L Y SEVEN D A Y S F R O M ( e x c e p t i o n — m a t e r n i t y cases)

324

(date)

APPENDIX L

325

HOSPITAL COMPLETE T H E FOLLOWING AND F U R N I S H COPY • To . Address Name of Patient _ Age If patient had other than Semi-Private Room indicate Semi-Private Daily Rate $ _ Admitted to Hospital on At M. Discharged on At M. Diagnosis from Records (If injury, give date and place of accident): Operations or Obstetrical Procedures Performed:

(nature and d a t e )

H O S P I T A L C H A R G E S (Complete this section or attach copy of itemized bill showing type of accommodation) Room and Board • Ward • Semi-Private [""] Private

days at $ " " $ " " $

Total $ " $ " $

Other Charges Anesthesia Operating or Delivery Room Laboratory X-ray Dressing Drugs Oxygen EKG B M R

$ $ $ $ $ $ $ $

$ Total

Hospital Address Taken from records on. .. Signed by

I $

19

A U T H O R I Z A T I O N T O R E L E A S E I N F O R M A T I O N : I hereby au thorize the above named hospital to release the information requested on this form. Date. .. 19 Signed Patient (parent if a minor)

A S S I G N M E N T O F I N S U R A N C E B E N E F I T S : I hereby authorize payment directly to the above named hospital of the Group Hospital Benefits herein specified and otherwise payable to me but not to exceed th*

326

A C C I D E N T A N D SICKNESS I N S U R A N C E

hospital's regular charges for this period of hospitalization. I understand I am financially responsible to the hospital for charges not covered by this assignment. Date 19 Signed _ Form H A P 4

Ed. 9-5}

(Insured)

I N S T R U C T I O N S FOR EMPLOYER As soon as it is known that an insured employee or one of his covered dependents, u n d e r your G r o u p Hospital Expense Insurance, will be confined in a legal hospital, you should, within 7 days, preceding entry— 1. Complete in duplicate a description of his hospital coverage on reverse side of this form. 2. Use dollar a m o u n t s in describing maximum benefits payable in connection with the particular hospital confinement. S. Fill in the r e t u r n address line which is marked with a star ( i f ) a n d the hospital will send the completed report to you. 4. Furnish employee with two copies of the form for delivery to hospital. 5. At the same time the employee receives this form, he also should be given a regular Statement of Claim form and asked to fill out and sign the employee section. After the form is r e t u r n e d to you, please complete the employer section. N o attending physician's report is necessary if the employee is entitled to only Hospital or Surgical benefits. In case of emergency, r e q u i r i n g immediate admission, you may be asked by the hospital or a m e m b e r of the employee's family to send these completed forms to the hospital. I N S T R U C T I O N S FOR EMPLOYEE 1. Present both copies of this form to the Admissions clerk at the hospital as evidence of your G r o u p Hospital Insurance. 2. If you intend to have these benefits paid directly to the hospital, you will be requested to sign the Authorization and Assignment sections o n the form. 3. W h e n this form is accepted, you pay only the difference, if any, between actual hospital charges a n d the benefits to which you are entitled u n d e r your G r o u p Hospital Insurance coverage. T h e Hospital will complete a section of this report and send the form directly to your employer.

INDEX Accident, defined, 21 22 Accident and Health Regulatory Law, 240, 2 % (Appendix D) Accident and sickness insurance: adequacy of present benefits, 11-12, 89-92 a m o u n t of benefit, 28-29, 39 application, importance of, 145 " b l a n k e t " insurance, 243-45 carriers, 9, 76 catastrophe hazard, 6-7 claim adjustment, 142-45, 158-62, 180-83. See also Claim adjustment. clarifying the terms, 1-2 compulsory, 46 problems of, 46-48 contract, the, 16-34, 114-28. See also Contract, coverage problems, 89-92 deductible used, 30-31 duration of benefits, 29-30, 39 earnings protection, 25 "franchise" insurance, 245-46 government, influence of, 12-13 g r o u p contract defined, 36-38. See also G r o u p insurance, hospital expense insurance, 59-75, 134-35, 216-20. See also Hospital expense insurance, hospitalization; see Hospitalization, income replacement insurance; see Income, replacement of lost, increases in, reasons for, 10-11 " i n d e p e n d e n t " plans, 76, 84 life insurance, kinship to, 18 losses, many factors affect, 3-4 major medical expense insurance, 81, 127-28, 221 malingering, 5 medical cooperation needed, 3 medical expense insurance, 79-97, 127, 220 nature of, 1-15 need of, 13-14 organized labor, influence of, 12-13

Accident a n d sickness insurance (continued): origin of, 18-20 period of greatest advance, 4, 8-9 personal and g r o u p contracts compared, 114-16 p r e m i u m rates, 184-95, 200-201, 20925. See also Premium rates, problems of, 5-6 purpose of, 16 rates; see Premium rates, regulation of, 232-62. See also Regulation. trends and problems, 247-62 reinsurance, 139-42, 157-58, 177-79. See also Reinsurance, reserves, 195-99, 202-7. See also Reserves, significant trends, 8-13 substandard, 8 surgical and medical expense insurance, 76-96. See also Surgical a n d medical expense insurance, underwriting, 129-39, 149-57, 165-77. See also Underwriting, u n i f o r m contract provisions, 99-113 Accidental death benefits, 32-33, 20910 Accidental means clause, 22 "Active life disability reserve," 195 Age limits, 111-12 AU-Industry Committee Report, 255 A n n o u n c e m e n t booklet, 117 Application, 135-36, 156 Autopsy, right of, 105 "Average earnings clause," 29 Aviation risks, 8 Babcock, Dr. Kenneth B., 62 Beneficiary, rights of, 107 Better Business Bureau, 250 Beveridge Report, 46 "Blanket accident" provision, 80 "Blanket" insurance, 243-45 Blue Cross, 9-10, 54, 59-73 extent of coverage, 74

328

INDEX

Blue Cross ( c o n t i n u e d ) : first developed, 59 individual plans, 73 versus insurance company plans, 60-73 B l u e Shield, 73. 76 97 number of plans, 76 Bureau of Accident and Health Underwriters, 186, 234n, 250, 251, 258, 259n California: compulsory disability benefits law, 42-43 Unemployment Compensation Disability policy, 204 Canadian Statutory Provisions, 236, 296 (Appendix E) Cancellation, 109 Capital sums, 31 Casualty Insurance, 13, 20 Catastrophe insurance, 6-7, 81, 221. See also Major medical insurance. Certificate of insurance, 117-18 Charts, 53, 55, 56, 58 Chicago Daily News, 63n Claim adjustment: group contracts, 180-83 policyholder draft, 181 prevention of abuse, 181 proof of claim, 180 personal commercial contracts, 142-45 accidental death claims, 145 application, importance of, 145 methods of investigation, 144-45 procedure, 143-44 personal noncancellable contracts, 158-62 differences in accident and sickness claims, 161 dishonesty problems, 160-61 handling bona fide claims, 161-62 procedure, 159 Claim forms, furnishing, 104 Coinsurance, 61, 63, 68, 83 Commission scales, 192 Commissioner of Insurance. See Insurance Commissioner. Common Care and Prudence R u l e . T h e , 26

Compensation of agents, 192 Comprehensive surgical and medical insurance, 81 problems of, 82-84 Compulsory non-occupational disability insurance, 36 California, 42-43 New Jersey, 43-44 New York, 44-45 R h o d e Island, 42 other states, 45 problems of, 46 Contract, the: cancellation provisions, 237, 318 (Appendix H) filed with Insurance Commissioner, 233 group, defined, 36-38, 200 announcements and certificates, 117-18 benefit provisions, 39, 124-28, 322 (Appendix K.) differences between group and personal, 114-16 disability, definition of, 40-41 effective date of contract, 120 effective date of employee's insurance, 120 insured individuals, 119 kinds of coverage, 322 limitations, 39-40 New York State statute, 37 notice, proof and payment of claims, 123-24 policyholder, 118-19 premiums, dividends, contributions, 122-23 provisions of, 114-28 termination of employee's insurance, 121 termination of policy, 120 laws regulating, 233-38 personal, 16-34 benefits, amount of, 28-29 duration of, 29-30 other provisions, 31-33 deductibles, 30-31 disability, definition of, 25-29 "exceptions" and "reductions," 112-13 insuring clause, 20-24 origin, 18-19

INDEX Contract, the (continued): personal (continued): provisions of contract; see Standard Provisions, Uniform Law, also Appendices A to H . regulation of; see Regulation, significant trends, 33-34 renewability provisions, 237, 318 (Appendix H) Dependents, defined, 77 Diagnostic expense insurance, 80 schedule of costs, 80 Dineen, Robert F.., 257n Disability: benefit provisions, 28-29, 31 defined, 2-3, 25, 26, 27 hazard, insurability of, 2-4 partial, 28 terms, confusion of, 1-2 typical benefit clause, 25 Disability insurance. See Accident and sickness insurance. Disability Insurance Sales Course. 147 Dismemberment or loss of sight, 31 Dividends: formulae for determining, 207-9 Doctors" reports, 136-37, 145-44, 181 Eisenhower, Dwight D., 48 Entire contract, 101-2 "Era of Containment," 13 Examination of insured, right of, 105 Excess of loss reinsurance, 141 "Experience-rating," 69 Facultative reinsurance, 141 Federal Reserve Board, 16 Federal T r a d e Commission, 231 Rules on Advertising and Sales Promotion of Mail Order Insurance, 231, 286 (Appendix C) Fitzhugh, Gilbert W„ 212, 214, 215 "Franchise" insurance, 245-46, 321 (Appendix J) "Fringe benefits," 65, 165 General medical insurance, 79 Gingery, Stanley W „ 218, 220 G r o u p contracts. See Contract. G r o u p insurance: beginnings of, 35

329

G r o u p insurance (continued): benefits subject to collective bargaining, 165 "blanket" insurance, 243-45 broad initial underwriting of, 166 characteristics of a good group, 3839 claim adjustment, 180-83. See also Claim adjustment, classification of industries, 169 compared with personal insurance, 114-16 composition of group, 169-70 contract, defined, 36-38 contract provisions, 114-28. See also Contract, coverage problems, 89-92 economic level, location, surroundings of applicant, 170-71 "experience-rating plan," 69 extent of coverage, 74 flexibility, need of, 165-66 forms of coverage, 200 full payment plans, 171-72 hospitalization and surgical coverage, 36, 50-75, 76-96. See also Hospital expense insurance, and Surgical and medical expense insurance, magnitude of single cases, 168 meeting hospital costs, 59 Blue Cross versus group plans, 60-73 premium rates, 200-201, 209-25 problems of underwriter, 168-69 rates; see Premium rates, regulation of, 241-43 reinsurance, 177-79. See also Reinsurance, renewal underwriting, 176-77 reserves, 202-07. See also Reserves, schedule of benefits, 171-72 special considerations given to, 24041 spread of risk, 173-74 state laws, 174 surgical and medical expense insurance, 76-96 transferred business, 177 underwriting, 165-77. See also Underwriting.

330

INDEX

G r o u p M o r t a l i t y C o m m i t t e e of Society of Actuaries, 210, 214, 217, 219 Hawley, D r . P a u l R „ 62 H e a l t h a n d Accident U n d e r w r i t e r s C o n f e r e n c e , 234n, 251 H e a l t h I n s u r a n c e C o u n c i l , 72, 180 H e a l t h I n s u r a n c e Plan of New York, 85, 86 H o b b s Bill, 231 H o s p i t a l e x p e n s e i n s u r a n c e , 59-75, 134-35, 216-20 claim a d j u s t m e n t ; see C l a i m adjustment, c o i n s u r a n c e p l a n , 61, 63, 68 e m p l o y e e b e n e f i t p l a n s , 73 e x p e n s e benefits, 125 e x p e n s e claim f o r m , 180, 324 (App e n d i x L) e x t e n t of coverage, 74-75 f u t u r e p r o b l e m s , 75 i n d i v i d u a l policies, 73 integration with other benefit plans, 73 m e e t i n g costs, 50-75 Blue Cross versus i n s u r a n c e company a p p r o a c h , 60-73 i n d e m n i t y a p p r o a c h , 60-67, 68 i n s u r a n c e c o m p a n y a p p r o a c h , 60 "service" a p p r o a c h , 60-67, 68 r a t i n g ; see R a t e s . experience, 69 r e t i r e m e n t a n d t e r m i n a t i o n , 70-71 u n d e r w r i t i n g : See U n d e r w r i t i n g . Hospitalization: ability to pay f o r , 57-59 admission p r o c e d u r e s , 72 charges for special services, 56-58 d u r a t i o n of c o n f i n e m e n t , 54-55 n a t u r e a n d e x t e n t of costs, 51-57 r a n g e of daily charges, 53 Hospitals, 62n H u e b n e r , S. S„ 17, 18 I n c o m e , r e p l a c e m e n t of lost. See also Accident a n d sickness i n s u r ance, a n d C o m p u l s o r y non-occ u p a t i o n a l disability i n s u r a n c e , g r o u p contracts, 35-49 benefits, 39

Income (continued): g r o u p contracts (continued): compulsory disability benefit plans, 42-46 N e w York State s t a t u t e , 37 p e r s o n a l contracts, 16-34 a m o u n t of benefit, 28-29 d u r a t i o n of benefit, 29-30 significant trends, 33-34 I n d e m n i t y a p p r o a c h , 60 " I n d e p e n d e n t " plans: characteristics of, 85 n u m b e r of, 76 survey of, 84n v o l u m e of, 84 Influenza e p i d e m i c , 198, 206 Inspection reports, 136, 144 I n s u r a n c e C o m m i s s i o n e r , 227-28 a u t h o r i t y to a p p r o v e or d i s a p p r o v e plans, 233-38 coverages supervised by, 241-46 i n s u r a n c e c o n t r a c t filed w i t h , 233 practices r e g u l a t e d by, 239 rates filed w i t h , 240-41 s u n d r y titles, 227 I n t e r n a t i o n a l Ass'n of Accident a n d H e a l t h U n d e r w r i t e r s , 147 "Kline

R e p o r t , " George H „ 257n K n o w l a n d a m e n d m e n t , 43 K u l p , C. A r t h u r , 13, 20. 258

256-57,

Laws. See C a n a d i a n S t a t u t o r y Provisions, N a t i o n a l Ass'n of I n s u r a n c e Commissioners, R e g u l a tion. Legal a c t i o n , t i m e limit o n , 107-08 Liberal R u l e , T h e , 26 Lloyd's of L o n d o n , 134 L o a d i n g , 191-95, 212-16 table of scales, 215 Loss-of-time benefits. See I n c o m e . Loss ratios a n d rates, 254-59, 320 (App e n d i x I) . M a j o r medical e x p e n s e i n s u r a n c e , 81, 127-28, 221. See also " C a t a s t r o p h e " insurance. M a l i n g e r i n g , 4-5 Maloney of C a l i f o r n i a , C o m m i s s i o n e r , 249-50

INDEX M a x i m u m coverage with s a m e insurer, 111 M c C a r r a n Act, 226. See also P u b l i c Law 15. Medical expense insurance, 79-97, 127, 220. See also Surgical a n d m e d i cal expense insurance. "Medically i n d i g e n t , " 57, 91-92 M i d d l e R u l e , T h e , 26 Miller, J o h n H „ 91 Miller, M o r t o n , 212, 215 M o n t g o m e r y W a r d and C o m p a n y : first g r o u p life policy, 35 M u r p h y of Delaware, Commissioner, 250

N a t i o n a l Ass'n of Insurance C o m m i s sioners, 98, 99, 228, 231, 234, 236, 237, 238, 240, 241, 245, 248, 250, 251, 252, 253, 255, 256, 261, 262 Accident a n d H e a l t h C o m m i t t e e of, 234, 251n Accident a n d H e a l t h R e g u l a t o r y Law, 240, 294 ( A p p e n d i x D) F o r m for filing experience, 241, 320 ( A p p e n d i x I) J o i n t Committees on R a t e s a n d R e g u l a t o r y Measures a n d Federal Legislation, 255n Renewability a n d Cancellation, 237, 318 (Appendix H) Statement of Principles, 237, 313 ( A p p e n d i x G) U n i f o r m definition of " f r a n c h i s e " insurance, 245, 321 ( A p p e n d i x

J) U n i f o r m I n d i v i d u a l Accident a n d Sickness Policy Provisions L a w , 99, 234, 272 (Appendix B) U n i f o r m Official Guide, 99, 236, 301 (Appendix F) U n i f o r m S t a n d a r d Provisions Law, 99, 236, 263 (Appendix A) N a t i o n a l F o u n d a t i o n for I n f a n t i l e Paralysis, 224, 225 National H e a l t h Insurance, 63 New Jersev, compulsory disability benefits law of, 43-44 New York., compulsory disability b e n efits law of, 44-45, 206

331

New York I n s u r a n c e Law: certificate, provision of, 37, 117 classes of policyholders recognized by, 118-19 Noncancellable contracts, personal, 146 revival of interest in, 8, 19 Notice of claim, 103 sufficiency of, 103-4 O c c u p a t i o n , c h a n g e in, 100-102, 107 Official G u i d e for t h e Filing a n d Approval of Accident a n d H e a l t h Policies, 99, 236, 301 ( A p p e n d i x

F) O h i o Disability U n e m p l o y m e n t Commission, 11 O p t i o n a l provisions, old a n d new, c o m p a r e d , 109-11 " P a n e l " doctors, 87 Pantasote L e a t h e r C o m p a n y , 35 Paul vs. Virginia, 226 P a y m e n t of benefits, 105-7 d e d u c t i o n of u n p a i d p r e m i u m s , 110 P e r m a n e n t e I n s u r a n c e Plan of California, 85, 86 Personal contracts. See C o n t r a c t . Personal insurance, c o m p a r e d with g r o u p , 114-16 "Policy reserve," 195 Polio insurance, 80-81, 135, 139, 224 P r e m i u m rates: g r o u p contracts, 200 201, 209-25 accidental d e a t h a n d d i s m e m b e r m e n t coverage, 209-10 hospital a n d surgical expense, 216-20 loading, scales for, 215 m a j o r medical expense, 221-24 m a n u a l of rates, 211-16 medical expense, 220-21 poliomyelitis expense, 224-25 retrospective, 207-9 weekly i n d e m n i t y , 211-16 personal commercial contracts, 18495 c o n t i n u o u s check i m p o r t a n t , 198 gross rate, 184 loading, 191-95 commission scales, 192

332

INDEX

P r e m i u m rates (continued): personal commercial contracts (continued): loading (continued): margin for profit and contingencies, 193-94 persistency factor, 193 p u r e p r e m i u m , 184-91 basic data, 186-87 classification of risks, 189-90 defined, 184 effect of ignoring equity, 190-91 field force as factor, 188 level premiums, 191 m e t h o d of computing, 184-87 subjectivity factor, 187-88 third-party interest factor, 18889 personal noncancellablc contracts, 184-95. See also Premium rates, personal commercial contracts, regulation of; see Regulation. President's Commission on the Health Needs of the Nation, R e p o r t of the, 87n, 9 I n , 92n Proof of loss, time limit, 105 Prorating for other insurance, 109-10 Public Law 15: 226, 255, 261. See also McCarran Act. Q u o t a share reinsurance, 140 Railway Passengers Assurance Company of L o n d o n , 19 Rates. See P r e m i u m rates. Rates and reserves. See also P r e m i u m rates. g r o u p contracts, 200-225 personal commercial contracts, 18499 personal noncancellablc contracts, 184-99 Regulation of accident a n d sickness insurance, 232-62 " b l a n k e t " insurance, 243-45 company practices, 229-32, 239 contract, 233-38 corporate existence, 228-29 financial solvency, 228-29 "franchise" insurance, 245-46 g r o u p insurance, 241-43 rates and loss ratios, 239-41, 254

Regulation of accident and sickness insurance (continued): text of laws and regulations. See Appendices A to H. trends and problems, 247-62 benefits in relation to premiums, 254-59, 320 (Appendix I) nonrealistic regulation, 252-54 over-regulation, 248-51 uniformity, 259-62 Reinstatement, 102-3 Reinsurance: group contracts, 177-79 cost, 179 mechanics, 178-79 personal commercial contracts, 13942 services of, 141-42 types, 139-40 personal noncancellable contracts, 157-58 Renewability and Cancellation Provisions Law, 237, 318 (Appendix Reserves: group contracts, 202-7 a m o u n t s not yet d u e on claims, 203-4 contingency, 206-7 f u t u r e contingent benefits, 204-5 reinsurance, 205-6 special, 206 unearned premium, 202 3 personal commercial contracts, 19599 contingency, 197-98 loss, 196-97 policy, 1 9 5 % u n e a r n e d premium, 196 unreported claim, 197 personal noncancellable contracts, 195-98. See also Reserves, personal commercial. Retrospective rating, 207-9 R h o d e Island, compulsory disability benefits law, 42 Risks: classification of, 151, 189-91 factors affecting, 131-34, 147-48, 168-77 substandard, 8

INDEX Schedule O, 204 Selection of risk, defined, 147 factors in, 131-54, 147-48, 168-77 Severity rate, 185n Sickness insurance, 19 Social Security Act, IS, 42 Social Security Administration, 84 Social Security Bulletin, 90n Society of Actuaries: establishes committee on group morbidity experience, 212 G r o u p Mortality Committee of, 210, 214, 217, 219 Transactions of, 212n, 218n, 221n Southeastern Underwriters Association, 226 Standard Provisions, personal contracts: characteristics of, 98-99 compared with new Uniform Law, 100-112

"exceptions" and "reductions," 112-13 optional provisions, old a n d new compared, 109-11 still effective in certain states, 236 Statement of Principles, 237, 313 (Appendix G) for advertising material, 239 "Study of Consumer Finances in 1952," 16 Substandard risks, 8 Supreme Court of the United States: decisions on insurance regulation, 226 upholds accidental means clause, 22 Surgical a n d medical expense insurance: benefits, types of: comprehensive, 81-84 diagnostic expense, 80, 127 general medical, 79, 127 m a j o r medical, 81-84, 127-28 miscellaneous and special, 80-81, 127 surgical, 78, 126-27 carriers: Blue Shield, 76-97 "Independents," 76, 84-89 H e a l t h Insurance Plan, 85-89 Permanente, 85-89

333

Surgical and medical expense insurance (continued): carriers (continued): insurance company, 76-97 claim a d j u s t m e n t ; see Claim adjustment, coverage problems: government employees, 91 higher age groups, 90-91 individuals, 89-90 "medically indigent," 91-92 rates; see P r e m i u m rates, reserves; see Reserves, u n d e r w r i t i n g problems; see also Underwriting, abuse of services, 95-96 benefit level, 94-95 cancellations, 94 claim administration, 95 inflation, 96 type of group, 93 Surplus reinsurance, 140 T a f t - H a r t l e y T r u s t , 165, 166, 176 Texas City disaster, 198, 206 T h a l e r , Alan M., 221 Transactions of the Actuarial Society of America, 212n Transactions of the Society of Actuaries, 212n, 218n, 221n Travelers Insurance Company, 19 T r e a t y reinsurance, 140 Underwriting: defined, 129-30, 148 g r o u p contracts, 165-77 administrability, 174-76 administrative problems, 93-96 benefits, schedule of, 171-72 broad initial underwriting, 16667 composition of group, 169-70 economic level, location, surroundings, 170-71 factors affecting risk, 168-77 flexibility, 165 full payment plans, 172-73 industry, 169 laws, 174 m a g n i t u d e of single case, 168 recent instability, 167

334

INDEX

Underwriting (continued): g r o u p contracts (continued): r e n e w a l u n d e r w r i t i n g , 176-77 s p r e a d of risk, 173-74 t r a n s f e r r e d b u s i n e s s , 177 m a l i n g e r i n g p r o b l e m s , 4-5 p e r s o n a l c o m m e r c i a l c o n t r a c t s , 12939 a d m i n i s t r a t i v e p r o b l e m s , 93-96 a l t e r n a t i v e s in h a n d l i n g a p p l i c a t i o n s , 137 e c o n o m i c c o n d i t i o n s , 138-39 f a c t o r s a f f e c t i n g risk, 131-34 s o u r c e s of i n f o r m a t i o n , 135-36 s p e c i a l lines, 134-35 personal noncancellable contracts, 149-57 a d v e r s e s e l e c t i o n p r o b l e m , 152-54 a l t e r n a t i v e s in h a n d l i n g a p p l i c a t i o n s , 156-57 c h a n g e of o c c u p a t i o n , 152 f a c t o r s in s e l e c t i o n , 147-48 field, 149 lay, 149-50 l i m i t s , 150-51 m e d i c a l , 154-55 o c c u p a t i o n a l classifications, 151 typical u n d e r w r i t i n g organization, 181-82 Uniform Individual Accidcnt and Sickness Policy P r o v i s i o n s L a w , 99, 234, 272 ( A p p e n d i x B)

Uniform Individual Accident Sickness Policy P r o v i s i o n s L a w tinued):

and (con-

c h a n g e s basic a p p r o a c h , 100 c o m p a r e d with S t a n d a r d Provisions, 100-112 effect o n a c c i d e n t a n d sickness p o l i cies, 235 e f f e c t i v e in 33 states, 234 " e x c e p t i o n s " a n d " r e d u c t i o n s , " 11213 n e w m a n d a t o r y p r o v i s i o n s , 108 o p t i o n a l p r o v i s i o n s , old a n d n e w c o m p a r e d , 109-11 U n i f o r m Official G u i d e , 99, 236, 301 U n i f o r m Policy P r o v i s i o n s , 98. See also U n i f o r m I . a w . U n i f o r m S t a n d a r d P r o v i s i o n s L a w , 99, 236, 263 ( A p p e n d i x A) United Mine Workers Welfare Fund, 74 United States vs. Southeastern Underwriters Ass'n, 226 W a i v e r s , 138, 156 War Department Group Insurance R a t i n g P l a n , 206 W o o d b r i d g e , N e w J e r s e y w r e c k , 198 W o r k m e n ' s c o m p e n s a t i o n , 35 Z o n e s , 228