<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:65307.wais]
LIFE INSURANCE: NEW OPTIONS FOR FEDERAL EMPLOYEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE CIVIL SERVICE
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JULY 27, 1999
__________
Serial No. 106-127
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
65-307 CC WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on the Civil Service
JOE SCARBOROUGH, Florida, Chairman
ASA HUTCHINSON, Arkansas ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
JOHN L. MICA, Florida DC
DAN MILLER, Florida THOMAS H. ALLEN, Maine
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
George Nesterczuk, Staff Director
Jennifer Hemingway, Professional Staff Member
John Cardarelli, Clerk
Tania Shand, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on July 27, 1999.................................... 1
Statement of:
Bartholomew, Michael J., senior counsel, American Council of
Life Insurance; Dennis New, second vice president for
special risk products, Unum/Provident; and G. Jerry Shaw,
general counsel, Senior Executives Association............. 35
Flynn, William E., III, Associate Director, Retirement and
Insurance Services, Office of Personnel Management......... 8
Letters, statements, et cetera, submitted for the record by:
Bartholomew, Michael J., senior counsel, American Council of
Life Insurance, prepared statement of...................... 37
Flynn, William E., III, Associate Director, Retirement and
Insurance Services, Office of Personnel Management,
prepared statement of...................................... 11
New, Dennis, second vice president for special risk products,
Unum/Provident, prepared statement of...................... 43
Scarborough, Hon. Joe, a Representative in Congress from the
State of Florida, prepared statement of.................... 6
Shaw, G. Jerry, general counsel, Senior Executives
Association, prepared statement of......................... 51
LIFE INSURANCE: NEW OPTIONS FOR FEDERAL EMPLOYEES
----------
TUESDAY, JULY 27, 1999
House of Representatives,
Subcommittee on the Civil Service,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:25 a.m., in
room 2154, Rayburn House Office Building, Hon. Joe Scarborough
(chairman of the subcommittee) presiding.
Present: Representatives Scarborough, Morella, Mica,
Cummings, and Allen.
Staff present: George Nesterczuk, staff director; Garry M.
Ewing, chief legal counsel; Jennifer Hemingway, professional
staff member; John Cardarelli, clerk; Tania Shand, minority
professional staff member; and Earley Green, minority staff
assistant.
Mr. Mica [presiding]. I would like to now reconvene the
Subcommittee on the Civil Service, and we will be taking up the
question of employee life insurance, FEGLI. I would like to
start with an opening statement that I have, and thank, first
of all, Chairman Scarborough for convening this hearing today.
However, the hearing that is being held today is marking up a
bill to bring group universal, group variable universal and
voluntary accidental death and dismemberment insurance to our
Federal employees. That is what we would be doing if OPM had
not dragged its feet in the last Congress.
Last year when I made it clear that these new products
should be offered to Federal employees, the Office of Personnel
Management objected. They said it was premature to act because
the bureaucrats were not ready and were not sure whether
Federal employees wanted better insurance options.
Rather than act OPM said we should study the question. But
we knew, as anyone familiar with FEGLI should have known, that
many Federal employees would be interested in alternatives to
term insurance that never builds up a cash value and is not
portable. I think we also knew that our Federal employees and
retirees would like to have more competitive rates available
and, again, additional options in competition in this program.
They want the same kind of insurance options that increasing
number of private sector employees enjoy. The members of this
subcommittee knew that also. That is why the bill passed the
House and directed OPM to submit a legislative proposal for
offering these new products. We wanted action, not studies. But
OPM persuaded the other body, the Senate, to strip out language
that we had approved and substitute a study instead.
Well, the Office of Personnel Management completed its
study this past May, and it confirmed what we already knew,
that our Federal employees are, in fact, interested in improved
coverage that these products would provide. Now OPM tells us
that it and others within the administration are talking about
making these products available to Federal employees. And OPM
tells us that it hopes--no promises, mind you--that these talks
will conclude by October 1st. I hope that that means that the
administration will submit a legislative proposal in October,
but I have my doubts.
In any event, even if OPM presents acceptable legislation
in October, I doubt employees will be able to purchase these
group products before this Congress adjourns. It took us more
than 1 year to get the Federal Employees Life Insurance
Improvement Act through the last Congress. So even if the House
passes legislation in October of this year, which is highly
unlikely, it is even less likely that the Senate would act
soon, and possibly not until late in the year 2000; at best
another year for OPM to actually implement this badly needed
reform.
As a result, it is very unlikely that Federal employees
will be able to take advantage of the same kinds of superior
insurance plans that are already available to many of their
counterparts in the private sector until possibly late in 2001
or maybe even 2002.
In short, after 2 years, some 2 years have passed since I
introduced the Federal Employees Life Insurance Improvement
Act, we are still talking rather than acting. If there's any
light at the end of this tunnel, unfortunately it is very dim.
I am most disappointed again to be here just acting as
Chair today and finding that we have not moved forward on this
badly needed reform to the benefit of both our Federal
employees and our Federal retirees.
I'm pleased now to yield to the ranking member, Mr.
Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman. I want to
in his absence thank Mr. Scarborough for getting this hearing
to the point we have it today, to even having it. And the FEGLI
Act of 1998 was the outgrowth of hearings held by this
subcommittee in 1997. The act was designed to improve the
structure and administration of FEGLI in several important
ways. Enrollees now have the opportunity to continue the full
extent of their life insurance coverage after they reach age
65. Enrollees will no longer have to seek out a new insurance
company from which to purchase insurance, something often
difficult and expensive to do in the late stages of life.
I understand, however, that there is some controversy over
the manner in which the Office of Personnel Management proposes
to implement this provision. OPM determined that a new premium
and age band structure would have to be developed. The
administrative office of the U.S. Courts, U.S. Courts, is
opposed to this action because it would significantly raise the
premiums of Federal judges with optional life insurance. I
trust that OPM will address this unintended consequence in its
testimony.
I am pleased to see that employees may increase family
optional insurance from the current fixed amount of $5,000 for
a spouse and $2,500 for each dependent child to up to five
multiples of the current amount. This benefit improvement came
as a result of an amendment I offered during subcommittee
consideration of H.R. 2675 in 1997. In 1999, FEGLI open
enrollment period, which ran from April 24th through June 30th,
gave Federal employees and retirees the opportunity to take
advantage of these new benefit improvements. I look forward to
hearing from OPM just how many did so.
More improvements are sure to come. As required by the act,
OPM conducted a study of FEGLI and found that enrollees have an
interest in a myriad of life insurance products. I would like
to hear from both panels their recommendation on legislative
changes that may provide new life insurance options for Federal
employees. I hope this hearing will be, as was the 1997 FEGLI
hearings, the catalyst for innovative and progressive
legislation that will result in even better life insurance
products for FEGLI employees. Thank you, Mr. Chairman.
Mr. Mica. Thank the gentleman.
Mrs. Morella.
Mrs. Morella. Thank you. And I want to thank you and the
subcommittee for holding the hearing today to examine the
recent changes in the Federal Employees Life Insurance Program.
FEGLI is an important program. It provides basic and optional
life insurance coverage for almost 2.5 million Federal
employees and 1.6 million retirees. I think today's hearing is
a good opportunity to discuss the improvements the Office of
Personnel Management has made to FEGLI since the President
signed the Federal Employees Life Insurance Act into law on
October 30, 1998. This act was intended to provide better life
insurance benefits to Federal employees under FEGLI.
Among other provisions, the act provides Federal employees
with the opportunity to continue the full extent of their life
insurance coverage after they reach age 65. Under previous
laws, when Federal employees reached age 65, they ceased making
premium payments, and the face value of the employees life
insurance was reduced by 2 percent each month for 50 months.
This change achieves a significant accomplishment by giving
Federal retirees the opportunity to continue to purchase life
insurance benefits at their own cost, rather than seeing the
their coverage phased out.
I received many calls from my constituents expressing
concerns about OPM's implementation of regulations to carry out
this change, and I hope that today's hearing will give Mr.
Flynn the opportunity to respond to those concerns on the
record. I am also interested in having OPM respond to concerns
several of my constituents raised about recently announced
premium increases in FEGLI. I understand that certain FEGLI
enrollees who elected the 50 percent reduction or no reduction
for basic had premium increases this year. And again, I hope to
look to Mr. Flynn to touch on the basis for these premium
increases during his testimony.
And finally the Employee Life Insurance Act directed OPM to
submit a legislative proposal to offer group universal life
insurance and group variable universal life insurance policies
under FEGLI within 6 months of enactment, and I understand
today's testimony will cover this. I look forward to hearing
from OPM on this matter.
Again, I thank you, Mr. Chairman for conducting today's
hearing.
Mr. Mica. Thank you.
Mr. I would like to recognize Mr. Allen for his statement.
Mr. Allen. Mr. Chairman, I want to thank you and Chairman
Scarborough for calling this hearing on the Federal Employees
Group Life Insurance Program. I commend your efforts to enhance
the financial security of Federal employees and their families.
Federal employees should have opportunities and choices in life
insurance coverage that are equal to workers' in the private
sector. In the difficult period that follows the death of a
family member, families deserve the best protections that can
be provided. We should enable Federal workers to protect their
families in the event of death.
I am pleased that we are considering an extension of
services for Federal employees. OPM's study indicates that
Federal employees have an interest. These additional life
insurance options, additional flexibility and choice in life
insurance plans will enable government workers to protect their
families in the way that best suits their needs. I hope we soon
will provide Federal workers with the protections that a
greater variety of life insurance options offers.
Again, thank you, Mr. Chairman, for this opportunity to
hear from the panel and consider life insurance options which
may become available to Federal employees. I yield back.
Mr. Mica. I thank the gentleman.
I'll now recognize the chairman of the subcommittee who's
just arrived for a statement.
Mr. Scarborough. Thank you, Mr. Chairman. In the last
Congress, this subcommittee, as you well know, examined the
life insurance benefits offered to Federal employees with the
purpose of providing more choices and a better value. Currently
the Federal Government offers only term insurance and
accidental death and dismemberment insurance through FEGLI, the
Federal Employees Group Life Insurance Program. The hearings
conducted by the subcommittee last year in the last Congress
revealed that private employers are increasingly offering their
employees the opportunity to obtain group universal, group
variable universal, and voluntary accidental death and
dismemberment coverage.
When the first group term coverage was written in this
country back in 1911, the average age at death was 49. By 1940,
the average age was 65. Today life expectancy is in the 70's
and climbing, and over time the price of term insurance has
come down. Unfortunately increasing lapse rates have also
increased the likelihood of benefits not being available when
they are really needed.
With increasing mobility in the future Federal work force,
it seems logical for us to follow the lead of the private
sector employers in offering additional life insurance products
to Federal employees.
No one likes to think about life insurance, but most of us
have chosen to purchase it. Insurance companies are now
offering a variety of flexible products worthy of
consideration. The objective is to select appropriate products
that provide individuals long-term satisfaction. Regrettably,
for too many years, Federal employees have had only limited
life insurance options from which they could choose.
The Metropolitan Life Insurance Co. serves as the primary
carrier and has done so since the inception of the program in
1954. MetLife processes all life insurance claims filed and is
reimbursed by the Federal Government for all claims paid. Under
this arrangement, the Federal Government assumes all the risks,
essentially acting as a self-insurer. This is a pertinent fact
in considering any additional offerings or alternative to the
existing program.
Numerous changes to improve the program took effect upon
the enactment of the Federal Employees Life Insurance
Improvement Act in October 1998. The Office of Personnel
Management is here today to provide us with both an update on
the implementation of the act as well as a review of the study
conducted on employee interest in additional products. The
study analyzed employees' interests in group universal life
insurance, group variable universal life insurance, and
voluntary accidental death and dismemberment insurance
products.
I look forward to the testimony of all of our witnesses in
today's oversight of the FEGLI program, and as we further
consider options to expand the insurance benefits available to
all Federal employees.
Mr. Mica. Thank you.
[The prepared statement of Hon. Joe Scarborough follows:]
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Mr. Mica. At this time there is a vote proceeding. So it's
quite fitting that we make OPM wait for their testimony as they
forced thousands of our Federal employees and retirees to wait
for options on their life insurance. This subcommittee meeting
is in recess for approximately 15 minutes, and OPM should not
leave the room until we reconvene.
[Recess.]
Mr. Scarborough [presiding]. I call this hearing back to
order; we have on our first panel Ed Flynn III. He is Associate
Director of Retirement and Insurance Services for the Office of
Personnel Management.
Mr. Flynn, if you could, please stand, and we will
administer the oath.
[Witness sworn.]
Mr. Scarborough. All right. Thank you. Be seated. Welcome
back.
Mr. Flynn. Thank you.
Mr. Scarborough. And I hope that we did not keep you
waiting as long as Mr. Mica would have liked us to.
Mr. Flynn. Probably not, Mr. Chairman.
Mr. Scarborough. Actually, I think he asked me if I wanted
to take a trip down to Georgia with him when I was over on the
House floor, but if you could begin your testimony, it would be
great.
STATEMENT OF WILLIAM E. FLYNN III, ASSOCIATE DIRECTOR,
RETIREMENT AND INSURANCE SERVICES, OFFICE OF PERSONNEL
MANAGEMENT
Mr. Flynn. Good morning to you and the other members of the
subcommittee. I want to thank you for your invitation to
discuss the changes that we're putting into place under the
Federal Employees Life Insurance Improvement Act, as well as
provide you with an update on the 1999 open season and possible
new life insurance products.
The Federal Employees Life Insurance Improvement Act
authorized a number of changes to respond to participant needs.
Numerous changes to improve the life insurance program took
effect virtually upon enactment. They included things like
increasing the insurance maximums covering foster children
under family insurance, the ability to pay premiums directly,
and provisions to continue insurance after 2 years, even if the
initial coverage was in error. In addition, individuals are
able to increase family insurance by substantial amounts,
retirees have the option to maintain insurance coverage after
age 65, and eligible employees will have insurance portability
at group rates during a 3-year demonstration period.
Now, OPM published interim regulations on April 27th of
this year. Most premiums have gone down due to improved
mortality and a change in the effective date for age-based
premium adjustments. The new opportunities for retirees,
however, created the need to evaluate the adequacy of existing
premium age bands. Consistent with industry practice, optional
life insurance premiums have historically been structured in 5-
year age bands. The top, age 60 and over band, reflected the
fact that once a participant was retired and attained age 65,
optional insurance reduced in value by 2 percent a month until
it reached zero. Enabling retirees to continue their optional
insurance beyond that age will substantially change the number
of individuals for whom a substantial benefit will ultimately
be paid.
Now, we're required by law to establish premiums for
optional life insurance so that the program pays for itself in
each age band. With the passage of the law, we initially
determined that new premium rates and new age bands were needed
for age 65 to 69 and for age 70 and above. At age 70 and above,
our calculations indicated that the premium needed to be
doubled. The impact of doubling the premium at age 70 and above
would constitute a significant and unforeseen change for older
employees, and we can find no evidence that this was
considered, much less intended, when Congress decided to make
unreduced optional insurance coverage available to retirees.
For these reasons, no premium increases for older employees
will be put into place until we've thoroughly examined
alternative approaches, including legislative options. The
earliest any change could take effect is April 24, 2001. Now,
we'll complete our review well in advance of that date and then
make proposals for the life insurance programs that flow from
it.
However, premiums did increase effective May 1st for
current retirees who previously elected to continue their basic
life insurance after age 65 without a reduction or with a
reduction limited to 50 percent. Because some retirees objected
to the increase, we have advised them that they may change to a
75 percent reduction at anytime, and that if they request that
change by July 30th, we'll refund the extra premiums they have
paid since May.
We've also advised annuitants over age 65 whose option B
insurance has started to reduce already that they have until
October of this year to elect to freeze their coverage at the
April 1999 amount and the premium charge necessary to honor
that election.
Now, the life insurance open enrollment period did run from
April 24th through June 30th of this year. Extensive
information was made available in many different forms, and by
all accounts interest in the opportunity was high. Agencies
just did a tremendous job working in cooperation with us to
make sure that employees and others had all the information
they needed and to change and alter their systems in ways that
enabled those open enrollment changes to be accommodated.
Nonetheless, it will be at least a year before we have any data
on open season enrollment activity. Employees register their
life insurance change with their agencies, and the changes
aren't effective until April 2000. So the earliest we'll see
any data resulting from the open enrollment period will be in
September 2000, indicating data as of the end of June of that
year.
Besides improving the existing Federal Employees Group Life
Insurance Program, we were asked to survey and submit a report
on the desirability of offering new life insurance products.
These products include a group universal life, variable group
universal life, and voluntary death and dismemberment
insurance. About 37 percent of the populations identified
responded to our survey. While respondents who participate in
the life insurance program are largely very satisfied with the
present coverage, they are also interested in new types of
products, including those that accumulate cash value. Among the
insured group 42 percent expressed interest in group universal
life, 23 percent interested in variable group universal life,
and about 48 percent indicated they would consider voluntary
accidental death and dismemberment insurance. Significantly
fewer of the noninsured population indicated interest in new
group products.
Now, these overall findings have prompted us to initiate
discussions within the administration to examine offering each
of the products we were directed to study, and we hope to
conclude these discussions by the end of the fiscal year. Life
insurance is an important component in a well-balanced employee
benefits package. The new products we are discussing could
provide substantial benefits to Federal employees who are
interested in group insurance products that offer maximum
flexibility to plan for life cycle financial needs.
We place high priority on working with this subcommittee
and others to respond to the diverse needs of a Federal work
force and enable the government to remain a competitive
employer.
That concludes my statement, Mr. Chairman, and I'd be happy
to try and respond to any questions you may have.
Mr. Scarborough. Thank you, Mr. Flynn.
[The prepared statement of Mr. Flynn follows:]
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Mr. Scarborough. According to your testimony, OPM is not
going to know the results of the open season for another year.
Tell me, do the results of who signed up for how much insurance
matter to you, to OPM, at all, and if so, what impact does that
have on how you administer the program in the future?
Mr. Flynn. Well, they do matter, Mr. Chairman. There were a
number of improvements that were offered as a result of the act
passed last October, but those improvements are law and needed
to be required. So the actual physical count results of the
open season, while they do matter, aren't of immediate interest
right now. If we needed to know a piece of it, we could
certainly do some surveys and get a rough idea of--of the open
season activity, but for right now, it's not terribly
important. The benefit changes are not effective, and your
premium rates for the open season changes don't go into effect
for a year or so. So it's not--it's not any difficult--any
difficulty to administer it.
Mr. Scarborough. So you're not going around right now from
agency to agency trying to figure out the number of individuals
who elected to take these options during the open season?
Mr. Flynn. No, we are not, and it's similar to the way in
which we operate the Federal Employee Health Benefits Program.
We typically don't know what changes occurred during the open
enrollment period until we get reports from the central
personnel data file in the spring following the effective date
of those changes.
Mr. Scarborough. And again, the reason why you say it is
just not relevant right now?
Mr. Flynn. It's not something that we need to know in order
to administer the program.
Mr. Scarborough. OK. You know, I and many other Members of
Congress have heard complaints from Federal employees
regarding--retirees about the new rates that OPM instituted,
which you alluded to, especially the rates for the new age
brackets. Rates for those over 70 doubled, according to your
testimony, and you have also said that these rates are based
upon mortality experience, and that the availability of
unreduced option B coverage will, quote, substantially change
the composition of the pool of individuals over 65 who will be
eligible for the benefits.
Let me ask you, how frequently does OPM review the rates,
and how frequently do you adjust the rates for FEGLI premiums?
Mr. Flynn. Well, we have an on-going process of reviewing
the experience of the program and the experience of the program
relative to the rates that are being charged. I know that you
asked in advance of the hearing for information about the
number of occasions on which rates have been changed, and you
can see that there is a--there is a history of that. They are
not on a regular schedule, but every several years you do see
rates change.
The important thing here I think is if you look at the
rates that went into effect coincident with this open season,
we had for some time a review of the adequacy of rates for all
of the different options that are available to people under
way, and with the advent of an open enrollment period, we felt
it was appropriate to institute the new rates at the same time
so that people could make choices with an open--with everything
out in front of them, understanding full well the financial
implications of those choices as well.
Mr. Scarborough. Do you negotiate or consult with the
carrier on setting the FEGLI premiums?
Mr. Flynn. Mr. Chairman, I'm glad you asked that question,
because a lot of discussion ensues about the competitiveness of
this program. Let me try and respond to this very quickly, but
very simply. Many people believe that rates in the Federal
Employees Group Life Insurance Program are noncompetitive
because we have this monopolistic relationship with the
Metropolitan Life Insurance Co. That is simply not the case.
There are three components that go to make up the cost of
this program: the cost of actually paying claims, the
reimbursement to Metropolitan Life for the administrative
expenses they incur in paying claims, and a service charge or a
profit that they are entitled to for their performance under
the contract. The latter two categories, the administration of
the program and the service charge, account for $1.73 per
person per year of cost in this program. The overwhelming
majority of cost in this program, $1.6 billion in 1998, was
simply the payment of life insurance claims that were due to
individuals and estates when people passed on.
So to assume that, that somehow or another these rates are
not competitive for that reason, I think, is pretty much set
aside by those figures.
Now, it is true that this program, when compared
selectively to other types of term life insurance products,
looks like it costs too much, but I will tell you that there
are two reasons for that. The first is the population that were
covered and the particular demographic characteristics that
that population presents, and the second are statutorily
mandated features of this program in terms of its benefit
design and in terms of its financing that--that just simply
make it that way.
But to somehow create the impression that 4 years of
working with a particular organization creates noncompetitive
premiums is just simply not the case, Mr. Chairman.
Mr. Scarborough. It certainly--if it's 40 years of a
productive relationship, that obviously can be used to help us
move forward over the next 40 years. But getting back to the
question on Met Life, do you negotiate or consult with Met Life
on setting the premiums?
Mr. Flynn. We consult extensively with Metropolitan Life,
though the premiums are OPM's to set.
Mr. Scarborough. And Mr. Mica would argue, as many others
would argue, that the disproportionate risk is on OPM and not
the carrier, while the carrier makes--Mr. Mica I'm sure would
characterize it as a cash cow or something colorful like that.
What would you say to such criticism, and is the risk shared
between carrier and OPM, or does OPM bear the burden?
Mr. Flynn. Well, ultimately, because of the unique
legislative structure of this relationship, the Metropolitan
Life Insurance Co. ultimately carries risk here, but I think as
was demonstrated in testimony on this program a year or so ago,
on any long-term relationship like this, sooner or later
premiums reflect the cost of the program, and risk is reflected
in the premiums that are charged, and I think that's clearly
the case with this program.
Mr. Scarborough. OK. And obviously we can get more
extensive testimony from representatives from Met Life who can
help fill in the lines, too, about the risk they do undertake.
You testified that the composition of the pool was
substantially changed. What is the basis for that statement?
And in setting new rates, what assumptions did you make
concerning the number of employees who will elect to carry the
full face value of option B insurance well into retirement?
Mr. Flynn. Well, actually you're absolutely correct, Mr.
Chairman. When I made that statement, I was talking about the
number of individuals who will elect option B and carry it
unreduced beyond the age of 65. When that option becomes
available, you increase the likelihood that some people will
find it attractive because it's a new option that was not
available to them before, and that then increases the
likelihood that substantial numbers of people beyond the age of
65 will present full face value claims for life insurance at
some point, and because of that and the fact that prior to that
the face value of the insurance began to reduce by 2 percent a
month, until it reduced to zero, it is important to look at and
project what we think the new experience will be under that
option and to set premiums accordingly.
Mr. Scarborough. You had said something, and this is the
last question I will ask this round before turning it over to
Mr. Cummings, but I just wanted you to expand on something for
me. You had said a few questions back--I'd asked you about the
risk and why rates were going up, and you talked about the
challenges, sort of the demographic challenges that are unique
to this group of insureds. Could you help me out there?
Mr. Flynn. I don't know that it is demographic challenges,
but if you look at the Federal work force and contrast it with
groups that are insured by others, and don't adjust for the
differences in the two groups and their mortality experience
and things like that, you can come away with a comparison, one
relative to the other, that's actually flawed. The Federal
Government on average is older. People who come to work for the
Federal Government aren't able to or--or are, in fact, enrolled
in life insurance from the start. We have 80 percent or
thereabouts in it, but there is no underwriting initially and
things like that. Those are the kinds of things that I was
talking about. You take those into account and look at how
others may structure the various pools of individuals that they
insure, you will see differences that cause some of the
differences in the rates.
Mr. Scarborough. OK. Thanks.
Mr. Cummings.
Mr. Cummings. It's very interesting. I just want to
followup on what you were just talking about. So the Federal
Government, other than having older workers, what other factors
would make our population different and more unique than, say,
the average population, other than the fact that they are
older? I take it that what happens is that people in the
Federal Government come in, and they may--as you were talking,
I was thinking, trying to compare to the private sector and
government, and one of the things I thought about was when
you're talking about the private sector, you have people moving
from job to job to job, they may not necessarily--especially in
the last 20 years, they may not stay with that employer, but
yet still in the government, they may move from job to job to
job, but they are still staying under the umbrella of the
Federal Government. I mean, is that part of it?
Mr. Flynn. That's part of it. I think another part of it,
and none of these things can ever be considered completely in a
vacuum, but the other part of it is if you look at the number
of people who are participating in the life insurance program
compared to the number of people who work for the Federal
Government at large, there will be differences between those
two as well.
What we have seen, and it's been commented on by various
observers of this program for some time now, is that with the
creation of term life insurance products in the private sector
that--that are themselves age-based, that differentiate between
risk pools in terms of gender, in terms of health status, that
require various forms of underwriting, what you quickly find,
Mr. Cummings, is that Federal employees, generally speaking,
who are relatively young and relatively healthy can move out of
the Federal Employees Group Life Insurance Program and purchase
term life insurance products on the private market at less cost
than what they would pay in the Federal Government, even with
the government contribution, particularly true for optional
insurance. And so when those people begin to leave the Federal
Employees Group Life Insurance Program, those that remain
become even more unique in their characteristics and more
likely to require the payment of additional claims and higher
costs, which over time results in higher premiums.
That's a tendency or that's a trend that concerns us very
much at the Office of Personnel Management. It's one that we've
watched, but the point I was trying to make earlier was that
it's not a function of a contractual relationship. It's a
function of statutory construction of the benefit design of the
program and the mechanism for financing.
Mr. Cummings. I want to get to that, but I want to go back
to what you have just said.
So do we see a lot of that, that is, Federal employees who
start off with the Federal life insurance program, and then as
they mature, they then see that they can do this, get life
insurance cheaper and move out; do you see a lot of that, and
how would you know that other than them saying, we no longer--
--
Mr. Flynn. We have to look at it sort of from our vantage
point, but if we look at the program, we do see fairly high
levels of enrollment in basic insurance. And remember, Mr.
Cummings, there are four different types of life insurance that
one can buy here, but we have about 80 percent participation in
basic. It's a level premium regardless of age. In part because
we were seeing people leave the program at younger ages, we
created some incentives a few years ago through the Congress to
keep them in the program, but we have about 80 percent of the
population eligible to enroll in basic.
Option A, which is a $10,000 increment additional
insurance, has about 40 percent of the population that's
eligible to enroll in it. Option B has about 34 percent. Option
C, which is--option B, which is multiples of salary, and option
C has about 33\1/2\ percent. So you can see, once you get away
from the basic insurance, you get to these age-based premiums
for optional insurance, there are substantial numbers of people
in the program, and it serves a vital need for many of them,
but there are also substantial numbers of people who are
meeting their insurance needs elsewhere, I suspect in large
measure because it's financially more advantageous for them to
do that.
Mr. Cummings. Then that certainly leads me to this other
area that you discussed. You said a few years ago we did some
things to try to make sure we kept people in the program, and
do you think that those efforts to keep people in the program
have been successful?
Mr. Flynn. I think that they are successful, particularly
if you look at the participation rates in basic insurance.
Eighty percent is pretty good. I think the real challenge is to
take steps as an employer to offer benefit options to people
that are attractive to them, that meet a diverse array of
needs, and that--and where we do have good participation, and
that's one of the reasons that we have looked at some of these
new insurance products to see whether or not we can do that
with them.
Mr. Cummings. Now, this $1.73 per person per year----
Mr. Flynn. Per year, right. Let me give you the absolute
numbers just to put it perhaps in a little perspective as well.
As I said earlier, $1.6 billion paid out in life insurance
claims. That is just simply face value of life insurance to
beneficiaries. The administrative cost to do that ran $7.1
million, and the service charge or profit participation was
$500,000.
Mr. Cummings. You said if we tried to do some comparisons
or contrasts, at first one might conclude that, well, maybe the
Federal employees are paying a bit much more; not a lot more,
but more. Is that a fair statement, at first glance?
Mr. Flynn. It is a fair statement, and it's particularly
fair if you look at the optional insurance, the age-based
insurance, yes, sir.
Mr. Cummings. And then you went on to say that you have to
look a little deeper and a little closer, and you will see that
because of population and statutory mandated benefits, it's
probably not as bad as it may look at first glance. Is that a
fair statement?
Mr. Flynn. Exactly.
Mr. Cummings. OK.
Mr. Flynn. People are getting the benefits that they are
paying for, and nobody is getting rich or fat off of this
program.
Mr. Cummings. That's where I need to get to. If most of the
money is being paid, the vast majority is being paid for the
claims, when you say statutorily mandated benefits, I take it
that there's a direct correlation there between the statutorily
mandated benefits and the claims that are paid. Is that a fair
statement?
Mr. Flynn. Absolutely, direct one for one.
Mr. Cummings. OK. So then we put that to the side, and then
we go to the $1.73. I mean, we're trying to figure out whether
or not--going back to Mr. Scarborough's question about
Metropolitan and whether you consulted and all that stuff. So
then we go to back to the $1.73. The $1.73, is that higher
than, say, if you were to compare it to other groups and you
took out all of the differences that you talked about a little
bit earlier?
Mr. Flynn. Mr. Cummings.
Mr. Cummings. I'm not saying it is. I'm just trying to get
down to the bottom line to make sure that we're getting a good
deal from Metropolitan. I guess that's what I'm trying to get
to.
Mr. Flynn. I think we're getting a very good deal. This,
for all practical purposes, is nothing in the cost, in the
context of the cost of this program, nothing at all.
Mr. Cummings. So basically what you're saying is that we
may be doing--if the mandated benefits correlate with the
claims that are paid, that's the vast majority of the money
that is paid that comes in and goes out, and then the $1.73 is
very, very low, then they may be, when you look at the total
picture, be getting a better deal than if they were not in this
system and went to another one; is that a fair statement?
Mr. Flynn. Yes.
Mr. Cummings. OK. You hesitated there for a moment. I don't
want to get stuck on the hesitation.
Mr. Flynn. No. All I was trying to do was to say it a
different way, but you're right, Mr. Cummings.
Mr. Cummings. All right. Let me just ask you a few other
questions because Jerry Shaw is getting ready to come up and
testify, and he has a some very interesting feelings and
concerns. He contends that Federal employees are not getting
the best price for the FEGLI insurance product they purchased.
I guess you disagree with that?
Mr. Flynn. I disagree completely.
Mr. Cummings. OK. He also said that he has this opinion
that you should integrate long-term care insurance into the
FEGLI program. How do you feel about that?
Mr. Flynn. I have seen that proposal. It needs to be looked
at. I am not sure that it is something that would make sense,
but it is worth looking through and making some judgments
about. As you know, we've talked before this subcommittee about
the President's long-term care proposal, and we have always
envisioned, once the legislation is passed, consulting with
stakeholders on the benefit design itself, and this is clearly
something we would want to look at. Whether or not it would
survive to the end or not, I really couldn't say at this point.
Mr. Cummings. Now, he also has an opinion on--the reason
why I'm asking you this is because I don't think you will be
coming back up, and I just found his testimony so interesting,
I would just like to hear what you have to say.
Could you assure us that OPM would be able to negotiate a
lower-cost long-term care premium for Federal employees than
would otherwise be obtained through a competitive process as
proposed by Mr. Shaw?
Mr. Flynn. To be quite honest, Mr. Cummings, I do not
completely understand the competitive process being
recommended, but the one thing that I can assure you is that we
will, once this legislation gets passed, offer long-term care
insurance at substantially lower prices than people can
otherwise get.
Mr. Cummings. So last question. Were participants in your
survey allowed to express an interest in insurance products
other than group universal life, variable group universal life
and voluntary accidental death and dismemberment insurance? If
so, what other products were they interested in?
Mr. Flynn. We included questions about those specific
products because those were the specific products reflected as
an interest by this subcommittee. We did not ask specifically
about others. Individuals had a comment section where, if they
were interested in something, they could tell us, and I am not
aware that anybody came back and said, we'd like something
different even from those things. So we didn't ask the
question, and I don't believe we got any substantial response
about interest in even other products.
Mr. Cummings. Would you say overall you felt that, from the
survey, that the employees were generally satisfied?
Mr. Flynn. I think it's clear from looking at the survey
that the individuals who have Federal employee group life
insurance today are extremely satisfied with the insurance they
have. They need actually to know more than they do know about
it, but as the same token, as we indicated earlier, they are
interested in other products as well.
Mr. Cummings. Now, what happens if somebody comes along and
says--another insurance company comes along and says, look, we
know we can do better than Metropolitan, what happens? I mean,
if somebody comes in here and says, look, this $1.73, you know,
we can do this stuff for $1.50 and keep your same structure
because that doesn't matter, your claims don't matter because
that's money going in and coming out, we break even there. I
mean, it's just a wash. I'm just curious, what would be your
impression?
Mr. Flynn. My impression would be to actively look at that
and to consider whether or not we might want to recompete this
contract in order to achieve additional cost savings, but I
would also say to you, Mr. Cummings, that it would have no
effect on premiums whatsoever. It's a question of the high
levels of customer service and performance that come at a $1.73
or $1.57, not the adequacy of the premium structure.
Mr. Cummings. That's an interesting statement. Just one
more question, two more. So you're saying that even if somebody
came in and said, look, we can do this for $1.50, and, first of
all, you probably wouldn't accept them because I guess--in
other words, what you're saying is you will look at the quality
of service for $1.50; is that it?
Mr. Flynn. Absolutely, because that's what we're looking at
from Metropolitan Life for the same thing.
Mr. Cummings. And if you saw they had the same or better
quality of service and----
Mr. Flynn. For a lower price.
Mr. Cummings [continuing]. For a lower price, $1.50, you're
saying the premiums wouldn't change?
Mr. Flynn. Premiums wouldn't change one iota, sir, not one
iota. Remember, just take my own situation, these are round
numbers, and it's off the top of my head, but I'm 52 years old.
I spend probably in the Federal Employees Group Life Insurance
Program somewhere in the neighborhood of $100 a month for life
insurance, not counting what the government contributes toward
the cost of that. That's $1,200 a year. That's in relation to
$1.73 per year for essentially administering the program and
performing well. It has no impact whatsoever on premiums.
Mr. Cummings. So it makes sense then for Met Life, they are
going to get their $1.73, and so it makes sense for them, I
guess if they want to make more money on this effort, and it
doesn't look like it's going to be a whole, whole lot, but I
guess if they are lean and mean and able to provide the
service, you know, the quality of service, then that's the only
way they make more money on this venture here; is that right?
You follow what I'm saying?
Mr. Flynn. I follow exactly what you are saying. The only
way they will make more money beyond being reimbursed for the
expenses they incur to administer this program is to satisfy
performance objectives we set for them and to demonstrate that
they did, and we would then increase that service fee to them
because of the satisfactory performance that they achieved.
That's a negotiated amount, Mr. Cummings.
Mr. Cummings. Thank you.
Mr. Scarborough. Thank you. Mrs. Morella.
Mrs. Morella. Thank you, Mr. Chairman. Mr. Cummings picked
up on a few of the questions I was going to ask, so I
appreciate your response.
I was picking up on Mr. Shaw's testimony with regard to
offering the universal life insurance with the long-term care
rider in it, and he also suggested that there be multiple
carriers, and I know that you don't quite feel that you--I
mean, you question it; you don't quite feel you can respond to
it. I just wondered if--behind you is Mr. Titus. Would Mr.
Titus feel free about responding to that? I mean, the reason I
said that is because he deals with long-term care.
Mr. Flynn. And I think I can probably speak to it as well,
if you would like.
Mrs. Morella. I would like you to then.
Mr. Flynn. The question about multiple carriers and the
parallel to the manner in which the Federal Employees Health
Benefits Program operates, I think is--is inappropriate for the
introduction of a long-term care group insurance package.
Everything that we've seen from the industry, everything we
have seen from other employer practices, everything we have
seen that points to successful introductions of group long-term
care insurance suggests that it needs to be clear, simple to
understand, offered through one carrier, and that's the most
effective way to do that because of the fact that, generally
speaking, in the market this is nowhere near the type of mature
product that health insurance is, or, you know, life insurance
for that matter, and presenting individuals with many choices,
at many different premium levels for something as complicated
and as complex as this is just simply a prediction for disaster
for most employers if they want to follow that route.
Mrs. Morella. I wanted to give you an opportunity to
comment on it because what happens in committee hearings like
this, you can't get everybody up at the table at one time, and
we always feel that we need to get a response from those people
who are involved.
Also, on another topic, you have been kind enough to try to
respond to Mr. Harry Bodansky. I wondered if you would just
share very briefly what his dilemma is with this subcommittee
and indicate what the disposition is of a situation like that.
I think it has a kind of typical component to it.
Mr. Flynn. I will try and do that as briefly and succinctly
as I can, Mrs. Morella. In Mr. Bodansky's particular case,
his--his life insurance began to reduce a few years ago, and as
I mentioned in my earlier testimony, up until the point of the
Life Insurance Improvement Act, ordinarily when that reduction
starts for optional insurance, it goes 2 percent a month for 50
months until it reaches absolute zero.
When this bill passed, Mr. Bodansky was in the latter
stages of that reduction period, and our decision to have an
open enrollment period where people could elect this option in
April essentially created for Mr. Bodansky what he felt and
understandably felt was a hardship, because he was looking to
have that reduction cease even earlier, but in this case, he
could only have it cease as of April which in effect reduced
the value of the insurance in force he could freeze going
forward, and while I'm very sympathetic to Mr. Bodansky's
situation, because we've met with him before, I know that there
any number of other Federal retirees who are in similar
circumstances, and the only thing I can really say is that when
you're administering a program like this with 4 million
policyholders, you've got to draw a line somewhere, and in this
case, we drew the line in April 1999. People who were before
that line are under one set of circumstances, people after that
line under another. It's not, I'm sure, a satisfying answer to
your constituent, but it's the best one I can give you.
Mrs. Morella. And the reason it becomes a unique case is
because he has a disabled son and wanted to have something left
for that son. I don't know what we can work on in terms of
trying to resolve something like that, but we would certainly
be open to whatever we could do to help.
I wanted to also--with regard to your testimony, you talked
about the new rates on older employees being delayed, why you
examined alternative approaches, including legislative options.
What kind of options are you thinking about legislatively?
Mr. Flynn. Well, we have had a number of options suggested
to us. Mrs. Morella. This is a situation where the existing law
pretty much dictated a course of action, but having taken that
course of action and seen the result of it in terms of premiums
for older employees, and having heard from many of those
employees, we realized that that was not an action that this
subcommittee or the Congress intended or that anybody did, and
before we put them into effect, and because we have some time
within which we can do that, a couple of years, we thought it
would be good to come back and look at whether or not there is
a better way to go; i.e., to provide individuals, employees and
retired former employees the ability to continue substantial
amounts of life insurance into their latter years, but to
understand the premium effects of different alternatives on
that benefit desire.
As you know, we have just finished a very, very busy 6-
month period, open enrollment period, including the--the report
that we issued to the Congress. We're just now in the early
stages of looking at those alternatives. A number have been
suggested, for example, creating a pool of retirees for
purposes of setting premiums and a pool of employees, even
though they may be the same ages. Now, that's something that
could be considered.
The only thing that I would say is we talked here just a
few moments ago about how the statutory construction of this
program creates premiums that many regard as noncompetitive.
The more we depart from what is typical private sector
practice, the more we will do that for some groups of people.
So it's a question of looking at the alternatives that we and
others have suggested, understanding the premium impacts of
those alternatives and making some judgments about the best way
to move forward.
Mrs. Morella. You will be doing that in consultation with
other groups?
Mr. Flynn. Absolutely, within the administration and with
the National Association of Retired Federal Employees, the
Administration Office of the U.S. Courts and others who have
raised this issue.
Mrs. Morella. Good. And you'll keep us posted, and you have
a timeframe, you say about a year?
Mr. Flynn. Well, as I say, we have, we know, a couple of
years within which--before these new premiums need to go into
effect. I'm hopeful that we can get this done within the next
several months and then move forward.
Mrs. Morella. Thank you. You're a distinguished civil
servant, Mr. Flynn. Thank you.
Mr. Scarborough. I thank the distinguished gentlelady from
Maryland.
I wanted to just go back briefly to a couple of comments
that were made during your exchange with Mr. Cummings. Just for
the record, and if you disagree with any of these, let me know,
I think you'd probably agree with the first one, when you were
talking about Met Life, and you were looking at the quality of
service, and if somebody underbid Met Life, you wouldn't
necessarily see that as a reason to change because it wouldn't
change premiums. I think another thing that a company that's
going to be taking this on, be it Met Life or anybody else,
would be stability. Obviously when you're talking about life
insurance, you're talking about a timeframe that goes well
beyond 5, 10, 15, 20 years, and obviously, Met Life has that
stability. So that obviously is something that's important.
On the other side of it, though, I--you'd agree with that,
correct?
Mr. Flynn. I would agree with that.
Mr. Scarborough. The importance of stability?
Mr. Flynn. Absolutely, among a range of other factors.
Mr. Scarborough. Right, among a range of other things.
Another thing you said, though, and I am glad Mr. Mica was
not here when you said it, the quote was, ``nobody's getting
rich or fat over this program.'' If I'm working the numbers
correctly, Met Life is getting $1.6 billion, a year which would
be about $16 billion over 10 years.
Mr. Flynn. To pay claims.
Mr. Scarborough. Right, right, and even if they're not
making a profit off of that, they're going to be investing, and
they're going to be drawing a lot. There are quite a few
companies that would take that opportunity to----
Mr. Flynn. Mr. Scarborough, if I could comment on that just
for a second.
Mr. Scarborough. If I can just finish, let me finish and
then comment on that. And just correct me if I'm wrong, if they
invest at 20 percent on that money, and they're paying off 7
percent interest on their CDs, they're doing quite well, and
again, as a Republican, your administration is carrying on the
proud administration of past Democratic administrations, saying
that we actually want people to get rich and fat. I mean,
that's the Republican way. So I have got no problem with Met
Life making that money. I just want to know----
Mr. Flynn. Met Life is not making that money, Mr.
Scarborough, and I think that should be very clear.
Mr. Scarborough. OK.
Mr. Flynn. The premium income that they get----
Mr. Scarborough. That's what I want you to clarify. What
happens to that $1.6 billion when it comes in?
Mr. Flynn [continuing]. Which is disbursed monthly largely
reflects the paid claims for the immediate preceding period,
largely.
Mr. Scarborough. OK.
Mr. Flynn. To the degree that it doesn't and it is
invested--first of all, the disbursements are from the
Treasury, so the trust fund is held by the government. It's not
held outside the government. So those disbursements move to Met
Life largely for the purpose of paying claims from the previous
month. To the degree that they are invested in securities,
equities, what have you, and earn interest, that interest
accrues to this program and is used to keep premiums lower than
they otherwise would be.
Mr. Scarborough. OK. I have got a vote in Judiciary. I'd
like to ask Mrs. Morella if you wouldn't mind taking the chair,
and I want to get back to this. Hopefully, I will be back in
time, because the way it was left hanging, I don't think is
fair to Met Life or anybody else, but I do think it's important
for us to get out on the record how much money is being made
here; do they have some income they can invest that way. These
are things that we hear quite a bit from Members interested in
sharing in the system.
Mr. Cummings.
Mr. Cummings. I don't have anything else.
Mr. Scarborough. Mrs. Morella, do you have anything else?
Mrs. Morella. No, I don't.
Mr. Scarborough. Why don't we go ahead and dismiss you, and
we'll go on to our second panel, and I'll tell you what, if you
don't mind, I'm just going to send you some questions in
writing on this issue and some other issues, and let's go on to
our second panel. Thank you, Mr. Flynn.
Mrs. Morella [presiding]. In our second panel we are going
to have Mr. Michael Bartholomew, who is the senior counsel for
the American Council of Life Insurance; Mr. Dennis New, the
second vice president for special risk products, Unum/
Provident; and Mr. G. Jerry Shaw, general counsel, Senior
Executives Association.
Gentlemen, as you know, it's a policy of this committee
that we swear in all of those who will be testifying. If you
would stand, raise your right hands.
[Witnesses sworn.]
Mrs. Morella. The record will indicate affirmative
response, and again, if we could ask you to comment, you know,
again using our timeframe that we have consistently of about 5
minutes, and your total testimony that we have before us will
also be verbatim in the record, and we'll start off then with
Mr. Bartholomew. Is that order OK?
STATEMENTS OF MICHAEL J. BARTHOLOMEW, SENIOR COUNSEL, AMERICAN
COUNCIL OF LIFE INSURANCE; DENNIS NEW, SECOND VICE PRESIDENT
FOR SPECIAL RISK PRODUCTS, UNUM/PROVIDENT; AND G. JERRY SHAW,
GENERAL COUNSEL, SENIOR EXECUTIVES ASSOCIATION
Mr. Bartholomew. Thank you, Madam Chairman.
Good morning, members of the committee. I am Michael
Bartholomew, senior counsel of the American Council of Life
Insurance, a Washington-based national trade association which
represents 493 legal reserve life insurance companies. Those
insurance companies that are our members provide group
insurance for the American public, which represents more than
80 percent of the group insurance market.
On behalf of the ACLI, I want to thank you for the
opportunity to talk about the success of employer-sponsored
benefits which supplement those life insurance benefits
routinely provided to employees. Specifically, I would like to
share with you what data we have on supplemental coverages for
group universal life, group variable universal life and some
small data about additional accidental death and dismemberment
coverage that's offered to employees as part of an additional
life insurance program.
We support the efforts of this Congress to look favorably
upon programs for Federal employees that will expand the
availability of life and accident insurance that can be
purchased on a tax-favored basis. These products help employees
secure financial protection of their assets due to premature
death and also to help to enhance their efforts at retirement
planning by the purchase of products that are linked to the
performance of our financial markets.
Group universal life was first introduced in 1985. It
essentially combines the traditional group term life insurance
with a cash accumulation feature. Once an employer is issued a
master group policy for this type of coverage, employees
receive a certificate as evidence of coverage, as they would in
the ordinary group life situation--as if has been sold,
however--and unlike usual group term life insurance, the
employee usually pays the entire cost.
The latest figures we have from our own member companies
show that those life insurance companies issued a face amount
of $77 billion of this coverage in 1997, which accounted for
10.5 percent of all the group life insurance written in the
United States during 1997. That amount of coverage covered over
4 million certificate holders and brought in a total in force
at $344 billion.
Another group policy called variable universal life is a
much newer product and is being sold by a smaller group of
companies as of now. It is similar in many respects to the
group universal life except that employees are given the choice
of different investment options and specify where the cash
value of the policy is to be invested. As of 1997, sales of
this product totaled nearly $26 billion, with face amounts
totaling $156 billion. In addition to the information that the
ACLI has compiled, sister organizations are also looking at
marketing trends for these new and voluntary group products.
One such study by LIMRA International, which is the life
insurance marketing and research association, an international
marketing organization, but is not yet published, looked at the
types of voluntary benefits offered by employers and broke down
the results of that study by employer size. The studies done in
early 1999 show that 35 percent of all employers with 20 to
5,000 employees offered voluntary supplemental life insurance
to their employees. More on point to this testimony, 76 percent
of the largest employers studied, those with 1,000 to 5,000
employees offered such supplemental life to their employees.
Twenty-three percent of this segment of the employer population
offered additional accidental death and dismemberment
insurance.
Measuring from 1994, the amount of new group premium for
group universal life has demonstrated a fairly consistent
pattern. Starting the study in 1994, they found that in all the
premium written for group insurance, 13 percent of it, or $2.3
billion in premium, was for group universal life. In 1998, that
figure had risen to $4.3 billion.
As you can see, with the exception of a down period in
1997, because of what they ascribe to merger and acquisition
activity, there has been a steady growth in the amount of
premium written for group universal life on a voluntary
business.
Let me just close and say that group universal life and
variable universal life are becoming more popular options for
employees looking for alternatives to the usual forms of life
insurance offered in the past. Innovation in this area to
access employment markets with a product that was previously
offered only through individual policies has been shown to be
very successful for life insurers writing group insurance.
It is our belief that the introduction of such a program
for Federal employees will result in similar success. Thank
you.
Mrs. Morella. Thank you Mr. Bartholomew, and you were right
within the timeframe. Bravo.
[The prepared statement of Mr. Bartholomew follows:]
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Mrs. Morella. I am now pleased to recognize Mr. New of
Unum.
Mr. New. Thank you, Madam Chairperson, members of the
committee. I appreciate this opportunity to appear before your
committee today to discuss UnumProvident's experience as a
provider of Group Voluntary Accidental Death and Dismemberment
Insurance, sold at the work site to the private sector.
My name is Dennis New. I am the second vice president of
special risk products and marketing for UnumProvident. In this
position, I am responsible for developing products and
establishing marketing strategies to support our voluntary AD&D
offering.
This presentation is intended to inform, educate and
outline the popularity and demand for voluntary AD&D insurance.
Today, many of the Fortune 1,000 companies offer a stand-alone
voluntary AD&D plan to their employees. Employees today want
more choices in the insurance benefit programs offered to them.
Employees are asking for voluntary insurance products that are:
offered at the work site, easy to understand, convenient to buy
and affordable, and offer family benefit options. Voluntary
AD&D is a product that fills those needs.
Also, statistics and trends support the need for voluntary
AD&D insurance. In fact, according to the National Safety
Council, accidental deaths are the leading cause of death among
people under the age of 38 and the fifth leading cause of death
overall. Also, nearly 9 out of 10 deaths occurred off the job,
which means people are dying traveling to and from work, while
on vacation or at home.
As the global economy expands, so does the increased risk
of exposure to accidents. Americans are traveling more for
business and pleasure. A few cited trends impacting the need
for voluntary AD&D include: Americans are planning a record
1.32 billion trips over 100 miles in 1999; also the FAA expects
air travel to leap from 600 million passengers to 1 billion
passengers a year by the year 2010.
Accidents can happen at any time, anywhere, to anyone. When
an individual suddenly dies, is dismembered or suffers a
disability that causes paralysis in an accident, that family's
ability to maintain a standard of living or prepare for the
future can be seriously jeopardized.
I would like to provide a brief overview of voluntary AD&D
and its value, benefits and services. Voluntary AD&D is an
employer-sponsored insurance program paid by the employees. It
provides coverage against accidents 24 hours a day, 365 days a
year, on and off the job, worldwide. It allows employees to
purchase high amounts of insurance at affordable rates. It
requires no medical history or underwriting and allows
employees to cover their spouse as well as their children.
In addition, there are many other benefit features that an
employer can design which cover more than the core accidental
death and dismemberment insurance. A few examples would include
a paralysis benefit which would pay a lump sum benefit if an
insured becomes paralyzed or partially paralyzed in a covered
accident. In addition, you can add a home alteration vehicle
modification benefit which pays an additional benefit if an
insured suffers an injury which requires the use of wheelchair.
This additional benefit can be used to help pay for making the
insured's home or car wheelchair accessible.
Also, additional service for travel assistance can be added
to round out the voluntary AD&D offering. As pointed out
earlier, Americans are traveling for business and vacations
more frequently within the United States and abroad. Most of
the time these trips are uneventful; however, emergencies can
and do happen. This is why many employers today are offering
travel assistance services with their voluntary AD&D programs.
The costs are typically built into the voluntary AD&D rate for
ease of administration. When packaged with voluntary AD&D,
travel assistance services, are a highly-valued service that
offers protection for employees and other family members when
traveling 100 or more miles from their home or outside the
United States. This aligns well with the travel trends:
Americans are planning a record 1.32 billion trips over 100
miles in 1999. Also travel assistance typically provides direct
access to worldwide assistance in the event of unexpected
emergencies for accident as well as sickness.
Finally, enrollment results for voluntary AD&D plans tend
to be high. UnumProvident's history and results in enrolling
voluntary AD&D plans average around 35 to 50 percent. Factors
contributing to the significant participation include: the
ability to purchase large amounts of insurance at affordable
cost, family plan options, attractive benefit enhancements and
travel assistance services, as well as no medical history
necessary.
In closing, on behalf of UnumProvident I appreciate this
opportunity to appear before you today to discuss
UnumProvident's experience as a provider of voluntary AD&D
insurance coverage. Considering options available in the
private sector as well as the mobility of the Federal
Government's work force, I feel strongly that voluntary AD&D
insurance will be a welcome benefit option to Federal
employees.
Thank you. I would be glad to answer any questions.
Mrs. Morella. Thank you, Mr. New. I am very impressed with
the number of benefits that you offer and that you have
outlined.
[The prepared statement of Mr. New follows:]
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Mrs. Morella. It is a pleasure to recognize Mr. Shaw who's
a regular at this committee.
Mr. Shaw. Thank you, Madam Chairman and members of the
subcommittee for the opportunity to testify. As you know, the
Senior Executive Association represents the interests of career
Federal executives throughout government.
The current Federal Employees Group Life Insurance Program
has served the Federal community well for a number of years.
However, the recent open season provided an opportunity for
private insurance carriers to educate employees about the
options available to them in the private marketplace. Many
learned they could sometimes secure the same or better coverage
from private companies for substantially better rates. Many
others learned that there were additional options they could
purchase, such as group universal life insurance linked with
long-term care insurance for their later years.
My firm issues a free weekly on-line newsletter for Federal
managers and executives read by well over 50,000 of them.
During the FEGLI open season, we received substantial feedback
in the form of e-mails from our readers who were confused and
upset to learn that they had been paying much higher prices for
their FEGLI insurance than they would pay in the private
market. A number told us that they had assumed that, in
purchasing FEGLI, since it was a Federal Government-sponsored
program, the government had negotiated the lowest possible life
insurance rates for them. They expressed dismay to learn
otherwise.
We explained to them, in response, that their higher rates
were helping to pay for other employees who would otherwise be
uninsurable. Some said that was cold comfort given their own
limited means. While SEA does not support any particular
product or program, the SEA board supports greater choice for
Federal employees generally and senior executives specifically.
What makes sense for one employee does not always make sense
for another.
In the bills which propose to offer long-term care
insurance to Federal employees and retirees there is a
dichotomy between two opposing positions; one of a single
policy in a program operated by OPM, which we see as analogous
to the FEGLI program; and one of OPM overseeing a variety of
options offered by a number of companies, but where OPM sets
the baseline requirements, which we see as analogous to the way
OPM operates the Federal Employees Health Benefits Program. SEA
would support the latter.
The current Federal Employees Health Benefits Program is a
great example of a benefit which works. OPM establishes the
ground rules, a number of options are offered, and the costs of
the program have been consistently less than those in the
private sector because of competition among the providers. We
see no reason why the same program would not work for the FEGLI
program or a long-term care program, either separately or
combined.
Some large insurance companies have argued that only one
long-term care policy, with a consortium of providers would
result in lower premiums for employees. We believe the
contrary. The FEGLI program has proven otherwise, instead
becoming progressively more expensive. We have seen no
incentive to keep rates down, and the FEGLI program has been
provided by one carrier for years.
By contrast, the FEHBP program has provided a number of
options to employees, and competition has kept the rates lower
than in the private sector.
These same insurance companies have said that the cost of
marketing long-term care policies to Federal employees and
retirees would cause an increase in premium costs. The FEGLI
program has had no marketing costs and yet the premiums have
gone up. In addition, some Federal employees feel they have
been misled into paying higher prices than what is necessary
for their life insurance. By contrast, the FEHBP providers have
had to market their policies and they still have consistently
beaten the prices and sometimes the quality of services
provided in the private sector.
The fact is that in order to sell long-term care policies
to many employees, if not most, especially those who are
younger and who generally believe there are better and more
pressing things to spend their money on, marketing and
widespread publicity will be a necessity. In addition,
providing alternatives such as universal life insurance linked
with long-term care, as well as other options, will increase
the level of discussion among employees and, we believe, will
result in an educated employee population which can make
informed choices.
We therefore support the maximum choice in programs and
carriers such as the FEHBP program for employee benefit
programs generally. With OPM oversight to ensure qualified and
financially sound providers, and the operation of the
competitive marketplace, we believe Federal employees and
retirees will enjoy the best choices and the most competitive
prices available in life insurance and long-term care products.
From there, employees should be free to do as they, in their
individual wisdom, choose.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Shaw follows:]
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Mrs. Morella. Thank you, Mr. Shaw. You actually did--as Mr.
Nesterczuk noted, beat the clock. Because we picked up on a few
of your comments that are in your testimony in talking to Mr.
Flynn.
I guess I could start off with Mr. Bartholomew. You say
that 76 percent of all large employers offer universal or
variable universal life insurance, mostly at the employees'
expense, and your products seem to be growing pretty quickly. I
just wonder, as we look at the Federal Government, what
features of your policies make them attractive to employees?
Mr. Bartholomew. The feature that I guess is probably the
predominant feature with universal life is that it's a contract
that has cash value. It also has a feature that has a
requirement that the premium can be altered, the contribution
be altered by the employee so all they have to do is meet the
minimum insurance costs, that the premium can be flexible. It
doesn't have to be scheduled like it would be in the
traditional group term life insurance contract.
But I think the primary attraction, from what the
researchers tell me, is the fact that it has a value that
exists beyond the straight insurance protection of group term
life insurance and is portable, so that it would be taken with
the employee after they leave.
Mrs. Morella. The portability is something that we feel is
very important also.
Does it appeal to certain segments of employees, do you
find? Can you characterize any groups to which it has a
particular appeal?
Mr. Bartholomew. Not that I know of, no.
Mrs. Morella. We appreciate learning more about it.
I want to now go on to Mr. New. Because of so many things
that are offered under the AD&D, I'm curious about what the
premiums are.
Mr. New. That's a great question. Typically, the premiums
or cost of insurance are based on the size of the group, and/or
the type of industry. With some of the large customers that
UnumProvident insures today, I would say for groups over
50,000, cost of insurance can be real attractive to the
employee and include the extra features like paralysis, the
seat belt benefit, as well as travel assistance services.
It would be hard for me to give you what a true cost
structure could be. However, if an employee or insured wanted
to purchase $100,000 of insurance, the rates may be $3 a month,
which would include all those extra features mentioned above.
If someone wanted to include their family, it may be $3.50 a
month.
Mrs. Morella. You also mentioned that the participation
rate varies from like 30 percent to 50 percent. Why is there
any disparity?
Mr. New. Participation rates tend to increase based on the
support we can get from the employer. The more they can
communicate the value of it up front, the better our
participation tends to be. Also certain industries show a
higher participation than others. Occupational hazards can play
a part in that.
Mrs. Morella. Have you ever heard the concept that many
employers might refrain from AD&D because too many options are
offered?
Mr. New. We hear that quite a bit today. What we try to
position from UnumProvident's standpoint is look at an industry
and the company and identify what enhancements or features make
the most sense for that industry. Instead of offering 15 to 20
enhancements or features, we try and identify the 5 or 6 that
really make sense to the employee population that are
purchasing the product.
Mrs. Morella. And the reason you can keep your premium low
is because you look at a vast pool, is that one of the reasons?
Mr. New. Typically, rates are based on the size of the
group. The larger the group, the better your spread of risk is.
Mrs. Morella. And the age of the employees that are part of
that group?
Mr. New. I'm sorry?
Mrs. Morella. And the age of those who are part of that
group, is that a consideration in negotiating premiums?
Mr. New. Typically, if I understand your question, we do
not----
Mrs. Morella. The younger people who are accident prone
or----
Mr. New. That is a statistic that is proven, that people
who are younger are higher risk for accidents.
For voluntary AD&D, we do not rate by age. We don't have
age-banded rates, which is a little bit different than a
voluntary group life product. It's one composite rate.
Mrs. Morella. I want to thank you, Mr. New.
Mr. Shaw, you had the benefit or you were here for Mr.
Flynn's comments with regard to your concept of the universal
life insurance with the long-term care rider. Would you like to
make any comments in response to that?
Mr. Shaw. I think one of the things that struck me about
his comment was that long-term care insurance is so very
complicated. And therefore employees, if they had too many
choices, might get confused.
We think that FEGLI health benefits, it's about as
complicated as you can get when you're taking care of your
family's health, and yet every year the employees manage to
make rational decisions about which health benefit program
they're going to participate in. I don't see any reason why
employees could not make a rational decision about which long-
term care program that they would want to participate in.
I know that the FEGLI program is a good program. And it has
a lot of people that participate. There are a lot of premiums
collected; I don't know how the investment dollar is returned
or spent. But the fact of the matter is that the rates are
substantially higher for a substantial number of employees
under the FEGLI program than they can get in the private
sector.
I've not only heard it, I've seen it. I remember one e-mail
vividly that we received from a manager who said, ``This is the
first time I ever realized that I could look around and find a
better rate. I assumed I was getting the best rate. And I saved
40 percent on my life insurance coverage premiums for my family
and myself.''
And it was a tremendous pay raise. I mean, these people
have not been getting very many pay raises, and for senior
executives they, like Congress, have had one pay raise in the
last 5 years. And how they spend their dollars is very
important to them. FEGLI is more expensive for employees who
can get insurance elsewhere. Now, the government has made the
determination that they're going to cover everybody and that's
fine, but employees have a choice. And once they find out they
have a choice, they look at that choice, and many of them leave
the FEGLI program.
Something's not working. It may be the most efficient, the
most effective, the most wonderful program in the world. But it
costs more. Something's not working. I don't know what it is.
The FEHB program works and there is choice. And the one
thing I take away from our SEA board meetings is, these people
want choices. They want long-term care insurance. Most of the
SES's and the other executives that we represent--and many of
them are managers, because we're also general counsel to the
Federal Managers Association--want choices. They are the prime
target for long-term care insurance. They don't want to have to
buy a product for which they pay premiums for life which they
may never use if they're never needed, if they have other
options.
If long-term care is tied to a universal life insurance
program, there are options. The premium dollars can also
provide a life insurance benefit to their family, and it's a
pool of money from which they can borrow against for kids'
education, and for other purposes. It's a choice they would
like to have, an option they'd like to have.
Not that it's the right thing for everybody, clearly it is
not. But why shouldn't the government offer that option to them
rather than ``one size fits all''? That's their view.
Mrs. Morella. Thank you very much, Mr. Shaw. I know that
OPM is listening to what you have to say, too, as they pull
together whatever alternatives are necessary.
Thank you, Mr. Chairman.
Mr. Scarborough [presiding]. Thank you, Mrs. Morella.
Mr. Cummings.
Mr. Cummings. Mr. Shaw, I'm just curious about something
here. You know, in the FEHBP program, you've got quite a few
carriers, 90 percent of them go for Blue Cross and Blue Shield.
So the argument of choice to me sort of goes down the tube.
They're not really making a choice. I mean, in other words,
it's more like--I'm sorry, 60 percent. But that's still a
sizable number. But I was just curious. Do you want to comment
on that?
Mr. Shaw. Well, if it were 90 percent I would have been
surprised, but 60 percent sounds more reasonable. But why
shouldn't they have that choice, Congressman? Because 60
percent think Blue Cross/Blue Shield is good enough for them,
does that mean that the other 40 percent have to have it?
Mr. Cummings. I'm not saying it shouldn't; I'm just saying
it goes to the argument of choice. In other words, are people
really--I mean, when you've got quite a few more companies that
are offering and you've got 60 percent of them and--I mean, 90
percent makes the argument even stronger, I must concede, but
60 percent of them taking Blue Cross and Blue Shield, it just
seems like these are folks who have decided choice is not--I
mean, that's it. So you take that 60 percent and they probably
do this every year, and--but anyway----
Mr. Shaw. Well, most people, once they get into a
particular program, tend not to change. Many Federal retirees,
for example, keep High Option Blue Cross/Blue Shield because
they can afford it even it provides benefits they would never
use and don't need. But they think, it's the most expensive;
therefore, it's got the most benefits in it; therefore, they
want it.
The fact of the matter is, if they shopped, they don't
necessarily need that. But that's still a choice they make, and
at some point, if they do read something and become educated
about it and decide to get something else--you know, that's
what the great American marketplace is about.
Mr. Cummings. As you were talking, I was thinking that if
you were talking about how much more expensive the program is
now, the FEGLI program----
Mr. Shaw. FEGLI program, yes, sir.
Mr. Cummings. And MetLife, that's basically what we're
talking about.
Mr. Shaw. I am not--I only know the facts; I don't know the
deals within which----
Mr. Cummings. But you heard the testimony. You were just
sitting here with me. We heard what Mr. Flynn said.
Mr. Shaw. I understand. That means something's wrong,
Congressman, when what you are doing is--there is no profit in
it, and if the administrative costs and your claims rate is so
much higher than another person's claims rate, then you're
doing something wrong. Either you're not investing your money
right, that's a possibility; or you are attracting a different
group of people than the other person is, that's a possibility.
And if so, then shouldn't you look at that? Shouldn't we
say, rather than just keep raising the premiums and driving
more and more people out, like is happening, shouldn't we look
at that and say, what are we doing wrong here, instead of
saying, this is the only and best program the good Lord could
make for Federal employees?
We don't agree with it, because our people are leaving the
FEGLI program and are buying products in the private
marketplace. And that is causing the FEGLI program to increase
in cost. Because the better-risk people leave. And they do that
because they can get cheaper premiums.
Mr. Cummings. That leads me to the question that I've been
just dying to ask you.
What happens--suppose 90 percent of the FEGLI people went
into your program. What would happen? Just random, 90 percent?
Mr. Shaw. I don't have any idea, Congressman.
Mr. Cummings. That's what bothers me about your argument--
go ahead, I'm sorry.
Mr. Shaw. No, excuse me. I'm sorry. I'm not sure what
program we're talking about.
Mr. Cummings. Well, you say that people can get this kind
of insurance, the insurance cheaper; that's been your argument.
Mr. Shaw. No, I don't know that. Oh, I'm sorry. We're
talking life insurance here. I'm saying that some people are
getting it cheaper from the private sector than what they have
to pay for the FEGLI program.
Could the private sector absorb all the people that are in
the FEGLI program who want to go to the private sector? I'm
sure they could.
Mr. Cummings. But I'm saying--let's say that there was
another, let's say, Jones Insurance Co., insurance--they're
over here and basically we've got MetLife over here that's
handling the FEGLI program right now, OK? I don't want to get
into it all, but just want to make this distinction.
I think it's kind of unfair to say that--I mean, you heard
the arguments of Mr. Flynn. He talked about statutorily
mandated benefits; he talked about, of course, the claims; he
talked about a number of things.
But one of the things he talked about was the population,
the population that they have in the Federal Government. And I
think it--you know, I'm Jones Insurance Co., and I've got 10
other insurance companies over here, and I've got MetLife over
here, and MetLife, then what happens is that the--those 10
insurance companies over here are then picking off my best
people out of MetLife. Then something's got to give.
Mr. Shaw. Well, MetLife has got to figure out a way to
compete, because MetLife is not competing now. But if we were
talking about MetLife--but we're not talking about MetLife,
we're talking about a statutorily mandated program--maybe the
statute needs to be changed. Maybe something needs to be done
to make this FEGLI program competitive. You know, what's going
to drive that, Congressman, is if you've got more than one
option and it's part of the FEGLI program. When the program
that's there that is high priced, it is either going to have to
compete or somebody else is going to eat their lunch. So we
have no competition, so why compete? Why change? We've got it.
Mr. Cummings. So maybe--just hang with me now.
Mr. Shaw. Yes, sir.
Mr. Cummings. If I'm one of the companies over here and I'm
constantly picking off the MetLife people, not only am I, as
you said, taking some of the better-risk folk, but I'm also
only taking a certain number of people. You follow what I'm
saying? In other words, if I had a more random coming from
MetLife and I was just one of these companies and I was taking
all of these people from MetLife, you're saying that because
MetLife's package may be a Cadillac package and may be over
here, we have more of a--I guess--what's the Pinto--a Pinto
situation over here, that it doesn't really matter. Is that it?
Mr. Shaw. Well, no, I don't think I am. The reason is
because, in that case, the benefits that are over here are
better than what is being offered in the FEGLI program.
Now, there is no question but what the FEGLI program has,
because of the way--I mean, well, let me back up one step.
When companies, life insurance companies, go in and sell a
program to a new company, generally they insure everyone that's
in that company. In the past, the Federal Government had been a
little bit different because people tend to stay in the Federal
Government for an entire career, and in a lot of private sector
companies there is a lot more turnover. We think that's
changing, there is more turnover now in government, and I think
there will be increased turnover. So portability becomes more
and more important to these people who want to take this group
life insurance with them when they go because they may become
uninsurable.
Whereas now there is a much older population in the
government than before, so if you can't get insurance anywhere
else, you're not going to leave anyway. So you've got a group
of people who are in there that you may have to subsidize
somehow, the government may have to be subsidizing, because
they can't get insurance anywhere else. And that's fine. The
reason that the other people are leaving, the healthier ones,
is because they don't want to provide that subsidy from their
pockets. So they're not going to.
If we had options that would help retain those healthier
people in the current program--and this is my fear for long-
term care, Congressman, too, because if we've only got one-
size-fits-all and you're going to keep, without competition,
the group in that long-term care program that are the sickest,
that aren't able to get coverage anywhere else. The people that
can get it better and cheaper elsewhere are going to gravitate
away. So you're going to have a group without options that is
going to stay in, and long-term care premiums are going to go
up and up and up for Federal employees. It's inevitable because
the private sector is going to compete for the people that are
healthier.
If you have all the options within the umbrella of the
FEGLI life insurance or the long-term care insurance program,
then people won't go away. I mean, the employee health benefits
program has worked for exactly that reason. If people want
something cheaper, they go get a cheaper one because they're
younger, they're healthier. As they get older or get a disabled
child or whatever the case may be, they change to Blue Cross/
Blue Shield and the premiums go up. But people make those
choices. And yet we're keeping them all in that program because
it's a lot cheaper than going out and buying an individual
policy someplace else.
And FEHBP has worked, in our view, because of competition.
Some companies have been driven out of FEHBP because they have
not been able to compete. Aetna comes to mind immediately. But
competition is a healthy thing, in our view, and options are
what our membership wants.
Mr. Cummings. You hope when you throw in that factor of
people who are uninsurable, that's a key factor because--and
those are your older folk; I mean, not necessarily, but----
Mr. Shaw. Right.
Mr. Cummings [continuing]. Generally that's who you're
talking about, so they're like a captured audience. I mean,
they've got to be there pretty much because they can't go
anywhere else.
Mr. Shaw. But competition has still--even with that kind of
a heavily weighted population in the fleeing health benefits
program because there are a lot of retirees in it--kept those
rates low enough that there isn't anybody in the private sector
that can compete even for the healthy group. I mean, they just
can't.
And that competition has worked; all the retirees that stay
in the FEHBP program are doing fine. And they have the option
every year to change if they want to, too. And many of them, as
I said, keep high option and are overinsured for more than they
need. But that's OK.
Mr. Cummings. This may be an unfair question, but I'm just
curious when you talk about maybe we need to look at our
package, what kinds of things would we be looking at? Are you
following me?
Mr. Shaw. Yes, sir. I am not enough of a life insurance
expert to say. In fact, I'm not a life insurance expert of any
kind. So I can't say.
One example might be--just something that comes to mind--
you may want to look at where the government subsidy part of
the FEGLI program goes. The government subsidy part of the
FEGLI program might go more to the people who can't leave the
program because of their health, don't have options, to keep
their premium level down; and for the others, the premiums will
be beased on competition for the rest of them because they have
options and the companies are going to have to compete for
them. That's off the top of my head. I haven't even thought of
it before.
Maybe that's how you manage to take care of the group that
is most at risk and can't go anyplace else versus the others
who can leave and go to the private sector, and get better
rates. If they can go to the private sector and get good rates,
then they ought to be able to get the same kind of rates in the
FEGLI program if you set up a separate risk pool.
Mr. Cummings. I have nothing else.
Mr. Scarborough. Thank you, Mr. Cummings. And I want to
followup and underline what you said, Mr. Shaw, regarding
MetLife not being attacked and not being suspect. I mean, we
have to turn the fingers back toward ourselves; they are doing
what we provide them by statute. Is this correct?
Mr. Shaw. That's right.
Mr. Scarborough. I wanted to ask you, and I got into an
exchange with Mr. Flynn right before I had to leave for another
committee and it said that, you know, one of complaints I heard
was that MetLife was able to get $1.6 billion a year, and they
were able to hold this money and collect a great deal of
interest over 20 years or whatever, which again is no problem
to me if they do that. We were told, though, by Mr. Flynn that
that's not how this system works; that it's money in, money
out.
Let me ask you, Mr. Bartholomew, if that's the case, and I
suspect it is, it seems to me that that causes a problem for
MetLife and the government also because is it not true that the
way you're able to pay your life insurance benefits is a
combination of premiums and earnings that you make by being
able to hold money and draw interest. And the way we're doing
it right now with the Federal Government and MetLife is simply
getting the money in, taking the money out; is that correct?
Mr. Bartholomew. That's right. That's the way life
insurance companies make their living is by receiving premiums
and investing them and setting up the appropriate reserves to
pay the benefits that they have promised under the contract.
Mr. Scarborough. Would you be able to be competitive as a
life insurance company if you were not able to set aside this
money?
Mr. Bartholomew. You probably wouldn't be able to do
business.
Mr. Scarborough. You wouldn't be able to survive very long,
which is, of course, the glory of being in the Federal
Government--defy the laws of business, which we do regularly.
Let me ask you one of the things we're having regarding
long-term health care is whether we have a single provider or
whether we have multiple providers. That's a question that
obviously we're asking right here. We've been informed that
because of the size of our Federal Government work force that
no single carrier is going to be able to carry the risk of
insuring it. Do you believe that a single carrier can provide
group universal or group variable and universal insurance to
the Federal work force?
Mr. Bartholomew. Do I think they could?
Mr. Scarborough. Yes.
Mr. Bartholomew. Yes, I do.
Mr. Scarborough. You do. OK.
Let me ask you, Mr. New, you testified that employees
actively at work are generally eligible for AD&D insurance, but
retirees usually are not unless there is a special agreement.
Why is it that retirees are generally excluded?
Mr. New. I can only say, by experience, that typically just
the active employees of the group or of the customer are
eligible for AD&D insurance. However, carriers are trying to
address the issues around portability when it comes to
individuals that want to continue coverage once they've had it
in place.
I can only speak on behalf of UnumProvident. We listened to
our customers and we are now offering true portability, which
will allow an employee who retires the ability to continue
coverage at the same group rates.
Mr. Scarborough. So that's not exclusively an employer
decision?
Mr. New. It starts out at the employer level. The employer
makes a decision when the contract is purchased if they want to
extend portability to their employees.
Mr. Scarborough. If the retirees are covered by special
agreement, are they put in a separate risk pool for rating
purposes?
Mr. New. I would say if you were going to look at the
Federal Government employees, and you're going to have a
separate classification for retirees, I would say, yes, that's
a safe bet.
Mr. Scarborough. Let me ask you this, Mr. Shaw, I have been
advised that the Senior Executive Association already offers
its members the opportunity to purchase long-term care
insurance from a variety of well-known companies at fairly
attractive discounts.
How many members does the SEA have?
Mr. Shaw. About 3,600, I believe.
Mr. Scarborough. Would you describe how this program works
and how you can get such attractive premiums while retaining a
fairly wide range of choices?
Mr. Shaw. Congressman, what we do is ask insurance
companies to offer to our members at a discount and they do
that. They offer it at a discount between 10 and 20 percent,
because they are given the opportunity to market to this group
that is sponsored by SEA, or SEA has looked at the company and
found that it's financially sound, et cetera, and we get those
kind of discounts.
I bought long-term care insurance about 2 years ago from
the United Services Automobile Association, which is an
insurance company which I went in when I was an officer in the
military, and only officers at that time could get in it, and I
got a 20 percent discount. And USAA is getting a piece. SEA is
not getting a piece, but USAA gets a piece of the policy
premium for itself for placing the insurance. And they have a
number of companies that participate that they have to look at
your application, and give them the best premium rate they can
give them. And they typically offer 20 percent discounts.
Mr. Scarborough. OK.
Mr. Shaw. They didn't have to market to me because I went
to USAA because I knew them to be a good organization. But
there are a platform of companies, they call them, where they
all get to look at the application from an underwriting
standpoint and make a rate offer; and I get the best rate offer
from whatever company I choose in the group.
Mr. Scarborough. Does your organization plan to extend the
sort of program to group universal or group variable universal
life insurance?
Mr. Shaw. The group universal life insurance or variable
universal--whichever, fixed or variable--with a long-term care
program is available through one of the organizations that does
advertise through SEA, I think it's underwritten by First Penn
Life. And I don't know how many have bought it or how many have
not, but it's an option that's available to them.
Mr. Scarborough. So your conclusion would be--I think it's
safe to say that the Federal Government could obtain favorable
rates on both long-term care insurance and on these new life
insurance products while offering the employees an opportunity
to shop among competing carriers?
Mr. Shaw. Yes, sir. And if OPM needs to know how it works,
they should go talk to the American Automobile Association, the
AARP, the United Services Automobile Association, et cetera,
who routinely get rate reductions for their members.
Mr. Scarborough. OK. Do either of you two gentlemen
disagree with this conclusion?
Mr. Bartholomew. No.
Mr. New. No.
Mr. Scarborough. OK. You can if you want. OK. All right.
Mr. Allen.
Mr. Allen. Thank you, Mr. Chairman. I regret missing part
of this hearing, but I wanted to say I was interested, Mr.
Shaw, to hear your comments about what Ed Flynn had said. So I
am going to try to go back and recreate this, and eventually I
have a few comments to make; then I will come back to Mr. New
for a moment.
Ed Flynn said that long-term care is complicated, there are
lots of choices. Your response was that health insurance is
complicated and employees somehow make rational decisions on
that. I confess I'm not persuaded that people make rational
decisions about their health insurance. I know that for me, I
was given, you know, a certain number of choices and they all
came with thick booklets. So I called someone in member
services and I said, what do most people do? She said most
people sign up for the standard Blue Cross plan in their area.
So I signed up for the standard Blue Cross plan in my area. But
I'm healthy.
I mean, I can sort through different booklets about health
care insurance and it doesn't mean much to me. I'm healthy.
That's the difference. Knock on wood. When you get to long-term
care insurance, all of the options you're provided assume a set
of circumstances that, by and large, most people have no way of
knowing. You don't know what kind of coverage you're going to
need, how long you're going to need it. You just have no way.
It's just a shot in the dark, I think, for most people who are
healthy, who are, you know, your age, my age, buying this sort
of coverage.
I think part of what, you know, we're really trying to do
here is to figure out how to drive down the costs for members
of the work force when we provide an additional benefit,
because after all we're not funding it, I mean, the discount is
all they get. And so I guess that puts me in the 60 percent who
signed up for Blue Cross/Blue Shield.
I tend to think that people stay in a program because it's
too hard to change. At least for some of us, it's the same way
with our telephone companies. There may be competition, we may
have the option to change, but it's not something we want to
do. I think there is a difference between, or that it is a
false choice. On the one hand, we don't want--there is one-
size-fits-all and on the other hand, there is allowing the
members of the group a very wide range of choices among
competing companies, letting all companies in or most companies
in.
I just don't think those are the two choices. And there has
got to be something that is more effective.
Now, Mr. Shaw, we heard from you on that topic. I want to
go to Mr. New. And I would say this, we've talked about long-
term care insurance today and how we deal with that. I didn't
understand that was a topic for today. And there might have
been someone else from Mr. New's company if he had realized
that we were going to get into long-term care. But with respect
to AD&D, let's deal with this context of AD&D.
What kind of structure makes sense to you, Mr. New? A
structure where the Federal Government, like many employers, is
basically picking from either one--is getting the best deal it
can from one company, and there is competition to be the
provider for that company; or you're picking--you know, you're
allowing a consortium to come; in or you're letting anyone come
in.
I mean, should this be--where do you come out in this
debate? On the one side, one company picked after a competitive
process; on the other side, you know, any insurance company
that wants to come into this market and offer AD&D or something
in the middle. Where do you come in?
Mr. New. I think that's a large question to answer. I'll
try to answer it the best way that I can.
I would think that when you look at any competitive
situation, you want to do your due diligence. You want to make
sure that you're looking at the marketplace to make sure that
you're getting the best product for your employees. When it
comes to the Federal employees, with the large population, you
can go at it a couple of different ways. It really comes down
to a couple of different factors.
One, the carriers who are working in this marketplace and
have worked in this marketplace for a long time know the
marketplace well. They usually have the product behind what
they want to offer to the employees.
It also comes down to what type of administrative
capabilities the employer will need. There is an enrollment
process that would have to be applied to this, and you will
have to customize to the customer to make sure that you can
adapt to their abilities from an administrative standpoint. You
can probably consider voluntary AD&D compared to other products
like long-term care. There is a complexity on the one hand for,
I believe, long-term care versus voluntary AD&D. You can
probably do it with a few carriers.
Mr. Allen. Do which?
Mr. New. Voluntary AD&D. If everything aligns from the
customization of the program to the customization of the
enrollment process, there is a strong possibility that one
insurance carrier can adapt and fill the need for the Federal
employees.
Mr. Allen. Mr. Shaw.
Mr. Shaw. I really would like to respond.
Mr. Allen. I was certainly not going to prevent you from
speaking.
Mr. Shaw. I appreciate that.
When you talk about the Federal Employees Health Benefits
Program, Congressman, there are any number of really good
publications that are put out that compare every program that
is offered and allow people to select depending upon their
circumstances. There are some that are better for families,
some that are better for retirees, et cetera. So even though
there are a lot of programs, employees can very easily, for a
very small investment, of about $5 for the Washington Checkbook
publication, compare these plans each year.
Second, when you talked about most companies or all
companies participate, we don't advocate that. There are two
programs in the government where companies get to compete to be
part of the program. One is when the General Services
Administration puts out a proposal, a contract for bid and
people can compete to be listed--to be listed on the Federal
Supply Service Schedule, which means they have to be
financially qualified and they have to be checked out by GSA to
make sure that they are capable of providing a quality program,
and then they have to offer competitive rates.
What it does is it gives them a license to sell but only
the best get on that list--get that license. And those
companies that get on that then go sell their product to the
Federal Government at what are the most competitive rates that
are available. That's one way that long-term care could be
done.
The other is like the FEHBP program where you pick--OPM
provides oversight, and would have to decide whether or not
these were quality companies, and were the best ones to provide
the products. But there would be a variety of products that
people could select from. And I'm sure that there would be a
publication like the Washington Checkbook that would spring up
overnight to evaluate these products, these long-term care
products, for employees.
Mr. Allen. You mentioned that Senior Executive Association
is 3,600 members and you ask companies to provide long-term
care as a----
Mr. Shaw. We have not asked any. We have been approached by
a variety of companies who have offered to provide it at a
discount to our members.
Mr. Allen. Is there some mechanism by which they can do
that through the association?
Mr. Shaw. They do that through their advertising through
the association's newsletter and magazine.
Mr. Allen. Do you have any idea how many of your members
have signed up for long-term?
Mr. Shaw. No, I do not. I'm sorry. I can get that
information, but I do not know now.
Mr. Allen. I would be interested. I think the----
Mr. Shaw. It's very new.
Mr. Allen [continuing]. Made before, which is that long-
term care insurance needs to be sold.
Mr. Shaw. Absolutely. And this is very new. That's why this
has all occurred within the last year or so, because people
have started to become more and more aware of the need for
long-term care insurance.
Mr. Allen. If I could come back to you, Mr. New, and maybe
Mr. Bartholomew, is AD&D insurance readily acceptable and
affordable outside of the group? I mean, do you sell to
individuals? Is there a market there to buy AD&D at a
reasonable price, or is it really tied mostly to--is it sold
mostly through employers?
Mr. New. Typically, it's sold through employers; however,
everyone in this room probably receives a mailing from their
credit card, maybe their bank offering high limit AD&D
protection. The rates tend to be much higher because there are
a lot of administrative fees applied to it from the bank side.
But, yes, it could be purchased by an individual through
their bank or credit card company. But typically the group
insurance environment is the easiest way to purchase it, as
well as the most affordable.
Mr. Allen. Thank you.
Thank you, Mr. Chairman.
Mr. Scarborough. Thank you, Mr. Allen.
I want to thank you gentlemen for coming and testifying
today. I think this is a continuation of a very important
process that we provide life insurance to Federal employees and
give them the best deal that they can get at the most
affordable price.
I would like to conclude by just saying for the record, I
think we had a correction. What was the percentage? OK.
Blue Cross, just in case it was going to keep anybody awake
tonight, Blue Cross's market share for Federal employees is 44
percent.
With that, we are adjourned.
[Whereupon, at 1 p.m., the subcommittee was adjourned.]
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