<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:42717.wais]
FEDERAL EMPLOYEES GROUP LIFE INSURANCE PROGRAM: COULD WE DO BETTER?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE CIVIL SERVICE
of the
COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
APRIL 30, 1997
__________
Serial No. 105-32
__________
Printed for the use of the Committee on Government Reform and Oversight
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WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California
JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York
STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,
THOMAS M. DAVIS, Virginia DC
DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
JOE SCARBOROUGH, Florida DENNIS J. KUCINICH, Ohio
JOHN B. SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio DANNY K. DAVIS, Illinois
MARSHALL ``MARK'' SANFORD, South JOHN F. TIERNEY, Massachusetts
Carolina JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire THOMAS H. ALLEN, Maine
PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee
MICHAEL PAPPAS, New Jersey ------
VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont
BOB BARR, Georgia (Independent)
ROB PORTMAN, Ohio
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
Judith McCoy, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on the Civil Service
JOHN L. MICA, Florida, Chairman
MICHAEL PAPPAS, New Jersey ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
CHRISTOPHER COX, California DC
PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
George Nesterczuk, Staff Director
Charli E. Coon, Professional Staff Member
Caroline Fiel, Clerk
Cedric Hendricks, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 30, 1997................................... 1
Statement of:
Brittain, Margery, vice-president, Group National Accounts,
MetLife; G. Scott Cahill, CLU, chief executive officer,
James B. Greene & Associates, Inc.; and Barnett I.
Chepenik, president, Lincoln Financial Group, Inc.,
Chepenik & Associates, Inc................................. 41
Flynn III, William E., Associate Director for Retirement and
Insurance, Office of Personnel Management.................. 3
Letters, statements, etc., submitted for the record by:
Brittain, Margery, vice-president, Group National Accounts,
MetLife, prepared statement of............................. 44
Cahill, G. Scott, CLU, chief executive officer, James B.
Greene & Associates, Inc., followup questions and responses 87
Chepenik, Barnett I., president, Lincoln Financial Group,
Inc., Chepenik & Associates, Inc., prepared statement of... 60
Flynn III, William E., Associate Director for Retirement and
Insurance, Office of Personnel Management:
Followup questions and responses......................... 38
Prepared statement of.................................... 7
Ford, Hon. Harold E. Jr., a Representative in Congress from
the State of Tennessee, prepared statement of.............. 82
Morella, Hon. Constance A., a Representative in Congress from
the State of Maryland, prepared statement of............... 29
FEDERAL EMPLOYEES GROUP LIFE INSURANCE PROGRAM: COULD WE DO BETTER?
----------
WEDNESDAY, APRIL 30, 1997
House of Representatives,
Subcommittee on the Civil Service,
Committee on Government Reform and Oversight,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2247, Rayburn House Office Building, Hon. John L. Mica
(chairman of the subcommittee) presiding.
Present: Representatives Mica, Pappas, Morella, Sessions,
Cummings, Norton, and Ford.
Staff present: George Nesterczuk, staff director; Charli E.
Coon, professional staff member; Caroline Fiel, clerk; and
Cedric Hendricks, minority professional staff member.
Mr. Mica. Good morning. I would like to call to order this
meeting of the House Civil Service Subcommittee. This morning
we are going to be talking about Federal employees group life
insurance. This is an investigations and oversight subcommittee
of Government Reform and Oversight and we have a responsibility
to look at various programs that affect our Federal employees.
Today, I will start with an opening statement and then
yield to the other side and then we will hear our witnesses. We
have two panels with us today.
I am going to reverse the order of the panels, just for
notification.
Today, we will examine the Federal Employees Group Life
Insurance Program, more commonly referred to as FEGLI. The
purpose of this hearing is to ensure that Federal employees are
receiving adequate coverage at reasonable cost. We will also
explore whether new options and alternative offerings now
available in the life insurance marketplace and in the private
sector may, in fact, be suitable for the benefit of our Federal
employees.
FEGLI provides basic and optional life insurance for 2.5
million Federal employees and 1.5 million Federal retirees.
Employees pay two-thirds of the basic insurance costs, and the
agencies pay one-third. The cost of optional insurance coverage
is borne entirely by the employees who elect such additional
coverage. Approximately 90 percent of eligible Federal
employees elect to participate in this program, so it is
subscribed to pretty widely.
The coverage consists of a term policy with a benefit which
extends into retirement. After age 65, a reduced benefit is
continued at no cost to the annuitants. The FEGLI program is
administered by the Office of Personnel Management, which we
will hear from in just a few minutes, and OPM sets and collects
premiums, establishes the reserves and manages most of the
funds.
Metropolitan Life Insurance Co. serves as the primary
insurer of FEGLI and has done so since the inception of the
program in 1954. Metropolitan Life 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 of the risks and essentially acts as a self-
insurer. This is a pertinent fact in considering any additional
offerings or alternatives to the existing program.
To help us in a program review, we will hear from witnesses
representing OPM and MetLife, and we have also invited experts
in the field of employee benefits to inform us about additional
insurance options provided by large private sector employers.
Again, this is one of our important oversight
responsibilities in this subcommittee. Our intent is to review
what has taken place and to provide some insights into what
options are available to our employees so that we can give them
the very best options that exist for life insurance or for
other benefits. That's the intent of the hearing today.
With those opening comments, I would like to yield now to
our distinguished ranking member, Mr. Cummings, from Maryland.
Mr. Cummings. Thank you very much, Mr. Chairman. I very
much appreciate your convening this oversight hearing on the
Federal Employees Health Benefits Program. It has been 2 years
since such a hearing was held. So it is certainly an
appropriate time for this subcommittee to review its operations
again.
The hearing record from 1994 indicates that there were no
significant problems with FEGLI at that time. I am not aware of
any complaints about the program and no one has, as yet,
approached me with any recommendations for any reform.
Mr. Chairman, I understand that one of your objectives
today is to explore whether the creation of new benefit options
would be appropriate. I note that OPM's testimony will indicate
that it does not believe any are needed. I expect that the
benefit experts on the first panel will have a different view.
I look forward to the testimony of all of today's witnesses
and the information you will provide about this very important
employee benefit program. Thank you, Mr. Chairman.
Mr. Mica. Thank you, Mr. Cummings.
We actually did not hold a full hearing on the FEGLI. It
came up incidental to discussions on the Federal Employee
Health Benefits Programs. So this is the first one that I know
of, at least since I have been Chair, and for some time on the
program.
I would like to yield to the gentlelady from the District,
Ms. Norton.
Ms. Norton. Thank you, Mr. Chairman. I want to thank
Chairman John Mica for calling this hearing today on the
Federal Employees Group Life Insurance Program. I have a
particular interest in this program because I conducted the
last oversight hearing on FEGLI in 1994, when I was Chair of
the Subcommittee on Compensation and Employee Benefits of the
Committee on Post Office and Civil Service.
Frankly, it is one of the most popular Federal Employee
Benefit Programs in which all Federal employees are eligible to
participate. Currently, almost 2.5 million active Federal
employees, as well as approximately 1.6 million retired Federal
employees, are covered under the program.
FEGLI is popular in part because it offers life insurance
at very reasonable prices and without medical precertification.
The tragic airplane crash involving the late Secretary of
Commerce, Ron Brown, and 15 other Federal employees, offers
testament to the importance of FEGLI.
Many of the Federal employees were young. FEGLI was all
some of them had for burial and other expenses, without which
the grief and trauma to their relatives would have been even
greater. Tragically, some did not even have FEGLI because they
had opted out.
Employees automatically get FEGLI unless they opt out. The
tragic accident in Croatia points up the importance of this
automatic coverage. The average Federal employee earns $35,000
a year. FEGLI means that an amount about equal to this salary
amount will be covered, an amount that will likely prove
indispensable considering average employee salary levels.
Although FEGLI is physically sound, I welcome this
opportunity to examine the program to ensure that Federal
employees are receiving adequate coverage at a reasonable
price. I also welcome the opportunity to explore whether or not
the range of optional benefits available under FEGLI should be
expanded. I look forward to the testimony of today's witnesses.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentlelady. And there being no
further Members present or opening statements, I would like to
call the second panel up first today: Mr. William E. Flynn,
Associate Director for Retirement and Insurance of the Office
of Personnel Management. He is no stranger to this panel.
Mr. Flynn, as is customary, we do swear in our witnesses--
are you the only one testifying?
Mr. Flynn. Yes, I am, Mr. Chairman.
Mr. Mica. We will swear you in.
[Witness sworn.]
Mr. Mica. The witness answered in the affirmative.
Mr. Flynn, also as is customary, if you would like to
summarize, you may. We don't have a timer today so you can take
your time.
The main thing we would like to hear is a report on the
status of this program, your evaluation of its effectiveness,
and its affordability for our Federal employees. Also, you have
heard my comments about looking at some possible options, so we
would welcome your commentary on that and other questions that
we pose to you. Welcome back and you are recognized.
STATEMENT OF WILLIAM E. FLYNN III, ASSOCIATE DIRECTOR FOR
RETIREMENT AND INSURANCE, OFFICE OF PERSONNEL MANAGEMENT
Mr. Flynn. Thank you very much, Mr. Chairman and members of
the subcommittee. I am pleased to be back today to discuss with
you the Federal Employees' Group Life Insurance Program.
Several of you have mentioned a number of the features of the
program so I might very well shorten even further my remarks
from the prepared statement that I know will be submitted for
the record.
This particular program has provided low cost life
insurance to Federal employees and retirees since 1954. In the
beginning, the program reflected essentially a one-size-fits-
all approach which accorded each eligible employee who did not
waive participation automatic life insurance and accidental
death and dismemberment protection essentially equal to 1
year's salary. Today, the program offers an array of options to
address individual circumstances. Enrollees have a choice of
basic life insurance, six levels of additional life insurance,
family insurance, three options for post-retirement basic
coverage, and accelerated payment options for the terminally
ill.
Since the basic features of the program were addressed
earlier, Mr. Chairman, I might just initially go on and talk
about some things that we have done in the program more
recently and address some of the matters you have raised
regarding continued evolution of the program.
Ms. Norton pointed out that this program provides important
protection, particularly for new employees, and the tragic
situation that occurs when new employees, for whatever reason,
choose to waive that coverage. Employees can enroll in the
program after they are initially hired by furnishing evidence
of insurability or by making application during an open
enrollment period.
Only six such open enrollment periods have occurred in the
history of the program, and two of those have been held since
1993, which I might touch upon briefly. In 1993, OPM reduced
the cost of basic and optional insurance. Premiums for basic
life insurance decreased almost 11 percent and many enrollees
over the age of 40 benefited from premium reductions for
optional insurance.
We reduced premiums because of low mortality and more
favorable interest rates earned by the life insurance trust
fund. During this particular open enrollment period, the
percentage of employees electing basic coverage increased about
1.5 percent from 88.4 to 89.9 percent, and more employees
elected optional insurance. For example, enrollment in option
B, which provides additional insurance in multiples of the
employee's salary, rose from about 36 percent to about 46.5
percent.
Now, the most recent open enrollment period was limited to
basic insurance and occurred in 1995. It coincided with the
Living Benefits Act of 1994. That particular law allows payment
of basic life insurance proceeds to an insured individual who
is terminally ill and who has a life expectancy no longer than
9 months.
Since the inception of that program, 1,703 living benefit
claims have been received; 1,301 have been approved; 904 of
them were approved for annuitants and 397 for employees.
Another option which has become recently available is the
insured's right to irrevocably assign all insurance ownership
to someone else. This option can be useful as a financial
planning tool and it may also be used by terminally ill
employees or retirees to transfer ownership of both basic and
optional insurance in exchange for cash, representing a
percentage of the anticipated insurance proceeds.
In your invitation, Mr. Chairman, you asked several
questions about the program and I might turn our attention to
those just for a moment. When the program was established,
OPM's predecessor agency, the Civil Service Commission, was
given full discretion to purchase a life insurance policy from
one or more insurers who met certain requirements. The law
further required any primary insurer to reinsure portions of
the total insurance with other companies in the group insurance
market.
After consultation with all eligible primary carriers, and
with their concurrence, the Civil Service Commission contracted
with Metropolitan Life Insurance Co. Metropolitan has been the
program's prime insurer since then. The company processes all
claims filed under the program, arranges participation of
reinsurers, and provides conversion information when group
eligibility terminates. Metropolitan's service to program
beneficiaries, as well as to the Government, has been
excellent.
You also asked, Mr. Chairman, that we address the topic of
risk. When the program first began in 1954, it immediately
covered the lives of almost 2 million employees and had no
reserves whatsoever. Because of that, a definite risk existed
for Metropolitan Life and its reinsurers. By law, Metropolitan
and the reinsurers were compensated for this underwriting
service by payment of a risk charge. That charge has been
renegotiated over the years, as the program accumulated
reserves to cover claims, and in 1990 OPM and Metropolitan
agreed to waive the risk charge indefinitely.
This is similar to the way in which other large group
insurance plans operate. Insurers set premiums for a group at a
level to maintain a break-even point after claims and expenses,
using assumptions relating to mortality, investment income, and
the like. If assumptions for the group go awry and the insurer
is unable to make necessary adjustments in premium, the insurer
is nonetheless responsible for paying benefits.
Today, the FEGLI fund has accumulated a balance that will
likely cover most claims. Nonetheless, major adverse changes in
mortality due to an epidemic or other calamity could occur so
there always will be an irreducible minimum of risk in the
program.
And finally, Mr. Chairman, your letter of invitation asked
if we considered providing alternative insurance options for
employees. You mentioned a near 90 percent participation rate,
and I would point out the current evolution of the program
makes 10 options or benefit levels currently available. In
light of this, we don't see any particular need for a basic
restructuring of the program.
We believe that the life insurance program has proven to be
and is responsive to the changing needs of the Federal
workforce. Nonetheless we look forward to working with you and
other members of the subcommittee to ensure that this
continues.
And finally, Mr. Chairman, I have attached to my brief
overview a chart which gives a snapshot of the current
financial status of the program. You will note that there is
just under $500 billion of insurance-in-force covering, as you
mentioned earlier, about 4 million insured individuals and that
the fund balance at the end of 1996 was a little over $17
billion.
That concludes my statement, Mr. Chairman. I would be happy
to answer any questions you or other members of the
subcommittee may have.
[The prepared statement of Mr. Flynn follows:]
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Mr. Mica. Thank you, Mr. Flynn.
I have a couple of questions to lead off. First of all, can
you explain the negotiation process that you undertake with
MetLife as it relates to service charges, administrative
expenses and related costs? What kind of negotiation process
goes on?
Mr. Flynn. Well, we work with Metropolitan Life under an
insurance contract that annually renews itself. Our
negotiations cover a range of issues relating to performance,
customer service, administrative expenses, and the like.
Those negotiations have gone on every year. This year we
have just concluded negotiations on administrative expenses
where, for the first time in the program's history, we have
agreed to a limitation on administrative expenses and a further
limitation on the amount of indirect charges charged to the
contract.
So there is a negotiation that goes on back and forth
that's related to the experience of the program, what we are
trying to provide in terms of performance related to our
customers, and what we think is reasonable and otherwise
allowable under this particular contract.
Mr. Mica. Well, I raise that question and I look back at
some of the recent administrative expenses. MetLife's
administrative expense in 1994 was $6.6 million and in 1 year
in 1995 it jumped to $9.2 million, and that's a pretty
significant increase.
If I was in the private sector operating a business and I
had an increase like that, it would certainly catch my
attention.
I found actually going out and looking at insurance
availability and premiums that there has been more competition
and you can get term insurance at much more competitive rates.
What justified that huge increase in that period of time?
Mr. Flynn. Mr. Chairman, if I might make perhaps three
quick points with respect to that. First of all, these are the
administrative expenses reported to us by Metropolitan. Our
Inspector General has recently completed an audit of
Metropolitan Life Insurance Co.'s FEGLI operations. That draft
audit report has not yet been released, so these are reported
administrative expenses and do not at this time reflect
accepted administrative expenses.
The second point that I would make is that, in 1995, as I
mentioned earlier we did conduct an open enrollment period for
the program and so there is an increase in costs for that year
attributable to that.
And I guess the final point that I would make is that the
administrative expenses incurred in this program occur in two
places: One, by the Metropolitan Life Insurance Co. and a small
amount by OPM. Together, those administrative expenses amount
to less than six-tenths of 1 percent of the total cost of the
program including benefits and are not at all determining in
terms of the premiums that are charged under the program.
Mr. Mica. Well, it may be a small percentage of the total
amount, but that's a pretty significant increase. I would be
interested to see what that audit shows, because it did jump
from $6.6 million to $9.2 million in 1 year.
Then we get into operating expenses which went from $8
million to $10.8 million for the same period. Any justification
there or is that also under audit or review?
Mr. Flynn. Well, the increase in operating expenses from $8
million to $10 million is primarily reflected in the increase
in Metropolitan's administrative expenses. The only other
additional amounts in there deal with administrative costs and
taxes for the Shenandoah plan, which covers people who were
insured under beneficial plans prior to 1954, and some State
tax payments. So the only real difference is about another
$150,000 between those two numbers.
But your point is well taken, Mr. Chairman. We want to make
sure that we are getting full value for the administrative
expenses. We will also look carefully at the report of the
Inspector General as we continue our oversight of this program.
Mr. Mica. Well, I think in the previous hearing that was
held on FEGLI that the question came up about MetLife and
reinsurers and really how much at risk they were, and it is my
understanding that MetLife is reimbursed for claims expenses
and in the event that claims exceed revenues, MetLife would be
compensated for any losses through an increase in premiums the
following year.
Does that still hold true?
Mr. Flynn. It is true, Mr. Chairman, that we negotiate
premiums from the Government to MetLife each year based on the
prior year's experience. And as I indicated in my statement,
that is not at all dissimilar to the way in which large group
plans operate. Again, not----
Mr. Mica. But are----
Mr. Flynn. Excuse me.
Mr. Mica. I was just going to say, are they then really at
risk? They are being reimbursed for their losses. Is there a
true situation of risk here?
Mr. Flynn. I would say, Mr. Chairman, that there is this
irreducible minimum that I mentioned in my opening statement.
It is also true, and I would acknowledge to you and to anyone
who asks, that, absent some aberrant or unusual experience, and
with the reserves available in the program and the anticipated
premium income over the long-term, actuarial analyses of the
program indicate that the premium income will be sufficient to
cover the benefit expenses of the program.
Mr. Mica. It sounds like a pretty good deal. You get all of
your operating expenses, all of your administrative expenses.
You say you have a risk, but you really don't have a risk. I am
just wondering what kind of real exposure these folks have and
why we don't have more competition.
Mr. Flynn. Mr. Chairman----
Mr. Mica. Is there any instance in which MetLife has
incurred a loss since 1954?
Mr. Flynn. Not that I am aware of, Mr. Chairman, but we
could certainly provide that for the record. The one point that
I might make about risk is that, at the inception of the
program, as I mentioned, there was considerable risk to
Metropolitan and its reinsurers and the compensation in
recognition of that risk was in the form of a risk charge that
up until the late 1980's was about $850,000 a year.
When the reserve levels in the program got to such a point
where the risk was minimized, we and Metropolitan Life
negotiated and agreed to waive the risk charge indefinitely
from that point forward.
Mr. Mica. Was there reimbursement or something that took
place where they had charged it and we got some of that back?
There is no longer a risk charge and we got everything back
that was due?
Mr. Flynn. There is no longer a risk charge, that is true,
Mr. Chairman.
Mr. Mica. A final question here. I want to give the other
panelists time to ask questions. Where is the $17.4 billion in
the fund balance invested?
Mr. Flynn. The overwhelming majority of that is invested in
the U.S. Treasury in nonmarketable U.S. securities, Mr.
Chairman.
Mr. Mica. What percentage; 90 percent, 95 percent?
Mr. Flynn. Even higher than that. I would say, with the
exception of, oh, probably about $50 million, the entire
balance is invested in the Treasury.
Mr. Mica. Except for $50 million. And there has never been
any thought of putting this in any other funds? Or this is also
being used in deficit reduction or----
Mr. Flynn. I believe that the statute that created the
program, Mr. Chairman, directs the manner of investment in this
program in Treasury.
Mr. Mica. So is that originally in place?
Mr. Flynn. I believe that's the case since the program was
established.
Mr. Mica. And there has never been any other
consideration----
Mr. Flynn. Not that I am aware of, Mr. Chairman.
Mr. Mica. If we will put a little bit of that into our
thrift savings plan and get a 20, 30 percent return, we have
$17 billion. I tell you we would have some cash to deal with,
wouldn't we? Maybe not all of it.
You will have to excuse me. I come from the private sector
so most of what you all do doesn't make sense to me. I just
have to think it out in terms of how I would be handling either
my money or my company's money.
With those comments, I yield to our ranking member, Mr.
Cummings. Thank you.
Mr. Cummings. I am just curious. If another insurance
company wanted to do this, how would they do it? In other
words, if another insurance company wanted to be the insurer--
--
Mr. Flynn. Uh-huh.
Mr. Cummings [continuing]. How would they do it? And I
guess, having run a law firm for 20 years and to be the
managing partner and having to look at insurance and whatever,
I am just curious as to how that would happen.
Mr. Flynn. Let me try to answer how it would happen, and
then perhaps comment on the implications of it happening, if I
might.
First, the law that established the program gave to OPM, or
the Civil Service Commission, its predecessor agency, sole
discretion to procure this insurance contract setting aside
normal competitive procedures.
Nonetheless, since then and in accordance with the terms of
the statute that set up the program, we have developed what we
call life insurance acquisition regulations that provide a
mechanism for us to put this life insurance contract out for
competition if we believe it is in the interest of the program
to do so.
Were that to be done, we would solicit proposals from
insurance offerors. Those proposals would have to provide a
benefit structure that is consistent with the benefit structure
that is provided in law. The benefits that are available to
Federal employees under this program aren't negotiated. They
are, in fact, provided for in statute so an offeror would have
to respond to the benefit levels that are set out in the
statute and then we would begin a process of negotiation,
resulting in an award. So it could easily be done that way.
The question for us, as the employer, is whether or not
there would be any particular benefit accruing to the
Government as employer or to Federal employees resulting from
doing so. Because the benefits are set out in law, and because
OPM sets rates for the program based on the experience of the
program, it doesn't appear likely that there would be any
particular benefit in the employer/employee relationship from
moving to a recompetition of the contract.
But that opportunity is available and if the program should
be changed substantially, where that might be something that
would seem appropriate for us to do, it certainly would be
something we would want to give serious consideration to.
Mr. Cummings. So basically what we have here is a
situation, based upon what you just said, that probably for the
next 100 years it is quite possible that no matter what
insurance company came along and said that we could do better,
that they would probably be locked out unless you could find
something--some kind of benefit to the employees or the
employer; is that correct? I mean, based on--I mean, we have
already gone 50----
Mr. Flynn. Forty-three years.
Mr. Cummings. Whatever.
Mr. Flynn. Right.
Mr. Cummings. Forty some years and I am just wondering. I
mean, that's a long time. And the other question is: Have there
been others--have there been--first of all, has it ever been
put up for competition?
Mr. Flynn. No, sir, it has not.
Mr. Cummings. And second, when--have other companies
expressed an interest or ever said that we can do better?
Mr. Flynn. I believe there have been expressions of
interest from time to time. But the question of doing better,
sir, is one that I would sort of come at with preservation.
Better in the context of this program can only mean we can
operate more efficiently administratively. We already know,
from our work with Metropolitan, that they get excellent
reviews from the beneficiaries, employees, and retirees that
they serve. Further, their administrative expenses, while we
will always want to make sure that they are appropriate and
allowable, represent a very minimal amount in terms of the
overall cost of the program, and don't affect premiums.
So ``better'' is a relative issue. Certainly, if someone
were to come to us and say, substantively we believe this can
be done better, we would certainly want to seriously look at
that, but I don't think anybody has approached us that way.
People have approached us from the standpoint of we think
we have a better benefit design or things of that nature. But
because these are set out in law----
Mr. Cummings. Right.
Mr. Flynn [continuing]. Those are not issues appropriate
for our consideration in the context of a solicitation.
We are very interested in better benefit designs, designs
that meet the needs of the Government as employer and meet the
needs of the individual employees and retirees in terms of
their own financial circumstances.
In fact, we have an effort underway to look at the
evolution of benefit design, not just in life insurance, but in
health care and other areas, to make sure that the Government
stays competitive as an employer and recognizes the evolution
and advances that have occurred in benefit design over the
years. And we will certainly look at that in this particular
program as well.
Mr. Cummings. When you--when you say ``benefit design,''
what does that mean?
Mr. Flynn. Well, for example, one of the things that we
have been asked to consider is a benefit called various things,
but sometimes referred to as universal life or variable
universal life which provides, in addition to life insurance
protection, a cash value at a certain point, a cash value that
can be used as a lump sum, or can be converted to purchase an
annuity and things of that nature. That's what I mean in terms
of benefit design.
And because we are an employer in the market, looking for
talent, it is important for us to stay competitive vis-a-vis
benefit design and with what other employers are doing, if
that's helpful, sir.
Mr. Cummings. Yes, that's very helpful.
If you have a situation--I know the law lays out what the
benefits ought to be. If a company came along and said, we can
provide more benefits, that--I mean, does the law say you have
to stay below a certain level, even if someone, a company came
out and said, look, for the same amount of money we can throw
in some extra benefits above the law, is that a ceiling that
must be met?
Mr. Flynn. It is a ceiling and a floor. The law specifies
precisely what the benefit levels are, and additions to or
subtractions from those levels would not be authorized under
the framework of Federal Employees Group Life Insurance.
Mr. Cummings. So the design, when you say design, that's
something that fits within the floor and ceiling. It's just the
way you do it; is that right?
Mr. Flynn. Yes, sir, it's the way it is administered;
that's correct.
Mr. Cummings. Right. In other words, it is not above, it is
not below, it is not more benefits, it is within--it is how you
do it within the floor and ceiling?
Mr. Flynn. To the precise specifications of the statute,
yes, sir.
Mr. Cummings. All right. You said a little bit earlier that
the beneficiaries were satisfied. Is that right?
Mr. Flynn. That's correct, sir; yes, sir.
Mr. Cummings. And certainly we are very concerned about
beneficiaries being satisfied.
How did you come to that conclusion? Is there some kind of
a survey that you all take over the years?
Mr. Flynn. I would point to three things. The first thing
that I would point to is the very large participation rate we
have amongst employees and retirees.
Second, the Metropolitan Life Insurance Co. has conducted
surveys of beneficiaries and has seen satisfaction rates in the
upper 90 percent ranges, 98, 99 percent. We also have our own
independent survey underway this year and I expect that the
results that we have seen in the past will be replicated in
that survey as well.
Mr. Cummings. To your knowledge, is this the first time
that you have--that OPM has done such a survey?
Mr. Flynn. It is the first time that we have gone out with
our own independent survey of the Federal Employees Group Life
Insurance Program.
Mr. Cummings. Why is that? Why is this the first time? You
are talking about 40-some years. It just seems to me that you
would want to have known that and you wouldn't just rely on
MetLife; you would want something independent. That's not to
take away anything from MetLife. It just seems to me that, I
mean, we have all kinds of audits in the Federal Government and
everywhere I have been. It just seems to me that such a
significant contract you would have done it before 40-some
years.
Mr. Flynn. I wouldn't disagree with you, sir. We have for
the past 6 years now conducted surveys of our retirement
program beneficiaries, and for the past 3 years our health
benefit program enrollees. This will be the first year that we
have done an independent survey of the Group Life Insurance
Program. I would prefer, myself, that ones had been done
previously.
Another indicator, however, of the performance is the fact
that we get virtually no complaints whatsoever about this
program. We do look at the administrative performance of
MetLife as a contractor to make sure that they are paying
claims promptly and accurately and things like that. And those
other indicators serve as a surrogate, but certainly not a
complete substitute for the type of survey that you mentioned.
Mr. Cummings. I have a number of questions, but I am just
going to end right here and I will ask you the others a little
bit later.
When you--when you--tell us what kind of issues are raised
when you do a survey. I mean, what kind of things are you
looking for? What kind of complaints do you--would give you--
you know, set off the alarm bells? I am just curious.
Mr. Flynn. Well, I think any complaint from any individual
sets off an alarm bell. Surveys tell us whether or not those
alarm bells arise from a systemic cause or from some program
policy systemic issue. So we want to know what's going on with
individual enrollees and their individual complaints, and we
do. But we also want to understand--and surveys help us
understand--whether or not we have a broader issue to deal with
and how it ought to be dealt with.
Mr. Cummings. All right. Thank you.
Mr. Mica. I would like to yield now to Ms. Norton. Thank
you.
Ms. Norton. Thank you, Mr. Chairman. I should begin by
disclosing that immediately before coming to Congress, I was on
the board of the Metropolitan Life Insurance Co.
Even recognizing that we all adhere to the if-it-ain't-
broke-don't-fix-it school of government, I think this hearing
is important to hear about this program and about any
improvements that might, in fact, be appropriate.
There have only been six open enrollment periods
apparently, according to your testimony, and two of those have
been since 1993 alone. Why have there only been six and why
have a third of those come only in the most recent period of
the relationship?
Mr. Flynn. Let me try and answer that by talking about our
approach to open enrollment periods generally and then comment
on the last two that we have had, one in 1993 and one in 1995.
We consciously only have open enrollment periods when there
is a significant event or a significant evolution of things
that produces an event in the program that cause us to say, it
is time to make this program offering available to everyone on
either a restricted or unrestricted basis.
One of the reasons we approach open enrollment periods that
way is because our experience has been, particularly with open
unrestricted enrollment periods, that you tend to get what is
known as adverse selection surrounding that period. That is to
say, people who have not participated in the program, who now
find themselves with a fatal illness and with a shortened life
expectancy, can come into the program when there is an open
enrollment period and will increase the cost of the program in
an unusual way until such time as that adverse selection works
its way out of the program. So we try to avoid doing that for
that reason.
Ms. Norton. Wait a minute. Wait a minute. Let me understand
this. Because some people who had opted, which is a very small
group, people who had opted not to come into the program
before----
Mr. Flynn. That's right.
Ms. Norton [continuing]. Will tend to want to come in
because of an event in their own lives?
Mr. Flynn. Because they have found themselves with, for
whatever reason, a shortened life expectancy, which will
increase the expense of the program because that's an unusually
unhealthy group of people who opt into the program.
I might just mention that in the unrestricted enrollment
period that occurred in 1993, we believe we had adverse
selection in the program at that time that cost the program
about $50 million.
Beyond that, as I mentioned, individual----
Ms. Norton. That's an interesting point you make, because
of the cost, on the one hand, to the program. And it would be a
more compelling point to me if, in fact, the Government didn't
start out with the presumption that everybody should be in the
program anyway.
Since you start out with the presumption that everybody
ought to be covered, then the logic of that presumption is that
even if they decide, you know, at a time which does not benefit
the Government, that was the rule and now they are playing by
the rule.
Mr. Flynn. Well, I might make one other point that perhaps
would give a partial answer to that. And that is, if someone
initially waives participation in the program and then later
makes a determination that they would like to participate after
a waiting period, and if they can furnish a certificate of
insurability, they are entitled to enroll in the program at
that point.
In addition, there are a number of qualifying life events,
birth of a child, marriage, divorce, things of that nature,
that enable people to come in or actually leave the program as
well, which you can do at any time.
But I understand the point you make, but it--when we do
have open enrollment periods, that's the phenomena that we
experience and it does increase the cost of the program in an
unusual way at that point.
The two most recent enrollment periods we had, as I
mentioned, one was in 1993 and it was open and unrestricted
because there was a broad reduction in premium rates for both
basic insurance and optional insurance that seemed to us to
make it appropriate to have an unrestricted open enrollment
period.
The open enrollment period in 1995 was restricted to basic
insurance only and, as I mentioned, was designed to coincide
with the implementation of the Living Benefits Act, which only
applied to basic insurance. So it seemed appropriate to
restrict it to basic.
Ms. Norton. Yes. In the crash of--in Croatia, the Federal
employees were disproportionately young and some had, as young
people do, apparently regarded themselves as immortal. At least
they were not ready until the next open enrollment period
perhaps. They were not in--they did not have insurance. It was
a terrible--it was a terrible thing for their families.
Anybody who looks closely at this program in the beginning
and understands its full benefits and perhaps a little more
about life insurance, it seems to me, is almost compelled to
make a decision to join, I mean, given even the cost.
It seems to me there would be two groups of people who
might not, ``get it''. One would be young people, younger
people in the Government, and the other would be poorly
educated people in the Government. What does the program do to
make up for the fact that these may be disproportionately the
people who don't get it or need further explanation?
Mr. Flynn. Well, Ms. Norton, I couldn't agree with you
more. Some of the Federal employees who were on Secretary
Brown's airplane--and others that we never hear about--
tragically did not have insurance and so their families were
not able to have life insurance benefits available to pay
necessary funeral and other kinds of expenses.
In part, to compensate for that, as you may know, the death
gratuity benefit law was passed that provides some mitigation
of that issue.
One of the things that I think----
Ms. Norton. Which might also have triggered at OPM the
thought that to avoid that in the future something more needs
to be done, since it is such a small number of people anyway
who don't come into the program. So that's why I want to know
what you all are going to do to avoid the Government having to
come up with amounts.
Mr. Flynn. I would mention a couple of things. First of
all, there is automatic inclusion upon initial appointment,
unless a specific waiver is executed by the newly hired
employee.
Ms. Norton. That's already there.
Mr. Flynn. Yes, ma'am, it is.
Ms. Norton. And nevertheless, there are people who are not
covered.
Mr. Flynn. There are people.
Ms. Norton. What are you going to do beyond that?
Mr. Flynn. Well, we do provide a Federal Employee Group
Life Insurance booklet. We do provide employees with
information during their orientation period when they are newly
hired. There are benefits officers available at agencies.
These, Ms. Norton, are all things that are in place.
I haven't given any specific consideration to additional
things that we might do, but we will certainly keep that in
mind.
Ms. Norton. I mean, this is not a big problem. It is just
one that I would encourage you, particularly given the Ron
Brown crash, to investigate whether or not----
Mr. Flynn. Absolutely.
Ms. Norton [continuing]. Poorly educated people or young
people might need some extra counseling.
People who retire can keep this insurance, I believe, until
age 65, is that right, if they--continuing to pay their same
employee shares and you continuing to pay your share?
Mr. Flynn. Yes. There are a series of choices that are
available to retirees, from the point in time they retire to
age 65 and then after age 65.
Ms. Norton. Do most retiring employees above the age of
65--below the age of 65 tend to keep this benefit?
Mr. Flynn. I think that can be answered in two ways. First,
there is a very substantial number of retirees who take their
life insurance into retirement.
We do see, however, the participation in optional insurance
in multiples of salary begin to decrease substantially as
retirees' financial circumstances change and the need for that
type of insurance declines, and given the fact that the
premiums are age-based and so they become more expensive in 5-
year increments. We see a fairly substantially drop-off with
that.
Ms. Norton. Was this benefit provided as well to people who
took buy-outs?
Mr. Flynn. Yes. To the degree that they met the
requirements for carrying their life insurance into retirement,
which for most people would mean having had insurance for the 5
years immediately preceding retirement, they would have been
able to take that into retirement even with a buy-out.
Ms. Norton. With the employer continuing to pay the
employee's share?
Mr. Flynn. For the basic insurance portion, yes.
Ms. Norton. Yes.
Mr. Flynn. Because for all optional insurance, of course,
it is all employee paid.
Ms. Norton. You say on page 4--you indicate on page 4 of
your testimony that in 1993 you were able to reduce the
employee's share of premiums almost 11 percent.
Mr. Flynn. For basic insurance, that's correct.
Ms. Norton. For basic, et cetera. And you gave some fairly
impressive rates, even giving the low cost of the insurance,
for the reduction.
Is that the first time there has ever been an employee
reduction?
Mr. Flynn. No, ma'am. In fact, there have been a series of
rate changes in the program since the program's inception.
Ms. Norton. What triggers a reduction in premium cost to
employees?
Mr. Flynn. Well, it is essentially the experience of the
program, and the claims that it pays out. There is also a trend
that we have seen over the history of this program of decreased
mortality for the group of people who are insured, and so that
contributes to that.
If I have it correctly--I don't see it right in front of
me, but there have been at least a dozen or so premium changes
in the program over the 43-year history of the program. The
first----
Ms. Norton. Improvements, changes downward?
Mr. Flynn. The first two involved premium increases and
ever since then they have been premium decreases.
Ms. Norton. How many reinsurers are there?
Mr. Flynn. There are currently 47 reinsurers participating
in the program.
Ms. Norton. Has that been the number all along?
Mr. Flynn. No. They have been much higher. As recently as
the late 1980's, I believe, there were 130 or so.
Ms. Norton. No beneficiary need be named apparently, here,
and according to the MetLife testimony that increases the
costs, the administrative costs of the program.
There must be a reason why that's there. It's very unusual.
Mr. Flynn. You raise a very good point that I will relate
back to a point you made earlier about educating people about
the importance of this program and their responsibilities under
it.
No beneficiary need be named but, of course, we encourage
very strongly that people review their designations of
beneficiary, not only for the life insurance program, but for
the retirement program as well, periodically, to make sure that
those designations reflect their intent.
When a designation is not made by an individual, there is,
under Federal law, a standard order of precedence which begins
to come in.
Ms. Norton. What--let's say you were a private company.
Would you have to name a beneficiary? Do all private companies
make you name a beneficiary?
Mr. Flynn. I don't know whether all private companies make
you name a beneficiary. I think our position, as the employer,
would be the same as any private company, and that is, we want
people to designate a beneficiary. But I think even in private
companies, there are occasionally problems with those
designations that may cause order of precedence to take over.
Ms. Norton. See, when you did the open enrollment and
people who only come in when they have an adverse event and
that increases the cost of the program, you don't want to do
that and you try to keep that from happening.
Now, not writing on a piece of paper who your beneficiary
is increases the cost of the program. It is absolutely
painless. And since this is mandatory and since everybody wants
in, I cannot understand why we won't increase it 1 cent because
somebody hadn't written down somebody's name somehow. I mean,
there must be a policy reason for it. If there is a policy
reason for it, then I can accept it. But if it is the cost of
the program, simply because there is always a legal procession,
a legal way to find a beneficiary, then I wouldn't understand
that.
Mr. Flynn. Ms. Norton, you raise absolutely a good point.
If there is a way for us to get to that point, and it offers us
the potential that we see in terms of reducing the
administrative costs of the program, I would agree with you, we
should be there and we ought to look for ways to get there.
Ms. Norton. I wonder if you would provide for the record
whether--or how much the cost of the program might be reduced
administratively if people were only asked to put somebody's
name down, their dog's name down, anybody's name down, and if
you would give that information to the chairman of the
committee. And perhaps if you find that there is a significant
reduction in cost, would you consider passing that cost on?
Mr. Flynn. Absolutely.
[Note.--The requested information has not been made
available to the subcommittee.]
Ms. Norton. Reduction on. I am sorry.
Mr. Mica. I thank the gentlelady and yield now to the early
arrival on our side of the aisle, the distinguished gentlelady
from Maryland, Mrs. Morella.
[The prepared statement of Hon. Constance A. Morella
follows:]
[GRAPHIC] [TIFF OMITTED] T2717.012
[GRAPHIC] [TIFF OMITTED] T2717.013
Mrs. Morella. Thank you. Thanks, Mr. Chairman.
I am not going to really pose any significant questions
now. I am going to wait for the next panel. But I do think it's
very appropriate that you called this hearing. I knew FEGLI is
a very popular program, but it is very appropriate that we
periodically look at it and see how it is working and whether
or not any changes are necessary and ask the appropriate
questions.
I wanted to thank you, Mr. Flynn, for meeting with me a bit
ago with regard to a constituent, Mr. Godinsky, that had to do
with legislation that I introduced to allow retirees with
dependents with severe disabilities to retain their additional
optional life insurance, and under the current system it is
phased out.
I remember that you said that at that time that it would be
more appropriate to do it across the board rather than, you
know, case-by-case, as it was appropriate.
I wonder--your comments about why it would be, would it be
less expensive or any comments you may have on that? Because I
am going to ask the same question of MetLife.
Mr. Flynn. Sure. Well, Mrs. Morella, in fact, when we met
on this particular matter, it had to do with enabling
individuals to continue their optional life insurance after the
age of 65. And as we indicated in our meeting, we had no
substantive objection to that inasmuch as the cost of all
optional insurance is borne by the individual policyholder.
It struck us, however, that inclusion in that proposal of
some of the features associated with eligibility would require
additional administrative cost on our part to make sure that
only eligible people were electing to extend this optional
insurance without any particular benefit for those costs of
administration.
So, we felt that perhaps the individual issue that you were
interested in could best be handled by a broader and less
administratively expensive provision that would enable the
continuation of that optional insurance past the age of 65.
Mrs. Morella. Again, thank you for your advice on that and
for the meeting.
Is there anything that you--I don't know whether you
mentioned it before, any changes you would like us to look at,
I mean, beyond what Delegate Norton has just mentioned? Are
there things we should be looking at?
Mr. Flynn. Well, there are a number of things that we have
had discussions with others on. I know that you have a
particular interest, and Ms. Norton had mentioned earlier,
about designations of beneficiary and the need to keep them
current. I know that you have a particular interest in those
matters when it comes to marital divorce, separations and
things like that----
Mrs. Morella. Right. Right.
Mr. Flynn. And looking for an easy way to administer court-
ordered divisions of property. I think that's an area where we
probably would benefit from some additional discussions.
Further, we do have some dissimilarities between, for
example, the life insurance program and the health insurance
program in terms of the definition of dependent children who
are eligible for coverage. Some further discussion about
clarifying and perhaps synchronizing those definitions would
help as well.
Also, I note from some of the testimony that has been
prepared in advance by others that when you look at family
insurance policies, and we do have a family insurance option in
the life insurance program, generally speaking a $10,000
benefit for spouses and a $5,000 benefit for dependent children
seem to be sort of the norm. The Federal program benefits are
about half that.
Inasmuch as these benefits are primarily used to cover the
cost of funeral and associated expenses, it might be worthwhile
to look at whether or not the limits in the Federal program are
adequate reflections of the cost of those items. But those are
the kinds of things that I think are important.
I mentioned before you arrived that we are also undertaking
a large study of benefit practices across a broad range of
programs and the evolution in those benefit practices among
private employers to make sure that the Federal program stays
competitive. And, of course, we will look at life insurance and
life insurance variants as part of that as well.
Mrs. Morella. Thank you very much. That was an excellent
synopsis of those points. Thank you. Thank you, Mr. Chairman.
Mr. Mica. Thank you. I yield now to our vice chairman, Mr.
Pappas.
Mr. Pappas. The late arrival.
Thank you, Mr. Chairman.
I am pleased to be here today to talk about an issue that I
think is important to so many of our Federal employees and
their families. And I guess I just have one or maybe two
questions. But one is: Could you give me and the rest of the
members of the committee an idea of the level of complaints
that are received with the present system?
Mr. Flynn. I would characterize the level of complaints
received with the current system as virtually nonexistent. I
think there are a number of reasons for that. We have very high
accuracy rates. We have very responsive service levels and
things of that nature.
The complaints that I have seen more often than not, and
they are literally the types of things over the past 3 years
that you can count on your fingers and toes, have to do with
issues in disagreement about who the appropriate beneficiary
was and whether or not benefits were paid properly, that sort
of thing. But, there are very, very small in number and
generally things that can be worked out where needed.
Mr. Pappas. Would it be safe to say, because I know that
some have said that some of the younger people who could
participate in this may not be, and going elsewhere because of
the cost, could you provide your understanding as to why that
may be taking place?
Mr. Flynn. Sure, I will try and do that. If I could just,
for a second, divide the program into the basic life insurance
component and the optional life insurance component.
If a young person looks at this program and tries to
compare it to group term insurance that he or she might be able
to purchase outside of Government, they are likely to see some
differences. One of the reasons they are likely to see some
differences is because, on the basic insurance side of the
program, premiums are not age-based; it is a level premium
regardless of your age. And so the older you are, the more you
benefit from that, and the younger you are, the less you do.
But part of the group insurance principle for basic
insurance is that we provide that insurance to everybody,
irrespective of their age, at the same rate.
There are also some features of the Federal Employees Group
Life Insurance Program basic component that are unlike features
that you would find, say, from an insurance agent who is
selling term life insurance. For example, we have already
talked about underwriting and insurability, things of that
nature.
In addition, part of the cost of the premium for basic
insurance goes to, in effect, pre-fund a post retirement
insurance benefit after age 65 for which no premiums are
collected once the individual reaches the age of 65. So young
people will see that differential.
And, in part, to respond to that, for people who are
enrolled in the group life insurance program under the age of
45, we provide additional insurance, starting at two times the
basic insurance amount until age 35 and then gradually
decreasing the extra coverage until someone reaches the age of
45, as an inducement to participate in this program, even
though the premiums might be a bit more than what they would
pay outside.
And then just finally, on the optional insurance side of
the program, those premiums are age-based in 5-year increments
and, in fact, for what they are, they are quite competitive
with things that you would find outside Government.
Mr. Pappas. Thank you. Thank you, Mr. Chairman.
Mr. Mica. Thank you.
Mr. Flynn, just a couple of questions. One of the things
that has interested me is not only competition, but some other
options in providing life insurance coverage for our employees
at as reasonable a rate as could be available on the open
market, or certainly we could put together a sizable group that
would be fairly attractive.
Do you think that FEGLI could compete with any other
parallel program?
Mr. Flynn. I think, Mr. Chairman, the answer to that is if
you look at a comparable level of benefits, the premiums
charged in this program for the benefits are extraordinarily
competitive.
Mr. Mica. OK. One of our responsibilities as an oversight
committee is to look at any changes that we might recommend in
the law. You said that you work under the constraint of law. I
noticed the 1980 FEGLI law established the original optional
insurance known as standard life and provides for, say, a
$10,000 life insurance, an equal amount of accidental and
dismemberment coverage. I am reading some of the provisions
here under the OPM description of the program. But, again, the
parameters, the benefits and some of this is set by law.
I know we have made some changes and modifications. Do you
have any other recommendations or could OPM look at this as
something we should pay attention to in changing some of the
benefits investments?
We now have all the investments in one limited pot, as you
described today. Can you look at that--or do you have any
recommendations you might give us today?
Mr. Flynn. Well, absolutely, Mr. Chairman. I mentioned to
Mrs. Morella a few minutes ago several areas where I think some
further discussion might be useful in this program, and also
the study that we have underway looking at the evolution of
benefit design practices by private employers. That may very
well lead to some legislative proposals that we would be more
than happy to discuss with the committee.
Mr. Mica. Another thing, our panel looks at the whole
picture of civil service and employment. At some recent
hearings we saw how many part time, temporary employees and
other employee activities that we haven't seen in the past, but
we are going to see more of in the future. And many of these
folks, I understand, don't have access to some of this
coverage. Is that correct?
Mr. Flynn. I believe this is correct, Mr. Chairman.
Currently, virtually any Federal employee, except those who
come in under temporary or intermittent appointments, are
eligible to participate in the life insurance program. The
nature of temporary appointments--temporary employment, if it
is done properly--or the nature of intermittent employment, is
such that one might argue against providing that coverage. But
this is an area that I think does bear looking at.
Mr. Mica. We have had instances.
Mr. Flynn. Yes.
Mr. Mica. I think Ms. Norton had an individual that was
part time or temporary for years and years, and didn't we pass
some special legislation?
Ms. Norton. Yes, special legislation.
Mr. Mica. Yes. But, there is a change in the private
workforce. There is a change in the Federal public workforce.
And we should be setting an example, not reacting to disaster.
So I would like to have you all----
Ms. Norton. Would the chairman yield?
Mr. Mica. Yes.
Ms. Norton. Has the law been changed so that we cannot, in
fact, keep temporary employees on for--past a certain temporary
period?
Mr. Flynn. That's true, Mrs. Norton.
Ms. Norton. What is that period?
Mr. Flynn. I believe temporary appointments cannot exceed 1
year. And if they do, there are certain provisions that go into
effect so as to avoid the kind of situation that occurred with
the gentleman that worked for the National Park Service.
Mr. Mica. Well, we need to look at this whole area since we
have new categories, and ascertain if there are areas that can
be improved; also the possibility of opening up other options
or even discussion of privatization investment of these funds,
options to get a better return. Maybe we could reduce premiums,
or increase benefits. I think we need to have some additional
discussions with you in that direction.
Are there additional questions? Mr. Cummings.
Mr. Cummings. I want to followup on the question that Ms.
Norton just asked. You said that we have these restrictions now
with regard to what defining ``temporary'' is. Is that right?
Mr. Flynn. That's correct, sir.
Mr. Cummings. And you also said that the new--the
provisions of this law--I take it that this is a law--would
protect against certain situations from occurring; is that
right?
Mr. Flynn. That's correct, sir.
Mr. Cummings. Now, I just want to go on that for just a
moment. Do we have--say, for example, if that employee is there
for more than a year, I want to know does he then become--does
his title become something else other than temporary? And then
how does the insurance--this whole life insurance situation
work into that, if at all?
Because I think that's what the chairman was sort of
getting to, too. If you have an employee who has been there for
a long period of time----
Mr. Flynn. Right.
Mr. Cummings [continuing]. And temporary is abused----
Mr. Flynn. Right.
Mr. Cummings [continuing]. And the person is there without
benefits, just talk about that for a little while so I can
understand it.
Mr. Flynn. And if you don't mind, sir, what I would like to
suggest, because appointments per se, whether they are full-
time or part-time or what have you, are not currently my
particular area of expertise----
Mr. Cummings. I understand that.
Mr. Flynn. What I would like to do is coordinate with the
office that deals with appointments and the benefit issues that
are associated with that.
Mr. Cummings. Sure.
Mr. Flynn. And perhaps provide that for the record, if
that's agreeable.
Mr. Cummings. That would be good because, see, that goes to
the very issue that the chairman was just talking about. I
mean, if we have got people who are on longer and they, for all
intents and purposes, become a permanent employee----
Mr. Flynn. Right.
Mr. Cummings [continuing]. I would like to see how the
benefit structure works into that, if at all.
And you will get back to us with that?
Mr. Flynn. Yes, sir, we will.
[Note.--The requested information has not been made
available to the subcommittee.]
Mr. Cummings. All right. One other thing, can you just tell
us the role that State Street Bank plays in the payment of
benefits?
Mr. Flynn. My understanding, sir, is that the State Street
Bank is the agent that the Metropolitan Life Insurance Co. uses
following the disbursement of life insurance proceeds from the
group life insurance program to the beneficiary.
This program was established a couple of years ago.
Essentially, if the proceeds to a beneficiary are over $7,500,
those proceeds, with the beneficiary's agreement, are deposited
into a money market account, immediately made available to the
beneficiary, and I believe the State Street Bank administers
that program for Metropolitan Life.
Mr. Cummings. And so that relationship is one between
Metropolitan Life and State Street and not OPM and State
Street; is that right?
Mr. Flynn. You are absolutely correct. That is a private
relationship following the disbursement of the proceeds of the
life insurance policy.
Mr. Cummings. So you all--when you all talk about--you said
that you all negotiate with MetLife. Does that issue--does that
come up at all? Is that just like a part of the process, almost
like it is their procedures and that you don't even get into
that? Do you ever ask----
Mr. Flynn. The establishment of this particular mechanism
for paying beneficiaries----
Mr. Cummings. Yes.
Mr. Flynn [continuing]. Is something that came up between
us and Metropolitan Life and is something that we agreed to.
And the reason we did, quite honestly, was because it offered
us a way to reduce the administrative expenses of the program.
In addition, it offered to the beneficiaries more security than
they had getting a check in the mail, and also gave them time
to decide how best to use those proceeds and, while they were
deciding, to earn some interest.
Mr. Cummings. I noticed on one of our panels we have a
representative from State--from MetLife coming on and maybe
this is a better question to ask them, but is there any kind of
competitive bidding, to your knowledge, with regard to that
service that State Street performs? Because I am sure there are
a lot of companies that would love to have that opportunity.
Mr. Flynn. Not to my knowledge. That particular arrangement
is a subcontracted arrangement. It wouldn't normally be
something that we would have oversight of.
Mr. Cummings. Can you tell us how many State Street earns
by doing this? Do you have that information?
Mr. Flynn. I do not, sir.
Mr. Cummings. Will you get that to us, please?
Mr. Flynn. I will.
Mr. Cummings. All right. Thank you.
Mr. Mica. Thank you. Mr. Pappas.
Mr. Pappas. Mr. Chairman, I just have one other final
question before we let you go. What is the beneficial plan and
Shenandoah Life's role in it?
Mr. Flynn. I am going to reach back into history, and if
you don't mind, if my answer on reflection turns out not to be
full enough I might augment that for the record.
Mr. Pappas. OK.
Mr. Flynn. But in 1954, when this program was established,
Group Life Insurance, as an employer-sponsored benefit, was
around in the country but was not anywhere near--didn't have
anywhere near the degree of acceptance and universality that it
does today. And because there was not a group life--employer-
sponsored group life insurance program available for Federal
employees, there was--there were created a series of what we
now characterize as beneficial associations; essentially,
people paying in to a fund and that fund--the purpose of that
fund would be to pay benefits, defray funeral expenses, what
have you, for Federal employees who passed away, and their
families.
When this program was created, in addition to creating a
single program to meet the life insurance needs of Federal
employees, the obligations of these beneficial association
programs sort of all got gathered into one and the Shenandoah
Life Insurance Co. administered it in a closed system pay-it-
out kind of basis.
That increasingly is a smaller and smaller part of the
program and for all practical purposes is financially
immaterial in terms of the effort that we have underway for
life--for the Federal Employee Group Life Insurance Program.
Mr. Pappas. Thank you.
Mr. Mica. Ms. Norton has no further questions.
Mrs. Morella.
Mrs. Morella. No, Mr. Chairman.
Mr. Mica. No further questions.
Well, we want to thank you for being with us today. We have
a number of questions from the panel that we would like a
response from you and OPM, and also convey to Mr. King that
this is an area we would like to further discuss with him as
Director.
Our goal here is just to ensure that we, you know, give the
best possible premium both to the taxpayer and the best benefit
to the employee and also responsibly oversee the program. So we
thank you for being with us. You are excused.
[The information referred to follows:]
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Mr. Mica. And I will call our second panel.
Mr. Flynn. Thank you, sir.
Mr. Mica. I would like to welcome Margery Brittain, vice
president of the Group National Life Accounts at MetLife; G.
Scott Cahill, CLU, chief executive officer of the James B.
Greene & Associates; and Barnett Chepenik, president of the
Lincoln Financial Group. If all of the witnesses could come up.
As I explained to our previous panel member, this is an
investigations and oversight committee, so if you will remain
standing and raise your right hand.
[Witnesses sworn.]
Mr. Mica. The record will reflect that the witnesses
answered in the affirmative.
I would like to welcome all our panelists today and
witnesses. We try to have our panel members and witnesses
summarize their statements. If you have a lengthy statement
that you would like to have entered into the record, we would
be glad to do that.
We have two small panels today so we won't hold you to the
5-minute rule, but we appreciate your summarizing.
And we are pleased to hear, first, from Ms. Brittain with
Group National Accounts at MetLife. You are most welcome and
you are recognized.
STATEMENTS OF MARGERY BRITTAIN, VICE-PRESIDENT, GROUP NATIONAL
ACCOUNTS, METLIFE; G. SCOTT CAHILL, CLU, CHIEF EXECUTIVE
OFFICER, JAMES B. GREENE & ASSOCIATES, INC.; AND BARNETT I.
CHEPENIK, PRESIDENT, LINCOLN FINANCIAL GROUP, INC., CHEPENIK &
ASSOCIATES, INC.
Ms. Brittain. Thank you, Mr. Chairman. I am very pleased to
be here today to address the subcommittee's request for
information, and as the chairman has indicated----
Mr. Mica. Could you excuse me. Pull the mic up a little bit
closer. Thank you.
Ms. Brittain. Is that better?
Mr. Mica. Yes.
Ms. Brittain. I am very pleased to be here today so thank
you, Mr. Chairman, for the warm welcome. As you have indicated
in your introduction of me, I am part of MetLife's Group
National Accounts Organization and I was recently made
responsible for the contract which we have with OPM relative to
the FEGLI program.
I know you have requested information from us in the
following three areas: MetLife's role in the program; a
comparison of the Federal plan to group life plans offered by
other large employers in the private and public sectors and
information about alternative insurance options which are
available in today's large group life insurance marketplace.
And I would like to very briefly address each of these topics.
First, MetLife's role in the FEGLI program. At the
inception of the program in 1954, MetLife was chosen as the
primary carrier because it was at the time the largest group
life insurance carrier in the United States. MetLife has
retained this leadership position over the years and today we
have $1 trillion of group life insurance-in-force.
The FEGLI program is administratively unique in four key
respects: The program is unique in how the benefit plan is
designed. The benefits are determined by law.
The program is unique in terms of its size. MetLife pays
approximately 85,000 FEGLI claims per year.
The program is also unique because the customer comprises
millions of individuals in hundreds of locations literally
throughout the United States and around the world who are
affiliated with multiple Government agencies.
And also the program is unique because, and this was
touched upon earlier, it does not require a beneficiary
designation and this does significantly increase the complexity
of FEGLI claim administration.
For almost 43 years, MetLife has proven its commitment to
providing outstanding service to FEGLI participants and their
beneficiaries. We believe that continuing this relationship
provides significant advantages to the program and to the
Federal Government.
MetLife's expertise has proven particularly valuable in
handling the types of disasters that Ms. Norton mentioned in
terms of the Department of Commerce airplane crash in Europe.
We are also quite aware these days of the recent Oklahoma City
bombing and, of course, we can all generate our own examples of
other unfortunate events.
Through its employees, MetLife provides the institutional
memory that is especially critical for the effective operation
of such a unique and complex group life insurance program.
In consideration of the claim cost and the administrative
tasks that we perform, MetLife is paid a monthly premium from
the FEGLI fund. This premium is set annually by agreement of
OPM and MetLife and it is intended to cover the estimated
claims expense for the program, MetLife's allowable
administrative expenses, the service charge to which MetLife is
entitled, a small investment management fee and applicable
Federal income taxes.
To put the payments to MetLife in perspective, it is
important to recognize that claims paid under the FEGLI program
currently amount to approximately $1.6 billion per year. In
fiscal year 1996, MetLife's administrative expenses amounted to
approximately 0.6 percent, or six-tenths of 1 percent of paid
claims.
I would like to focus now on the subcommittee's request for
information about life insurance programs provided by other
large employers. For purposes of responding to this request, we
reviewed a sample of our large group business and active
prospect files for group life insurance programs.
My written statement does summarize the results of our
review in the following areas: Types of coverage and
contributions; dependent life benefits, funding arrangements,
program administration and the cost of the program.
At this point, I would like to highlight three selected
findings. First, in our review of the types of coverages and
contributions, we found that the design of the FEGLI program is
generally consistent with that of other large public sector
employers. But it differs in some respects from the large
private sector plans we have reviewed. Specifically, in the
private sector, the vast majority of employers pay 100 percent
of the cost for basic term life coverage equal to an employee's
annual salary or earnings.
Supplemental life benefits offered in the private sector
are typically employee pay all, as is the current FEGLI plan
and many public sector plans, but in the private sector
supplemental life benefits often include group universal life
coverage.
Second, in our review of evidence of insurability or
medical underwriting requirements among the programs that we
looked into, we found that in both public and private sector
plans open enrollments are rare. By contrast, the FEGLI program
offered open enrollments in 1985, 1993 and 1995.
And third, unlike the practices which prevail in the group
health insurance environment, both private sector and public
sector employers typically select only one insurance company to
administer their group life program. This is primarily because
of the absence of the delivery of care component from the group
life insurance programs and the specific desire for consistent
claim administration and cost efficiency.
Finally, turning to alternatives available in the large
group marketplace, my written statement identifies four trends
of note.
At this point, I would just like to comment that as the
company of choice for 55 out of the Fortune 100 corporations,
it is MetLife's perspective that those employers with the most
successful employee benefit plans are those which design the
plans to address both the individual employer's workforce needs
and its business needs.
I appreciate very much the opportunity to present these
comments to the subcommittee on behalf of MetLife. Thank you.
[The prepared statement of Ms. Brittain follows:]
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Mr. Mica. We thank you for your testimony. And we will now
hear from Scott Cahill, chief executive officer of the James B.
Greene & Associates. You are recognized.
Mr. Cahill. Thank you, Mr. Chairman. Mr. Chepenik is going
to give our testimony.
Mr. Mica. OK. We will hear then from Mr. Chepenik.
Mr. Chepenik. Thank you, Mr. Chairman and distinguished
members of this subcommittee. Good morning.
For the record, I am president of Chepenik & Associates and
affiliated with the Lincoln Financial Group.
We thank you for the opportunity to give testimony to this
committee. As I understand it, our charge is twofold: To
compare the FEGLI program with life insurance programs offered
by large employers in the private sector and to discuss any
financially feasible alternative insurance options for civil
service employees.
We have prepared a chart titled ``Compare the FEGLI Program
with the Life Insurance Programs Offered by Large Employers in
the Private Sector'' to be used as a guide during the portion
of this testimony.
Our research in the FEGLI program consists of a fiscal 1993
statistical abstract and a paper entitled, ``Federal Employees
Group Life Insurance,'' dated April 1997.
The private sector data comes primarily from three sources:
Our data on Fortune 500 companies, group life insurance
carriers that cater to those companies and a report from
actuaries that we consult with frequently.
Please note that for this discussion that some companies
have gone on to full flex comp strategy whereby each employer
is awarded flex funds equal to some percentage of their base
salary. They are then able to use those funds to purchase
benefits that meet their particular personal needs. We have
disregarded data from companies who use a full flex approach to
benefits.
If you will refer to the chart, we can look at the benefits
and options and compare the FEGLI program to the private
sector. If I may direct you to the basic life, which is term
insurance, you can see that the FEGLI program provides a one-
time salary with $136,000 maximum benefit. Notation one at the
bottom refers to the fact that employees under age 45 receive a
greater benefit than one-time salary under the basic FEGLI
program. This is very uncommon in the private sector.
If you look at the private sector, we see that the basic
term life insurance is also typically one-time salary. However,
we are able to get the maximum guarantee issue amount up to $1
million as indicated by notation No. 2 at the bottom.
Through skilled negotiation, we are able to provide the
most competitive underwriting concessions, optional benefits
and costs to the client companies.
Under the FEGLI program, the basic term benefit is funded
33 percent by the employer and 67 percent by the employee. In
the private sector, we typically see the employer paying 100
percent of the basic term cost.
The first optional benefit is optional term life.
Typically, it is a multiple of salary on a guaranteed issue
basis. This seems to be consistent between the FEGLI and
private sector programs and both are funded similarly. However,
in the private sector, we usually negotiate for an annual open
enrollment. This allows each participant the opportunity to buy
up or down annually on their optional insurance. Under the
FEGLI program, this appears to take place periodically.
The Dependent Insurance Program under FEGLI provides $5,000
for the spouse and $2,500 for each child regardless of the
number of children. This benefit is funded 100 percent by the
employee. In the private sector, we have seen benefits vary
from no dependent benefit to up to $200,000 on the spouse. We
feel the dependent insurance plan in the FEGLI program is
competitive with that found in the private sector. However,
there is an opportunity to tailor a program to offer additional
competitive life insurance benefits purchased at the work site.
The next item is post-retirement benefits. The FEGLI
program has three options: 25 percent of final pay, 50 percent
of final pay and 100 percent of final pay. The FEGLI program
appears to be competitive with the private sector. The trend in
the private sector has been to move away from providing post-
retirement life insurance benefits.
Since there is a tremendous, if not increasing, need and
demand for post-retirement insurance benefits, the private
sector has been addressing this with very competitive permanent
type life insurance policies referred to as group universal and
variable life insurance policies.
The next item is optional permanent life insurance. The
FEGLI program, to the best of our knowledge, does not offer a
permanent product. This is defined as one that would have cash
value.
The group universal and variable life products are shown
under the private sector. These are 100 percent funded by the
employee and can be tailored to the employee's need. We often
see these policies fully funded during the employee's working
life so the employee would retire with a cash value policy that
would potentially require no future premium deposits. These
policies also have a feature to annuitize should the retiree
decide to receive an income stream from the policy as opposed
to providing a death benefit for his or her heirs.
The next benefit is accelerated benefits. Under the FEGLI
program, this appears to only apply to the basic life and is
funded in the same proportion. The private sector typically
provides accelerated benefits for both basic and optional
benefits.
The basic is 100 percent employer-funded and the optional
is 100 percent employee-funded. There are still a few insurers
that do not offer the accelerated benefits, but overall the
competitive group carriers are offering this option.
The last item is the conversion. The conversion option is
available under both programs and is funded by the employee in
both situations. Group conversion policies are typically the
least competitive that we see. This is due to the fact that
they are almost exclusively adverse selected; i.e., if someone
is--if someone can purchase a policy elsewhere, they will
because it will be less costly. Therefore, only the uninsurable
or the highly rated individuals seek group conversions.
The group universal and group variable products are
automatically convertible at the same group discounted rates
and avoid the need for the conversion feature. From this
discussion, I think we have learned that an optional group
permanent life insurance policy would be financially feasible
since it would be funded by employee contributions.
As we look to the private sector, we see significant
participation rates and good retention shown with the low lapse
rates, indicating that the private is well received by the
participants.
With this data and discussion before you, Scott Cahill and
myself would be pleased to entertain questions and enjoy an
open discussion on this information.
[The prepared statement of Mr. Chepenik follows:]
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Mr. Mica. Thank you for your testimony and also for your
work in preparing this comparison for us.
I would like to ask a couple of questions first of Ms.
Brittain. Can you summarize for us the major differences
between the management of FEGLI and the life insurance programs
that you manage for large employers in the private sector such
as General Motors? What is the difference?
Ms. Brittain. Sure. I would be happy to do that. I think
one of the earlier questions in part of the interchange and the
testimony of Mr. Flynn discussed the issue of benefit plan
design. I think one of the greatest differences here is that
the benefit programs, the actual amounts payable to individuals
who choose to participate in a program, are defined by law.
That's very unique. We have no equivalent, that I am at all
aware of, in the private sector.
So contrary to a normal interchange, with some of our
largest clients, where there are regular discussions about new
benefit offerings or benefit redesign, we find that this
particular customer has some constraints, by definition of the
program, that really make that not an agency-only type of
decision.
So that is very different in terms of our interaction as an
insurance carrier, with our customer, as well as in terms of
the program management. There are not a lot of benefit
revisions that we are regularly placing.
However, having said that, we have heard the testimony this
morning about the evolution of the program and that is very
typical compared to the private sector, where for large groups
some number of years ago, the one-size-fits-all concept was
very typical in benefit plan design, and we do see the
evolution toward more employee choice. And certainly that is
something that has occurred with the benefits provided to
Federal employees.
However, as we just heard, in the private sector, that
employee choice component now includes more permanent type
insurance, cash value type insurance kinds of benefits.
Mr. Mica. Does OPM seek your professional advice regarding
additional options and alternatives they may want to consider
for Federal employees?
Ms. Brittain. Yes, they do, on a regular basis. We are also
aware that they are conducting the survey not just for the life
insurance program, but for all benefits, and that's often
helpful for us to hear about if there might be a change in
health benefit offerings or so forth, if that triggers an idea
of how we could gain some consistencies and clarifications for
Federal employees eligible for multiple programs.
Mr. Mica. And you also suggest to OPM certain options that
are being offered by private employers?
Ms. Brittain. We do and on a regular basis we are actively
looking at that.
Mr. Mica. Do they have enough flexibility within the
confines of the law to adequately pursue some of those options,
or do you find limitations?
Ms. Brittain. Well, the law is very specific, and I
understand it governs the program.
Mr. Mica. I know. But should we have more flexibility given
the range of new options and the evolution of insurance
coverage and benefits? Are we dealing with antiquated
restraints? Could we do a better job if we went back and
modified some of these provisions?
Ms. Brittain. The private sector does have more flexibility
and we have seen the trends that large employers, such as the
Federal Government, have implemented. So I think that would be
something that this committee could look at.
Mr. Mica. So you think we could go back and look at how the
law is written and the constraints that we have----
Ms. Brittain. Yes.
Mr. Mica [continuing]. That we make you operate under?
Now, you mentioned some of your expenses in your testimony.
You said you have an investment management fee on page 4. I
heard you quote that was one of the expenses you charge off.
What is that for?
Ms. Brittain. Yes. We manage a very small portion of the
funds that support or back the FEGLI program and we receive a
fee which really just covers our expenses for managing that
program. It is 2\1/2\ basis points and it is roughly in the
neighborhood of $100,000.
Mr. Mica. Also, I think you heard my question to Mr. Flynn,
about the increase in the administrative costs from 1994 to
1995, which he said, is currently under review. Is there any
reason why there should be a 30 percent increase? Was there
something exceptional that occurred in that period?
And also in operating expenses, you also had a significant
increase, from $8 million to $10.8 million. Any light you could
shed on that for the subcommittee?
Ms. Brittain. Sure. I can comment on the differential
between the $6.6 million that was referenced in 1994 and the
$9.2 million referenced for 1995. The larger totals relative to
operating expenses go beyond the MetLife expenses, and I think
Mr. Flynn could perhaps best shed further light on that. But
the MetLife expenses did increase significantly, as reported to
OPM, in 1995 as compared to 1994. And there are two reasons for
that.
One, significantly more work was done in 1995 because of
the open enrollment and, two, there was a bookkeeping timing
issue so that some of the charges that otherwise would have
been applied in 1994 did not get applied to the program until
1995.
Regardless of that, though, I would like to also comment
about the area of administrative expenses. It is certainly, in
the business that I conduct in the private sector, a focal
point for all of my clients, and we give that serious
attention. We have, as the committee has been informed this
morning, instituted an administrative expense ceiling for the
current fiscal year for the FEGLI program. And we are also, as
a company, and I think this has been widely made public,
aggressively re-engineering our business and restructuring our
support staff so that we can reduce our administrative costs.
Mr. Mica. I have sort of an open-ended question for Mr.
Cahill and Mr. Chepenik. You have had an opportunity to look at
the FEGLI program, so what one or two things would you
recommend that we change that would improve the program, just
general observations you might convey to the subcommittee? Mr.
Cahill, anything?
Mr. Cahill. Yes, sir, Mr. Chairman. After speaking with
three actuaries, several benefits departments and our own
knowledge in working in the private sector, large group life
carrier cases, we have come to the conclusion that I think you
would like to consider or may need to consider some group
permanent type of life insurance policy that will allow the
employees to dial up or dial down their death benefits for
themselves and then also some portable features for their
spouses and children.
That would solve some of the problems that Mrs. Morella
alluded to earlier as far as conversion after age 65, the
optional piece. So that's the biggest piece.
A lot of other things I didn't understand as far as the
pricing structure. It seems that the current pricing structure
could allow for adverse selection, the fact that it overcharges
the young and undercharges the older. But I don't understand
enough to make that charge.
Mr. Mica. Thank you. Mr. Chepenik, did you have anything
you wanted to add?
Mr. Chepenik. No. I think I will go with the comments that
Mr. Cahill has made.
Mr. Mica. Thank you. I will yield now to the ranking
member, Mr. Cummings.
Mr. Cummings. Yes.
Mr. Cahill and Mr. Chepenik, talk about open enrollment and
how significant that is. I mean, in--you briefly talked about
it in your statement. But talk about the private sector and do
you have any concerns with regard--what are your concerns, if
any, with regard to the open enrollment situation with regard
to this program?
Mr. Chepenik. I will go first, and I think Mr. Cahill
probably will add to this.
We typically, in handling a large group, annually from a
competitive standpoint, negotiate with that incumbent carrier
in getting an open enrollment. If we don't have success with
the incumbent carrier, if necessary, as a last resort, we
always have the option to change to a new carrier, which
automatically gives us an open enrollment. And it is usually
not--most large cases do not change on a yearly basis. They
often go long-term. So it gives us the ability to negotiate.
One of the advantages you do have, I guess, in the private
sector is that you--as evidenced from both testimonies, that
most of the employers in the private sector do pay 100 percent
of the at least basic life costs, rather than the two-thirds/
one-third. So that you have got a nucleus to start with. Even
if you don't have 100 percent paid for, you always have the
attention of the insurance companies and they are willing to
negotiate.
So it is price-driven and the ability to reopen the door to
add those few people, or whatever percentage, typically less
than 25 percent that might have declined the coverage.
Mr. Cummings. So I take it that you all--you consider that
having flexibility with open enrollment to be of some
significance; is that right?
Mr. Chepenik. Very, very significant.
Mr. Cummings. Did you have something, Mr. Cahill?
Mr. Cahill. No. I agree with those comments.
Mr. Cummings. Do you think--you have heard the testimony
with regard to the program with regard to open enrollment. I
mean, do you think that this is too restrictive?
Mr. Chepenik. I would--the three of us, one person behind
us who is not testifying today, and Mr. Cahill and myself spent
8 hours yesterday talking about the program. We would--we wish
they had the opportunity to make recommendations on changing.
We didn't realize the Government really sets down the basic
guidelines, because we would probably bring some ideas to the
negotiation table to redesign and make some more modern items,
modern techniques, provided in a new design program.
Mr. Cummings. So am I hearing you right that at this
moment, there are some--there are things that you would
recommend; you are not necessarily prepared to make the
recommendations right at this moment? Is that--am I hearing you
right? Would you be kind enough to get those recommendations to
us when you can?
Mr. Chepenik. Gladly.
Mr. Cummings. We would appreciate that.
Let me go to you, Ms. Brittain. Following up on something
that the chairman was talking about, he asked you about
possible recommendations for benefits and he talked about--he
questioned you about the constraints of the law. And I am just
wondering, are there things that we could do in changing the
law to loosen the constraints and at the same time increase
benefits without increasing premiums?
Ms. Brittain. I would be happy to comment on that. Thank
you for the question.
I think that some of the things that might be considered if
you were looking to increase benefits without increasing
premiums, the one point that was mentioned was the relatively
low maximum amount of term insurance that's currently provided
under this program, as compared to the size of the program.
That is something where the size of the program, I think, could
support a much higher maximum benefit with no significant
increase in cost.
That would certainly get to those individuals who are
looking to protect earnings, for example, in the event of their
demise and need family members to pay off mortgages or pay
education costs or things of that nature if the benefit itself
doesn't cover their total earnings or the appropriate ratio
that they are looking for or could find elsewhere. That's an
important matter.
Similarly, there was testimony provided about dependent
life benefits. That is something that would need to be priced
out specifically, but a lot of discussion was given about
family members, the changing workforce, the two-career earners
that we have now. That is something that while there may or may
not be a cost, if there is a cost, it would certainly be very
insignificant compared to the costs that are currently borne by
the program. And that is something where the benefit level is
not, for the most part, although as reported, and a MetLife
survey agrees with this, there is a wide variety of family
coverage out there. There are many private sector plans that
have more significant benefits for family members.
A third thing that I would like to comment on, in terms of
costs overall, certainly if employees of the Federal Government
are in need of permanent insurance or are in need of savings
vehicles, investment vehicles, greater flexibility of options,
a program such as a group universal life program sounds ideal.
It is, I think, important to note, however, when we are
talking about costs, that in addition to claim costs we also
have administrative costs, and there are two features about
group universal life programs that do generate some additional
costs.
One is that education piece that I know Ms. Norton is
particularly interested in, and that is that the program is
significantly different and more complex than what has
currently been in place. There is also a lot of flexibility, by
definition, with that type of arrangement. But the mechanics to
support it, particularly thinking about things like payroll
deduction, if you have multiple payrolls, if those payroll
systems are not able to easily extract premium funds and so
forth, especially variable premium funds, and get the insured
the coverage that he or she thinks they are purchasing when
they sign up for the benefits, that will dampen or, in fact,
perhaps if the administrative issues are significant enough,
negatively impact the success of that type of a program.
I am not saying that those should be limiting factors, but
I would just like to, while we are focused on costs, bring up
the point, because I think it is something that should be
reviewed in conjunction with any other aspect of that
particular program.
Mr. Cummings. Let me ask you this: Are there any--I am sure
each program is unique, but are there situations with MetLife
where people are paying about the same amount of premiums, but
getting greater benefits, say with the private sector?
Ms. Brittain. Yes, there are, but I would like to comment
as to why that might be the case. As we discussed a little
earlier today, in the concept of group insurance, particularly
in the large group insurance environment, the mortality of the
group, the actual claims and the amount of those claims--as a
function of the individuals that are insured and access those
benefits--really determines the largest portion of the cost of
the program. It virtually is the cost of the program.
So many large employers who have restructured and might
have entered new industries, such as telecommunications or
entertainment industries or so forth, whose workforce is very
young, very healthy, as a predominant factor, often who have
individuals who are very young and very healthy in high level
positions and so with the highest level of benefits, those
types of programs offer more insurance for the price that might
be similar to the Federal Government Group Life Insurance
Program.
Mr. Cummings. Well, let me ask you a little different way.
With a similar situation that we have with FEGLI, do we have
anything comparable at MetLife, I mean, that where people are
getting more benefits for the dollar?
Ms. Brittain. In our private sector business, we do see
many times basic life insurance being entirely paid for by the
employer. And that could have a positive impact on the cost.
The reason for this being that everyone would then
automatically be covered in the program and that would include
generally those younger, healthier employees that it was
mentioned earlier are the ones that either through a lack of
understanding of the importance of these benefits or for
whatever other reasons they might choose, in the case of the
current program, actually opt out of that program.
Having said that, I think it is important to note that the
90 percent participation, while in no way taking away the
attention that we must pay to those individuals who opt out and
do not participate, is a very high participation rate for a
program where the employee bears two-thirds of the costs.
Mr. Cummings. Just one last question. You said that the
no--and I may have missed this during the discussion.
Ms. Brittain. OK.
Mr. Cummings. You said that the no beneficiary designation
increases your costs. Is that right?
Ms. Brittain. I said it makes the program more difficult to
pay claims for, and I think by definition that would increase
our costs, yes.
Mr. Cummings. Can you talk about--I mean, do most people
designate a beneficiary or is it--I mean, would you know what
percentage that might be?
Ms. Brittain. I wouldn't know the percentage, but I can
find that out and provide that to you. But certainly, if a
beneficiary is designated and if the beneficiary designation is
properly completed, because there is some need for review to
make sure that it is an effective and appropriate designation,
then the payment of claims process is much more simple.
In the event that there is no beneficiary designation,
again--and this is prescribed, this procedure is prescribed--
there has to be a complex step 1, step 2, step 3 approach to
determine who is actually entitled to the benefits. Certainly
if that were eliminated, either through increased education or
through any other mechanism, I think that that would benefit
the program.
Mr. Cummings. Thank you very much.
Mr. Mica. Thank you. I yield to the gentlelady from
Maryland, Mrs. Morella.
Mrs. Morella. Thank you. Thank you all for testifying. I
value it.
I want to ask you, Ms. Brittain, about--tell me more about
your money market plan for beneficiaries.
Ms. Brittain. Certainly.
Mrs. Morella. And if you can get also into the investment
concept that you alluded to earlier. I am curious about it.
Ms. Brittain. OK. Briefly, it has been a tradition in group
insurance benefits, which we know were introduced relatively
some time ago in the early fifties, to offer beneficiaries what
is referred to as settlement options.
And the purpose of this is that a life insurance program
typically gives the average beneficiary, at a point of very
difficult trauma, grief and so forth, an amount of money that
might be greater than any sum that that individual might have
ever dealt with at one time. And it does so at a time when the
person is probably least equipped to make the best decision as
to what to do with those funds.
In the past, in the early fifties and sixties and
seventies, basically State laws, and I am simplifying for ease
of our discussion, required insurance companies to offer a
series of settlement options, such as an annuity or a limited
time payout of those large life insurance proceeds.
We surveyed our book of business during the seventies and
early eighties and found that very few beneficiaries were
taking advantage of those settlement options. In fact, we found
that the vast majority of beneficiaries were leaving checks for
a huge amount of money in desk drawers, unattended to, because
they couldn't cope with them. Or the reverse, they were making
instantaneous investment decisions that were not well thought
out, that they regretted and that they could not easily undo.
So we created a settlement option, which has now been
replicated and is in fact pretty much the industry standard,
where when the claim is paid, when the group program has
acquitted its obligations, instead of offering a beneficiary a
lump sum check with no interest generated on that check until
the time that they positively elect to do something with it and
make a decision about what they want to do, we offer a money
market option.
And what that does is basically give the beneficiary a
checkbook instead of a check. It generates interest at
competitive rates until the funds are taken out of that money
market option.
If the beneficiary has plans for the funds, maybe there was
a long illness and residual medical expenses must be paid, or
maybe there is an investment plan, or an estate plan, all they
need do is write a check on that money market option for any or
all of the funds and negotiate it at any bank or investment
company, as they would a check would their own personal
checking account. So there is no restriction on their use of
the funds.
On the other hand, if they are confronted by a sudden
tragedy, such as the Croatian situation that we encountered, or
any of the private tragedies that are not always headline news,
they have the time that they need to decide what to do with
those funds.
Mrs. Morella. Is it popular?
Ms. Brittain. Yes, it is very popular. In fact, we
specifically surveyed, at OPM's request, the FEGLI
beneficiaries and we got a 99 percent satisfaction rate--I
believe the distinction was 90 percent were highly satisfied
and 99 percent were somewhat or highly satisfied.
Mrs. Morella. Excellent. Excellent. That's splendid.
Let me throw in something that may be somewhat
controversial. And that is the idea of you know how our Federal
Employee Health Benefit Program allows all the options. There
are a myriad of possible plans that you can utilize in
companies. Would you like to comment? I mean, I know what your
answer is but would you give us some reasons why you think that
might not be the best idea? And I assume that that is going to
be your stance.
Ms. Brittain. I think what would not be the best idea, as I
understand health plans--I am not an expert there--but I
understand that there is an annual open enrollment period
amongst all the plans. And the reason that I would not be in
favor of that, and I know there is a differing opinion here----
Mrs. Morella. I am going to ask them also to respond to it.
Ms. Brittain. Is basically because of the experience that
we have seen and because of the different nature of group life
insurance programs as compared to group health insurance
programs.
Life insurance programs, as complex as things like the
order of precedence ruling for the OPM program in lacking
beneficiary designations, as complex as that might be,
adjudicating life insurance claims does not impact the ultimate
result to the beneficiary as long as it is done accurately and
in a timely fashion.
Whereas in the health care arena, the actual method in
which care is delivered and in which the benefits are received
is very different, for example, in an HMO environment than it
may be in an indemnity environment when you get into issues
like choice of providers and preventive care and other
different reimbursement items.
So in a life insurance environment, basically employee
choice is more in terms of what are their personal life
insurance needs or savings objectives. And usually that is
defined or the amount of choices or the amount of available
insurance is defined by the employer, basically saying what do
we know about our workforce and what do we know about our
administrative capabilities?
So in that context, I very much favor or would recommend to
any large employer a life insurance program that does offer
choice of benefit levels.
Specifically addressing the issue of whether that choice
should be offered annually on an open basis to all potential
participants, I would offer the following: We heard testimony
this morning about the fact that individuals who opt out of
coverage and then specifically select life insurance coverage
generally do so when they know about adverse health status. And
you see that in the cost of the plan.
We also know that there are provisions in most plans, and
the FEGLI program includes this, that for individuals who might
not have particular levels of coverage but have life events
that would normally require a reassessment of their needs, such
as marriage or divorce or birth or adoption of a child, they
have the option to at that time, without medical evidence of
insurability, change their selection.
To, without medical evidence of insurability, annually
invite participants who are not currently in the program to
assess their needs really will attract to the program those
individuals who feel strongly that their beneficiaries will
need their benefits.
That may be a choice, but what we have found is that the
cost, both of the enrollment itself, and of the resulting
claims, particularly in a program where participation levels
are relatively high, is not necessarily sufficient to address
the cost to the program.
Mrs. Morella. Gentlemen, would you like to comment on that,
whether there should be more competition within the system?
Mr. Cahill. The annual open enrollment is a benefit to the
employee and it helps them decide what they need, how much and
when. It is done typically on a short period of time before the
annual renewal of the contract. I do agree that it would be
adverse selection and, as Mr. Flynn stated earlier, there was
about a $50 million hit in the last open enrollment.
Over time, if you have an open enrollment, over time that
number will not be as significant at each open enrollment
because it becomes commonplace as opposed to people having a
pent up demand to get on the plan the next time they have the
opportunity. And in the private sector, if one carrier won't do
it, we will find one that will.
Mrs. Morella. Very interesting.
Mr. Chepenik. I would like to just add to that.
Mrs. Morella. Expand on that. Thank you.
Mr. Chepenik. Life insurance is a lot less complicated than
health insurance. Under an HMO program, a federally qualified
HMO, it is required that you have an open enrollment on an
annual basis, and somebody having health problems coming in to
work for a new employer, having a major problem or pregnancy, 2
months later goes into the HMO, has no pre-existing condition
and gets instant coverage. And so probably often where exposure
could exist on the HMO side and on the health side than it
would on the life. A comment that Mr. Cahill used, over time
life insurance should level itself out. So it is a very key
tool for negotiation for the consultants, the agents, as we
negotiate with the private insurers. It assists and it works.
Ms. Brittain. Can I offer an additional comment on that?
Mrs. Morella. Yes, you may.
Ms. Brittain. Some of the experience that we have seen in
the private sector from employers who began early on when group
universal life was offered, to offer on a regular basis
employee-pay-all life insurance annually, with or without
multiple carriers, although almost entirely it has been with
single carriers, found that a number of those programs got into
trouble very quickly.
The mortality assumptions that had been built in did not
anticipate the cost of selection against the program. And what
this did was put a number of employers very much in a bind
because, keep in mind, these are typically employee-pay-all
programs.
So here they did a fine job of trying to offer state-of-
the-art benefits, communicating extensively because it is a
more complex benefit than the traditional group term benefit,
and then found themselves having to go back to employees and
request premium increases.
What happens in that kind of a situation, and I think we do
have some health care parallels there, is that the individuals
who are healthiest, who can get a better deal elsewhere, are
quickly enticed to do that, which leaves then an even less
attractive risk for the program and, again, tends to accelerate
the cost increase. To move the program to try to avoid the cost
increase, move it by administrator or underwriter or insurance
company, may in some instances postpone the inevitable, but I
don't believe that it would prevent it.
I think we could provide some case studies or examples if
that would be of interest to the subcommittee.
Mrs. Morella. I appreciated your response.
Let me just pick up on what I had mentioned to Mr. Flynn,
that I had in the last Congress introduced legislation to allow
retirees with dependents with severe disabilities to retain
their optional life insurance, which they can't do now. And he
did say that he thought it should be applied to the entire
retiree population without restricting it. And I just wondered
from MetLife your response to that?
Ms. Brittain. We would agree with that assessment.
Mrs. Morella. You would agree with that?
Ms. Brittain. Yes.
Mrs. Morella. You have no problem with having that
extended?
Ms. Brittain. No.
Mrs. Morella. And I guess just finally, since that was such
a fast answer, I will just indicate that I think Mr. Flynn,
when he first made his comments, talking about what possible
changes might take place, looking at your comparison here, with
regard to the amount that dependents get, it says that in the
private sector it varies greatly.
My recollection from his testimony was that maybe we need
to look at that because we may not be on the Federal level
paying as much as we should.
So I just wondered, could you synchronize that for me? You
say ``varies greatly.'' You make individual determinations and
what do you factor into the determinations? And do you think it
should be increased? I mean, if it varies greatly, I don't
understand this increase. There must be some range you are
talking about. So OK. Explain that.
Mr. Chepenik. Varies greatly, there are some employers,
large and small, that don't offer any dependent life coverage.
And where we said that we have carriers that provide up to
$200,000 of group life coverage for the spouse and, of course,
typically at 50 percent value, so if a spouse--if an employee
had a one-time salary and a spouse which, in the private
industry could equate to $300,000, $400,000, $500,000 in life
insurance, if the spouse had $200,000, the child would have
$100,000. If the spouse had $50,000, typically it is one half
of the coverage.
So often you will see $10,000 at least for a spouse and
$5,000 for the children; $25,000 for a spouse, $10,000 or
$15,000 for the children. So they are typically higher amounts
offered in the private sector than you have today. Why we say
offers--varies greatly is because there is some companies that
don't offer any.
Scott, would you like to respond?
Mr. Cahill. We couldn't compartmentalize this benefit like
we could the one-time salary basic because it is truly all over
the board.
Mrs. Morella. You said you could not compartmentalize?
Mr. Cahill. Yes, the spousal benefit and try and put a
simple answer for you in this format.
Mrs. Morella. OK.
Mr. Cahill. It would take every company--in a random
sampling of probably 6 or 8 large employers on Monday, there
were no two that had the same but they all had the same basic.
Mrs. Morella. You are saying that you look at what the
benefits are going to be for the spouse and the client and make
a determination through that, the companies make a
determination?
Mr. Chepenik. It is typically negotiated with the employer.
The Human Resources Department is where we would start and
management of the company, where they have set so many dollars
aside and have asked for an analysis of the benefits, what
could be offered. And we would then propose, we could offer a
one-time salary for life insurance and then propose a few
different levels of dependent coverage, and it is from a
negotiations standpoint that the employer might say, great, we
will take the one-time salary.
Can you get us $500,000 of guaranteed issue? And the answer
would be, yes, and we will show them what it would cost to give
them $100,000 of spousal coverage and a lesser amount for their
children and what it would cost for $50,000. And some employers
will say, great, let's take the $50,000 and we will pay for the
life insurance and provide this much offered to the employees,
and the employees would in turn then select and pay for that
spousal coverage. So it really becomes an individually
negotiated item with each employer.
Mrs. Morella. Sounds like a dice game.
Do you think that--do you think that, therefore, we should
keep it the way it is? Or do you think it should be open to
some changes?
Mr. Cahill. I think there is opportunity to evaluate it.
Mrs. Morella. Evaluate it?
Mr. Cahill. I believe that's the same comment Ms. Brittain
and Mr. Flynn came to.
Mrs. Morella. OK. Great. Good. Well, I want to thank you
all. Thank you, Mr. Chairman.
Mr. Mica. Thank you, Mrs. Morella.
I recognize now, Ms. Norton.
Ms. Norton. Thank you, Mr. Chairman.
To get to the bottom line, the fact is that the
Government's program, even given some tradeoffs, is not, from
an employee point of view, not as good as private sector
programs, the way in which the Government has constrained its
costs and options and benefits; is that not the case?
Mr. Chepenik. That would be a correct statement.
Ms. Norton. I just put that on the record because of the
notion that somehow Federal employees are robbing the bank,
that I was, frankly, a little surprised to look at the chart
and to follow your testimony to find that the Government has
been--the Government has been at some pains, it would appear,
to make sure that it was not a leader in this regard, where it
sets the example for the rest of the country, but that it was
following the leaders in the private sector.
Considering the size of the employer we are talking about,
I think that ought to be noted for the record and for those who
claim that Federal employees are somehow robbing the bank.
When you talk about improvements that could be made in the
program, I have some confusion as between Ms. Brittain's
testimony and the improvements that you two gentlemen speak of.
Are you talking--she seems to say that she thinks some things
could--improvements could be made without adding to premiums.
Are we talking about no-cost improvements in the program?
Because obviously we can all think of ways to improve the
program.
But are we talking about ways to improve the program with
no additional cost to the Government and no additional cost to
the employee? I would like each of you to answer that.
Ms. Brittain.
Ms. Brittain. Certainly. As I mentioned, I believe that the
size of the program that is currently in place could probably--
at virtually no cost----
Ms. Norton. I am sorry. I cannot hear you.
Ms. Brittain. As I mentioned, I believe that the size of
the program as currently in place could support a higher
benefit level at virtually no cost to the employer or to
employees than is currently in place, and that would certainly
satisfy needs if there are individuals who do not feel they get
as much income replacement as they believe they need in the
event of the death of a primary breadwinner.
Ms. Norton. Is the reason that that does not occur
automatically constraints of law?
Ms. Brittain. That's my understanding.
Ms. Norton. So if there were certain changes in the law,
employees could get enhanced benefits without costing the
Government anymore--without accruing anymore costs to the
Government?
Ms. Brittain. I believe that's a correct example.
Ms. Norton. Would you provide to this committee those
options?
Ms. Brittain. Sure.
Ms. Norton. Mr. Cahill, Mr. Chepenik, do you want to
respond to that, too? You also are talking about improvements
of the kind Ms. Brittain has indicated with no cost to the
Government and no additional premium cost to the employee?
Mr. Cahill. We believe that there are opportunities to
change the structure of the benefits and it would take
actuarial evaluation. Ms. Brittain has access to that data that
we don't, and if she says it could be done with little or no
cost, I would go with that.
She did make a good point on the group universal, where
there is a cost even if it would be employee-funded, a cost of
the payroll deduction and the enrollment, things like that. And
that is a discussion on who is going to bear that cost, whether
it be the carrier or the employer.
Ms. Norton. I don't want to get--the reason I am intrigued
about what you had to say during your testimony, Ms. Brittain,
is because I really do not want to get into a situation where
we are talking about more cost to the Government, because that
is a nonstarter.
But, Mr. Chairman, at a time when Federal employees find
year after year that they essentially are, if you will forgive
the pejorative, giving back part of the statutory pay raise,
the notion that there may be enhanced benefits out there at no
cost to the Government and with no premium cost to the employee
is, it seems to me, very, very much worth following up,
particularly given the next 5 years, the years where the
employee is already behind the private sector and obviously
deliberately behind the private sector, it would seem to me
that we had an obligation to maximize at least this benefit,
particularly given the very large employee participation in
this benefit.
Mr. Mica. Absolutely. Thank you.
Did you have additional questions?
Ms. Norton. I have--yes, I have just two more questions.
One, I want to know how the reinsurers are chosen and I
want to know how the bank is chosen.
Ms. Brittain. I can address both of those items, Ms.
Norton. In terms of the reinsurers, to be a participant
reinsurer you have to meet qualifications, again, either by law
or by regulation. I can certainly get for the record what those
qualifications are. I believe that they consist of things such
as being licensed to do business in something like 47 or 48
States and the District; reaching a certain financial solvency
level; having a certain number of assets in the program.
Ms. Norton. You are giving me qualifications. Is there any
other----
Ms. Brittain. No.
Ms. Norton. Whoever comes forward gets to be one, to be
qualified?
Ms. Brittain. To my understanding, if they meet the
qualifications that are clearly defined, then they are welcome
to participate.
Ms. Norton. So everybody--there is something like 47 or 48,
you testified, were reinsurers?
Ms. Brittain. Yes.
Ms. Norton. So essentially everybody can be an insurer?
Ms. Brittain. If they meet the qualifications, yes.
Ms. Norton. Yes, all right. How about the bank, how was
that chosen?
Ms. Brittain. MetLife, in creating the new settlement
option, the money market option that we spoke about earlier,
needed to find an agent that would perform the banking
functions under that kind of an arrangement that MetLife does
not have the capability to do. And so they did a search of the
marketplace to canvas for capabilities as well as cost-
effectiveness of providing those services.
State Street Bank was chosen at that time, and I don't know
the specific time period, but it was probably over 10 years
ago. It's my understanding that State Street Bank now provides
those services for most of the insurance companies in the
industry that offer that type of benefit.
Ms. Norton. I was astonished, finally, to read on the last
page of your testimony, Ms. Brittain, that mortality rates in
Government entities are generally 10 percent higher than those
of other groups, which translates, I take it, into Government
employees die faster or sooner than other employees. I wish you
would comment on why that is the case.
Ms. Brittain. Certainly. That is a result of a review of
our book of business. And we think that particularly in the
book of business that we have, the Government entities that we
insure, for most of them, the complexion of the group is older
workers, male workers. The experience that we have seen is that
there are higher dollar amounts and more frequent claims on
those groups than on groups in dissimilar industries.
Ms. Norton. So Federal employees are older workers?
Ms. Brittain. Government entities in general that we
insure, that book of business demonstrates that there are more
claims on that book of business that we insure, for any
governments that we insure, than the non-Government entities.
Ms. Norton. It is very interesting because--and, again, I
realize we are dealing with a different entity here, different
denomination, apples and oranges, but in health insurance, of
course, where these same employees are insured, same diversity,
more exposure, that apparently is not--or at least the
insurance premiums have been going down every year. Is that the
case with health insurance? Let me ask you, compared with--
where you compare our health insurance with others, where we
have, of course, a great deal of competition as we do not here
have, within the policies offered.
Ms. Brittain. I cannot comment on the experience of health
insurance for Government and non-Government employees. MetLife
is no longer in the medical insurance business. But I can
mention, and I cannot say that this is a direct tie, but as all
the panelists here have mentioned, in the private sector
typically that basic insurance coverage is fully paid for by
the employer. So there is no opting out. And there are
typically more younger, healthier individuals in the benefit
mix. So I think those two--that fact and the mortality fact, I
think, really need to be viewed together.
I think you are seeing in the experience in the life
insurance programs another impact of that contribution rate
that's being charged to government entities typically, or other
public groups.
Ms. Norton. It is interesting because the implication of
what you are saying is that if the Federal Government paid for
everybody's health insurance, with no opting out, paid 100
percent, then it would cost the Government less!
Ms. Brittain. Potentially, in the long run it could save
money.
Ms. Norton. I want the record to put an exclamation point
behind that matter that is now in the record.
Thank you very much, Mr. Chairman.
Mr. Sessions [presiding]. Thank you so much. The chairman
has stepped out so I will preside in his absence.
It was my turn, anyway, to ask questions so he felt that
that was probably pretty appropriate.
Thank you for taking time to be here. I think you have gone
through a good number of questions and the one thing that did
not--was not readily available to me when the question was
asked probably by our chairman or Mrs. Morella, I really don't
remember, but when we talked about what private or other non-
Government services, products would be available as opposed to
the Government, we kind of, in my opinion, didn't specifically
ask what are those things that are offered out there to other
people that is different than would be available for the
Federal Government life insurance?
Can you just let me enumerate with that, either of you,
please?
Mr. Chepenik. Sure. The group variable universal life or a
group-type product which has cash value, would be an item that
could be offered. That, to our knowledge, is not being offered
currently in any governmental program. It could be offered with
multiple options; on a long-term basis would save--an employee
could have multiple cash at the end when they decide to retire,
10 years, 20 years, 30 years and make it as flexible as
possible and make it as competitive as possible so that the
decision made today doesn't mean that you have got to live with
that decision 20 years from now.
It needs to be a flexible product. That's one item that is
not offered and that we think could be, and it could be done by
employee's money.
Mr. Sessions. That is something that we, the Congress, or
the laws or rules that we have laid in place has put--has made
it impossible or is that simply not a part of the product
offering that we have decided?
Mr. Chepenik. I would give my best guess. I would probably
have to ask Ms. Brittain. I don't believe that it is dealt with
in the law. I don't know that there is a restriction. I just
don't think it has been looked at or offered. I haven't seen
the law and can't interpret it, but I would imagine it is
probably not restrictive. It has merely told you what you can
have. It probably hasn't said that if you offer this benefit to
the employees, it could be done.
Mr. Sessions. OK. So the question, which I think you know
what it is, is what I am trying to get at is, is to determine,
within the contract, within the pricing structure, to where we
put no one at risk, are there benefits or is more flexibility--
could it be allowed and is there an impediment to that? And
what would your suggestion be, please? Did I say that right?
Mr. Chepenik. I think you said it very distinguishably.
Mr. Sessions. Since I am the chairman, we will say I did.
When Mr. Mica comes back, he will have a decision probably on
it. Please.
Ms. Brittain. Sure. I would be happy to comment on that. My
recommendation would be that you separate your question into
two issues. One would be, if the Federal Government were
created today with the workforce of today and projected for the
future, what are the benefits that would be of most value to
the workforce and also, keeping in mind the chairman's
assignment, the best possible deal also for the taxpayers?
I think if we had the answer to that question, we could
certainly go backward in terms of what is currently available
and where are the differences. And I believe that from Mr.
Flynn's testimony that is underway with the broad review that
he has already initiated, and I believe results are expected in
the fairly near future there.
Second, I think, on a technical aspect, it is my
understanding that the law defines what benefits are available
under the FEGLI program, that it can be amended, and I believe
it has been amended, to offer changes. But I don't believe that
benefits, called a part of the FEGLI program, can be offered
without a change in the law.
Mr. Sessions. So you believe that in the instance that was
given with the cash value that that would be a change of the
law as it relates to the product that you are offering via the
Federal law?
Ms. Brittain. It is my belief that to introduce a cash
value or a permanent life feature under the FEGLI program would
require a change in the law.
Mr. Sessions. Let me ask your opinion, then, as the
representative from MetLife. How would you--what would be your
evaluation? If we did think about changing the law and offering
this, would it substantially alter in any way your ability to
either provide that product or unreasonably change your
offering that you know today?
Ms. Brittain. MetLife is a leader in the area of group
universal life and we also were the first major insurance
company to introduce group variable universal life, so we
believe we have a product array that could meet any large
employer's needs.
Having said that, that is very different from the product
that is currently in place and it would require different
pricing and an extensive actuarial analysis once the plan
design were determined.
Mr. Sessions. Would you prefer that my comments be taken as
a suggestion that you look at that or would you like for me to
write you to ask for that?
Ms. Brittain. I think a suggestion is fine.
Mr. Sessions. Because I am interested in when we do come to
some consensus about what might be better, that I believe that
Federal employees, as well as the taxpayer, be given some
evaluation of what we are doing.
So I tell you what I will do. We will followup with a
letter asking for this to be done so that you look at and give
some evaluation.
Ms. Brittain. Thank you.
Mr. Sessions. Good.
Mr. Chepenik. A second item that you addressed, as far as
what other benefit could be offered within the same dollar
amount, I think is broken out in two pieces, and that MetLife
indicated that it could be done. And without specific numbers,
we couldn't put the exact numbers, but an example, instead of
the Government spending any more money, possibly the employee
would reduce the employee's cost and end up with the same
benefit, if there are apparently some extra dollars that could
be placed in from the actuarial study.
Mr. Sessions. Good. Thank you. Thank you so much.
I will followup with that letter.
Mr. Chairman, even your counsel admitted to me that I got
too comfortable in your chair. So now that you are back, sir,
let me be more submissive in my role and thank you for allowing
me the opportunity for that time. Thank you, sir.
Mr. Mica [presiding]. Thank you, Mr. Sessions. You are
going to do very well on this subcommittee.
Mr. Ford, you are recognized.
Mr. Ford. Thank you, Mr. Chairman. Let me underscore my
freshman colleague's point. He looked darn comfortable in your
chair in your absence.
Mr. Mica. I feel like I am being eyed from both sides here.
Mr. Ford. Let me thank the panelists and again thank the
chairman. I join with Congressman Sessions. I would like to
followup with you on that issue as well. I have some questions
and concerns, and I think we may be on the same page there.
I apologize for not being here for the majority of the
hearing, Mr. Chairman. We had a markup dealing with the Careers
Act on the Education Committee, and I do apologize.
Just one very quick question, dealing with portable life
insurance and the magnitude of the cost, if any, or the extent
of the cost, if any, associated with providing portable life
insurance. If one of the panelists might be able to respond?
Mr. Cahill. The group universal is portable.
Mr. Ford. Oh, it is portable?
Mr. Cahill. Yes.
Mr. Ford. You answered it very succinctly. I appreciate it.
With regard--one other question. With regard to what Mr.
Sessions has talked about in terms of that--you talked about
how it would substantially alter the product which is offered
now. In terms of cost, could you--I hesitate to ask you to
speculate as to what the costs associated with that might be,
but could you give us some idea of, when you talk in terms of
substantial alterations, what that might constitute?
Ms. Brittain. I don't feel comfortable giving an estimate
of new charges versus current charges because there is a wide
variety of group universal life plan design programs that could
be offered. But to get at the issue, I think there are two
components of why the cost structure is different.
One is that the benefit to the participants is not just
term insurance. It is term insurance plus cash accumulation. So
there is a different nature of what we are insuring. There is
also separately a different administrative structure that's
required. In the current term insurance environment, it is a
very simple payroll deduction type of an arrangement.
With the group universal life product, where there are cash
value features, there are typically administrative transactions
that don't exist under group term. Some examples of those are
changing variable deductions. This month, I want to contribute
more; last month, I contributed too much so I want to
contribute less. That takes some followup to make sure that
that is done appropriately.
Also, there are typically loan or withdrawal provisions,
one of the major attractions of that benefit. And usually,
depending on how the benefit is designed and what those
features are, then the cost is a function of the projection of
how many loans, how many withdrawals, how would that work? So
that's why the plan design really has to come first before the
pricing structure, but that is why there is a differential
there in the pricing.
Mr. Ford. Thank you. Mr. Chairman, I would just ask if I
could submit my opening statement for the record, if that is
permissible?
Mr. Mica. Yes. Without objection, so ordered.
[The prepared statement of Hon. Harold E. Ford, Jr.,
follows:]
[GRAPHIC] [TIFF OMITTED] T2717.035
Mr. Ford. Thank you.
Mr. Mica. Well, I have a couple of concluding questions
here. First of all, Ms. Brittain, there is $17 billion in the
trust fund, which has accumulated over the years. It is
invested in nonnegotiable certificates of indebtedness or U.S.
Treasury, all but a minuscule amount.
Is this reserve adequate, in your estimation?
Ms. Brittain. Well, MetLife plays no role in establishing
what the reserve is.
Mr. Mica. Right.
Ms. Brittain. But certainly, as we know, the claims are
roughly $1.6 billion a year, and with a reserve of 17-point-
some billion dollars, that more than covers a year's claims.
The reserve is also designed to mitigate changes in agency or
employee contributions, as well as to take into account that
retirees, assuming that they follow through with the current
benefit structure and do not elect to enhance that, pay no cost
to continue their benefits. And certainly if the retiree
population is growing, we might see increased claims.
Mr. Mica. It is now earning a minimum return. I don't know
if you would like to comment, but with a trust fund of that
size--there may be some investment restrictions now, as far as
law, but it seems kind of money, you could at least take a
portion of that money and invest it for a higher return than 7,
8 percent, whatever the current one is.
Ms. Brittain. I was struck by your comments earlier, Mr.
Chairman, about the private sector and owning your own business
and how you might invest your funds. Most of our clients are
aggressively monitoring what their funds are and the investment
return they have.
Most of our clients are not in the same position as the
Federal Government would be with the additional investment and
Treasury-related and deficit-related questions, so beyond that
I don't believe I can comment.
Mr. Mica. Well, I happen to have a MetLife IRA account and
I have them divided up into three different categories. Some
are very secure CDs and others, the wild card, and others in
blue chips. And I can't recall my exact return for the last 4
or 5 years, but it is pretty phenomenal.
Ms. Brittain. Glad to hear that.
Mr. Mica. It is from the private sector. But just looking
at those statements, I have about doubled in about 5 years with
MetLife handling my money. And here I see $17 billion sitting
there, which concerns me that our public employees aren't
receiving some benefit or the Government isn't receiving a
better benefit.
So part of the constriction is set by Congress, and we need
to go back and look at that.
You also have 90 percent participation, you said. What
percentage of participation do you have in this State Street
Bank arrangement? Are they controlling all the funds that go to
a beneficiary or into an account?
Ms. Brittain. I would be happy to address that. State
Street Bank administers the individual money market accounts.
They keep the records. They clear the checks that pass through
the money market account. They do not have any funds. MetLife
retains the funds on behalf of those beneficiaries that elect
to keep the money market option.
Mr. Mica. Is there 100 percent participation of those?
Ms. Brittain. Basically, any claim that is paid under the
FEGLI program where the proceeds are $7,500 or more--that is,
with the exception of some retiree claims, virtually every
claim that is adjudicated. And once the claim is paid, then the
automatic option for the beneficiary is the creation of the
money market account.
Mr. Mica. So you say automatic option.
Ms. Brittain. Or the automatic process.
Mr. Mica. Is that 100 percent?
Ms. Brittain. Yes, 100 percent of claims $7,500 or more,
with very strange administrative exceptions, such as if
somebody designates multiple beneficiaries in a unique legally
sanctioned way, but basically I think it is fair to say that
100 percent of claims of $7,500 or more.
Mr. Mica. Mr. Cummings asked about the relationship between
State Street Bank and MetLife. You don't bid that? Is that put
out for any kind of offering? You just negotiated a deal with
them to do this?
Ms. Brittain. It is regularly reviewed. I know when we
began the program, no one else had it and they were best suited
from our search for companies that could do this program, and I
assume that that was either a bid or an RFI process. They have
become the standard provider of this service in the industry.
Nonetheless, MetLife regularly reviews the marketplace
capabilities there.
Mr. Mica. Now, does MetLife get anything back in return for
their participation?
Ms. Brittain. MetLife pays State Street for the services
they provide.
Mr. Mica. They do?
Ms. Brittain. Yes.
Mr. Mica. There is no arrangement where any money goes back
to----
Ms. Brittain. No. There is no transfer of dollars. The
dollars that the beneficiaries elect to keep with MetLife
through their money market option account are managed by
MetLife's investment department and part of our general
account.
Mr. Mica. And the money that you are paying State Street,
is that one of the costs that we are assuming, that you pass on
to us?
Ms. Brittain. No. There is no cost for the money market
option. That is incorporated in our overall cost of doing
business. There is no charge to the programs that participate.
Mr. Mica. So there is no money that changes hands----
Ms. Brittain. No, there is no----
Mr. Mica [continuing]. Between MetLife, State Street or?
Ms. Brittain. No. State Street is paid a fee for the
services that they provide.
Mr. Mica. And you don't charge that off?
Ms. Brittain. And we don't charge that off.
Mr. Mica. OK. I think we asked in our questions, and I am
not sure if you got it or not, but--now, we talked about
private sector and maybe I am trying to compare apples and
oranges--I hope not, because I think we need to be headed in
that direction--but big States and big municipalities, do you
have any record of experience, what kinds of premiums?
I think we asked this question, and I don't know if you can
answer it here, but I would like to see what employees in big
municipal or governmental settings are paying, what benefits
they are getting, what kind of coverages in comparison. Can you
provide us with that?
Ms. Brittain. Yes. I can comment on that now, actually.
Mr. Mica. If you would.
Ms. Brittain. Most of the public sector benefit plans are
similar to the FEGLI benefit plans, and I would preface this by
saying this is based on our review of our own public sector
plans and any active prospect files that we have. And in saying
that they are similar, I would focus on two points.
One is in terms of the basic term insurance, most of the
public sector plans that we are aware of do not have a fully
employer-provided basic term life insurance. The employees do
contribute some portion of the cost just as the FEGLI program
requires.
Also in the area of supplemental life insurance, to our
knowledge most of the large public plans that we are aware of,
do offer supplemental benefits which account for employees
making elections and paying all of the costs. But those
supplemental benefits are typically optional term insurance,
just as the FEGLI program is.
We do not see currently any penetration or any significant
penetration of the kind of cash value or group universal life
coverage that we have just discussed as characteristic in the
private sector.
Mr. Mica. The final question. Now, when we started this
some 40 some years ago, MetLife was the big big provider,
carrier, whatever you call it.
Ms. Brittain. Top dog?
Mr. Mica. Top dog. Are there others that have this
capability today? Where do you all rank? Are there others that
could compete to provide this service with the same type of
asset base?
Ms. Brittain. Well, MetLife and its affiliates have some
$300 billion of assets under management. We also have
approximately $1 trillion of group life insurance-in-force.
That certainly makes us far and wide an industry leader.
Having said that, I would like to put that in perspective.
Our share of the FEGLI program is approximately $175 billion of
insurance. So the difference between $1 trillion and $175
billion clearly shows us that a lot of companies in the
marketplace have chosen us.
We were very pleased when the Travelers Insurance Co.
decided to exit the group or employer-provided benefits arena;
that we had the opportunity to decide if we wanted to purchase
that business. We did purchase that business and it is a
competitive world so we had to prove our capabilities to those
former Travelers' clients and we were able to do that and
retained, beyond our highest expectations, those clients.
So we believe that we are uniquely positioned to provide
this coverage and also that we are an industry leader.
We also, though, function in a private world. We welcome
competition and we are out there every day proving our merit.
So for our largest client, which the Federal Government is, we
certainly expect that interviews like this and our ongoing
relationships with OPM and the FEGLI participants, who I
realize may include many of you and certainly your staffs, will
continue to get the good reviews that we have gotten so far.
Mr. Mica. Thank you for your testimony.
Mr. Cahill, are there any folks that can provide the same
kind of services today as opposed to 1954, from your experience
or knowledge?
Mr. Cahill. I would certainly believe that there are other
carriers that could provide the same service. And after reading
the information, I believe that was also available in 1954, but
the reason stated was they were chosen because they were the
largest at the time.
Mr. Mica. Did either of you have anything else you would
like to contribute at this point? Mr. Chepenik.
Mr. Chepenik. No. It has been a very informative process
for us, as we view this, and this is my first opportunity at
something like this. And I guess I would just say that
negotiation is probably the key part of any process, and look
back at our own block of business, between myself and Mr.
Cahill and Mr. Farb, and it is constantly looked at on a yearly
basis and negotiated on a regular basis and not just with the
existing carrier. That's what keeps it competitive and makes it
possible to provide options.
Mr. Mica. I want to thank both of you and Mr. Cahill, Mr.
Farb, for coming at your own expense, putting your neck out. I
think the life insurance industry is a pretty cozy group, from
what I have learned. Sometimes we ask people to step forward
and make comments or evaluations and we do that in the light of
competition.
As you have learned some things today, the two new
panelists, I guess all of--you may also be new, but this is the
process. We are only temporarily here on behalf of the
taxpayers. And also this subcommittee represents the public
employees, of which we just happen to be temporary public,
part-time public, employees on a brief, at least the elected
folks, on a brief retainer here, a 24-month contract. So we are
trying to do the best we can.
I am convinced, after the hearing, that we can do a better
job in providing possibly lower premiums, at least better
coverage and benefits from what I have heard, and will charge--
and Mr. King is going to get a letter from me today or tomorrow
asking for what corrections we might or modifications we might
make to law; what improvements might be recommended. You are
going to get a letter, too, from me, for MetLife, for
suggestions that can be volunteered from the private sector.
While we can't always improve the compensation over and
above what meager increases Congress can provide, we can look
at these benefit programs and see what can be done to provide a
little better coverage at lower premiums and costs to our
employees, and also to the taxpayer.
So if there is no further comment or business before the
subcommittee this morning, this meeting is adjourned. Thank
you.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
[GRAPHIC] [TIFF OMITTED] T2717.036
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