Benefits Products & Services

Product differentiation critical in voluntary market

American General Life fine-tunes its lineup and packaging

By Thomas A. McCoy, CLU

It's been close to a year since the enactment of the Patient Protection and Affordable Care Act, but with early 2011 health insurance renewals comes a new sense of urgency, or angst, concerning the law. Barring any successful legal challenge or legislative do-over by the newly configured Congress, it's too late to turn back now.

While the law will have a sizeable impact on employer-provided health coverage by dramatically expanding eligibility, it also will bring indirect change to the voluntary market, with its array of ancillary health and supplemental medical coverages. That's the view of Steve Howard, vice president of marketing for American General Life's Benefit Solutions. "The business has shifted toward voluntary anyway over the years, but we just think health care reform will accelerate it," he says.

"Under the new law, the health carriers, depending on their market segment, are required to have an 80% to 85% loss ratio on their products. How are they going to continue to see the same returns while maintaining that loss ratio? There's only so much they can do to reduce administrative costs. So, they will be looking toward reducing producer commissions. Many brokers have historically relied on group medical premiums to fund their operations. If that is now in jeopardy, they'll be forced to start focusing on voluntary coverages."

Howard thinks that some brokers will have difficulty making this transition. "They are used to a commodity, price-oriented business, with fairly low product differentiation." With voluntary business there's a need for "robust enrollment capabilities and a complete understanding of how those voluntary products match and fit with their core health programs."

American General provides a range of support for its voluntary benefits producers—including training, enrollment services and administration. Except for the company's business that is marketed through associations, it classifies its brokers as belonging to one of three channels: benefits brokers, general agents and worksite brokers. Each segment is compensated and supported in accordance with its needs.

For example, the worksite channel consists of brokers with a strong expertise in voluntary, and generally serves larger groups—250 employees or more, and sometimes more than 1,000 or 2,000. "They usually are entrepreneurial independent agents, typically not associated with large brokerage houses," Howard explains. "They often bundle services such as enrollment and TPA services. They are really just looking for a carrier they can plug into."

The benefits broker channel typically serves all types of accounts, from the very small to the mega-sized employer. "These brokers include large, nationwide brokerage firms as well as smaller regional and local firms," says Howard. "They tend to be kind of new in voluntary and require a different level of support from us."

The company's General Agent channel writes predominantly small group business (under 100 lives), and much of it is employer paid.

In 2008, about 60% of American General's benefits business was comprised of policies that were at least partially voluntary. Since then, the company has continued to focus on the voluntary side, offering life and supplemental medical products. On the employer paid side, it offers group life, disability, dental, and vision. It is not in the group medical business.

Companies, as well as brokers, are being drawn into the voluntary market today, Howard says, including some new and well-financed players. "The big health carriers are looking at ways to differentiate their portfolio to include voluntary products. So we're looking at more competition down the road on the voluntary side."

But Howard believes American General is well positioned to handle this voluntary market competition. It intends to build on the strength of its ancillary and supplemental medical products by differentiating those products in new ways. For example, for its dental products, which are offered both as employer-paid and voluntary, it is considering the development of a voluntary-only dental plan.

"It would be a scaled down plan that's more affordable for employees, somewhat like a limited medical plan. With the added costs that employees are facing for their health coverage and ancillary products, we want to be able to offer them some level of coverage at an affordable price."

Another new concept that the company is looking into is the bundling of voluntary products—grouping them into a single product for the purpose of underwriting, application and enrollment. "We've already done this with products on the employer-paid side," Howard notes.

"What we want to do with voluntary is, for example, if a broker says, 'I need a quote for disability and life,' we'll say, 'If you agree to quote the critical illness coverage or dental as part of that package, we'll give you a discount.' We're finding that brokers are receptive to this approach, giving them something that maybe another market source isn't offering."

For employers, the bundling initiative is designed to simplify the choices that employees must make about their voluntary benefits. The success of voluntary products has multiplied the number of these choices, "When you add choice, you add complexity," says Howard.

"Traditionally you might offer a life insurance plan and maybe a critical illness and an accident product, it wouldn't be unusual in the industry for each of those products to have a different application and different underwriting requirements. If you make the employees go through a different process for every product, they are overwhelmed. They don't understand it and how it relates to their needs.

"So we think the bundling approach makes sense," says Howard.

He points to recent research suggesting that "a good percentage of employees will be taking a closer look at what they are paying for"—as opposed to what they may have done in the past, which was just to select whatever they had paid for the previous year. "Clearly there is an opportunity to not only offer additional programs but to provide additional education and communication around those plans," Howard says.

American General is putting increasing emphasis on this communication effort, Howard says. "We recently created a consumer research staff position to ask employees questions such as: 'How do you want to receive information on your benefits? What is the best way to help you understand what your needs are?'"

With the shift toward voluntary benefits taking place in the marketplace, that kind of emphasis on research and communication will be crucial.