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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

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

CHRISTOPHER COX, California

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

JOHN E. SUNUNU, New Hampshire

PETE SESSIONS, Texas

MICHAEL PAPPAS, New Jersey

VINCE SNOWBARGER, Kansas

BOB BARR, Georgia

ROB PORTMAN, Ohio

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

———

BERNARD SANDERS, Vermont

(Independent)

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

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER COX, California

PETE SESSIONS, Texas

ELIJAH E. CUMMINGS, Maryland

ELEANOR HOLMES NORTON, Washington,

DC

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

(III)

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

(1)

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 onethird. 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

2

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.

3

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

4

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.

5

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.

6

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:]

7

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9

10

11

12

13

14

15

16

17

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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?

19

Mr. FLYNN. Well, the increase in operating expenses from $8 mil- lion 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

20

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 panel- ists 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 excep- tion 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

21

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

22

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.

23

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.

24

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’tfix-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.

25

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

26

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.

27

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 inVerDate 11-MAY-2000 08:45 Jul 02, 2002 Jkt 080157 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 W:\DISC\42717.TXT pfrm09 PsN: 42717
28

creases 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:]

29

30

31

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, caseby-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.

32

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 agebased; it is a level premium regardless of your age. And so the

33

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?

34

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.

35

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.

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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—employersponsored 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

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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.

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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 emVerDate 11-MAY-2000 08:45 Jul 02, 2002 Jkt 080157 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 W:\DISC\42717.TXT pfrm09 PsN: 42717
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ployers 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

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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.

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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

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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 21⁄2 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 in- crease, 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?

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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.

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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

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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

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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 opVerDate 11-MAY-2000 08:45 Jul 02, 2002 Jkt 080157 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 W:\DISC\42717.TXT pfrm09 PsN: 42717
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tions, 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.

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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

73

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.

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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 deVerDate 11-MAY-2000 08:45 Jul 02, 2002 Jkt 080157 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 W:\DISC\42717.TXT pfrm09 PsN: 42717
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pendent 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.

76

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.

77

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.

78

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.

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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?

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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?

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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:]

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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 reVerDate 11-MAY-2000 08:45 Jul 02, 2002 Jkt 080157 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 W:\DISC\42717.TXT pfrm09 PsN: 42717
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tains 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

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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

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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:]

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