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United States General Accounting Office I &Yg&jL 

TeStimony 1 

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/ / I Fok Release Federal Employees Group 

onj Delivery 

Ex ected 

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at 

9:,30 a.m. EST 

Wepnesday 

ApJri.1 27, 1988 

Life Insurance Program 

Statement of 

Rosslyn S. Kleeman; Senior Associate Director 

General Government Division 

Before the 

Subcommittee on Employment and Housing 

Committee on Government Operations 

House of Representatives 

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135656 

;hO/T-GGD-88-32 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the federal employees 

group life insurance (FEGLI) program. As you requeste$, we will 

address the need for the government to continue pay-&pg,,pFemiums 

to insurance companies to act as r&insurers of.the program. In 

addition, we will discuss some other areas of the FEGLI program 

which we believe need attention. 

The FEGLI program was established in 1954 and provides basic and 

optional life insurance coverage for federal employees and 

retirees., It is administered by the Office of Personnel 

Management (OPM). Except for the Postal Service, which pays the 

full cost of FEGLI basic insurance for its employees, federal 

agencies pay one-third of the basic insurance cost, and their 

employees pay the other two-thirds. The cost of optional .1-I" -'*(,.. 

insurance is borne fully by the employees electing such coverage. * 

The program has been very popular among federal employees with 

over 2.3 million or 90 percent of those eligible, participating. 

Also, the families of about 1 million employees are now covered 

by optional insurance. The FEGLI i,nsurance fund has grown to 

$8.4 billion and is increasing by more than $700 millibn 

annually. Revenues in 1987 were about $1.7 billion whiile 

payments of claims totalled $1 billion. 
During the past decade, we have issued three reports on,various 

aspect8 of the FEGLI program. Those reports are listed in an 

attachment to our testimony. 

The *FF,GLI Act of 1954 (P.L. 83-598) required the use of *' 

reinsurers. Today, about 200 insurance .companies participate as 

reinsurers along with the prime insurer in sharing the insurance 

risk under the program for which the government annually pays 

them a total of $850,000 in risk charges. The prime insurer is 

separately paid to process claims against the program. The major 

function of reinsurers is to share the risk of catastrophic loss 

with the prime insurance carrier so that no company is unduly 

burdened by such a loss. However, the relationship between the u 

government and the insurance companies in the FEGLI program 

differs considerably from the relationships between other 

employers and insurance companies under their group life plans. 

Under FEGLI, the government assumes all risks, establishes and 

collects premiums, establishes reserves, and manages most of the 

funds. In non-federal plans, these functions are primarily the 

responsibility of the prime insurance carriers. 

The government, in effect, is a self-insurer of FEGLI but does 

not reap all the advantages that could accrue from such a 

relationship. Since the government is contractually obligated to 

reimburse the prime insurer for ~~~.FEGLI claims paid .in good 

faith, no insurance risk is being assumed by anyone except the 

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government. But, because of the legal requirement, OPM's policy 

with the prime insurer, continues to provide for the payment of 

risk charges. We believe these payments are unwarranted and the 

legal requirement for them should be repealed. 

There are three other areas of the FEGLI program where we believe 

changes are needed to make the program more equitable. These 

areas are: (1) correction of an oversight to require the 

government to pay its share of basic insurance cost for employees 

retiring after December 1989, (2) elimination of the charge for 

FEGLI's unfunded liability in setting employee premiums, and (3) 

reconsideration of the appropriateness of FEGLI's economic 

assumptions. 

GOVERNMENT'S SHARE OF RETIREES 

INSURANCE COST 

The FEGLI Act of 1980 (P.L. 96-427) added a requirement that all 

employees retiring after December 1989 must continue to pay their 

two-thirds share of the premiums for basic insurance coverage 

until they reach age 65. Employees retiring before that date are 

b 

not required to pay premiums on basic coverage after retirement. 

The 1980 Act contained no companion provision for the government 

to pay its one-third share. We believe this to be an oversight 

in drafting the 1980 Act which should be corrected. 

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FEGLI's UNFUNDED LIABILITY I 

The unfunded liability for the basic FEGLI program has been 

decreasing over the years, due in part to interest earnings, and 

now stands at about $1.3 billion. This liability was created by 

the government when it granted full benefits to employees who 

retired shortly after the program's inception and charged 

premiums in the early years which did not cover accruing benefit 

costs. Since 1982, the government has been charging higher 

premiums (about 4 percent higher) to amortize the remaining 

liability over 100 years. As we concluded in our 1986 report on 

FEGLI, the government should assume the responsibility for the 

liability that it created and reduce employees' premiums 

accordingly. 

ECONOMIC ASSUMPTIONS 

In determining FEGLI premiums, OPM makes assumptions about the 

future behavior of certain economic factors that influence the 

cost of insurance benefits. OPM uses a salary growth assumption 

to reflect periodic increases in pay for federal empldyees and an 

interest assumption to reflect the average long-term return on 

FEGLI investments. Salary growth increases the cost of benefits, 

while interest income reduces those costs. 

In our April 1986 report, we recommended that OPM recalculate 

program costs using economic assumptions consistent with those 

used in the civil service retirement system because both programs 

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cover the same universe of federal employees and invest, in 

government securities.’ Later that year, OPM adopted our 

recommendation. However, in 1987, OPM lowered the salary growth 

assumption by 0.5 percent when it recalculated the cost of civil 

service retirement benefits because pay increases had been less 

than previously assumed but it has not changed FEGLI's 

assumptions. We believe that OPM should continue to use 

consistent economic assumptions in determining the cost of these 

programs and, thus, should recalculate costs for both programs 

whenever the economic assumptions change. 

That concludes my prepared statement, Mr. Chairman. I would be 

pleased to answer any questions you may have. 
ATTACHMENT AjTTACHMENT 

GAO Repor'ts on the Federal Emplovees 

Group Life Insurance ProgramChanges to the Federal Employees Group Life Insurance Pr'ogram Are 

Needed, FPCD-77-19, May 6, 1977 

Federal Life Insurance Changes Would Improve Benefits and 

Decrease Costs, FPCD-81-47, August 21, 1981 

Assessment of Federal Employees Group Life Insurance Program, 

GGD-86-28, April 7, 1986 

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