Lecture 5

Social Insurance
Unemployment Insurance
Workers’ Compensation
Medicare and Medicaid
Social Security
 Risk Management Techniques

• Risk management techniques:

– Risk control
– Risk financing
• Retention
• Risk transfer
– Hedging
– Insurance
 Pure Risks
Frequency

Low High

Low ?? Risk Control

Severity
High ?? Avoidance
 Risks and Risk Management Techniques

•
High
• Transfer plans
•

• Loss Severity Retention or Hybrid plans

• transfer plans
•
•
• Retention plans
• Low
•
•
• Loss Frequency
 Insurance

• Insurance is a system for transferring risk from people

and organization to insurance companies.
– Insureds are persons or organizations who transfer
the risk of financial loss to insurers by purchasing
insurance policies from them.
– An insurer, or insurance company, sells insurance
policies that protect insureds against financial losses
– An insurance policy is a legal contract between the
insurer and the insured
 Types of Insurance
• Insurance can be classified as
– Private insurance
• consists of all types of coverage written by
privately organized groups,
– Government insurance
• includes all types of coverage written by
government bodies
 Private Insurance
• Private insurance
– Life and health insurance
• Life insurance
• Health insurance
– Medical expenses
– Long-term care
• Disability-income insurance
– Property and liability insurance
Property and Liability Insurance
• Property and liability insurance
– Personal lines
• Refer to coverages that insure the real estate and
personal property of individuals and families or
provide protection against legal liability
• Major personal lines include
– Private passenger auto insurance
– Homeowners insurance
– Personal umbrella liability insurance
– Commercial lines
 Commercial Lines
• Major commercial lines
– Commercial property insurance
– Commercial auto insurance
– Inland and ocean marine insurance
– Aircraft insurance
– Equipment breakdown insurance
– Farm insurance
– Title insurance
– Credit insurance
– Commercial crime insurance
– General commercial liability
– Professional liability
– Workers compensation
 Government Insurance
• Government insurance
– Social insurance programs
• Financed entirely or in large part by mandatory
contributions from employers, employees, or both,
and not primarily by the general revenues of
government
– Other government insurance programs
 Social Insurance
• Characteristics
– Compulsory employment-related coverage
• Employment-related
– The persons covered should be attached – either
presently or by past service – to the labor force
– Partial or total employer financing
– Benefits prescribed by law
– Benefits as a matter of right
– Emphasis on social adequacy
 Social Insurance
• Characteristics
– Benefits as a matter of right
• Social insurance benefits are paid as a matter of right
– Different from other public assistance or welfare programs
under which applicants must meet a needs test
» For example, WIC, SNAP food stamps
– Emphasis on social adequacy
• Benefits are designed to provide a minimum floor of income
to all beneficiaries
– Benefits are not related to contributions
» High-income persons, single persons or small families, and
the young are subsidizing low-income persons, large
families, and the retired
 Social Insurance
• Major social insurance programs in the United States
– Old-Age, Survivors, and Disability Insurance
• Social Security
– Medicare and Medicaid
– Unemployment insurance
– Workers’ compensation
– Compulsory temporary disability insurance
• Five states — California, Hawaii, New Jersey, New York, and Rhode Island
— and Puerto Rico require employees to receive short-term disability
coverage.
– Railroad Retirement Act
– Railroad Unemployment Insurance Act
 Workers’ Compensation and Employers Liability

• WC&EL exposure:
– Loss exposure of employment-related (occupational) injuries and
diseases
• Employers liability:
– Liability based on tort suits to pay for employment-related
injuries and diseases to employees or their dependents
• Workers’ compensation:
– Liability imposed by statutes (workers’ compensation laws) to
pay for employment-related injuries and diseases to employees
or their dependents
 Workers’ Compensation
• The workers' compensation system is administered on a state-by-state
basis, with a state governing board overseeing varying public/private
combinations of workers' compensation systems.
• As each state within the United States has its own workers' compensation
laws, the circumstances under which workers' compensation is available to
workers, the amount of benefits that a worker may receive, and the duration
of the benefits paid to an injured worker, vary by state.
• In the United States, some form of workers compensation is typically
compulsory for almost all employers in most states, with the notable
exception of Texas as of 2018.
– Texas is unusual in that it allows employers to opt out of the workers' compensation system,
with those employers who do not purchase workers' compensation insurance being called
non-subscribers. However, those employers are exposed to legal liability in the event of
employee injury.
 Workers’ Compensation
• Possible financing methods include:
– Private insurance
– Assigned risk plans
– State funds
– Self-insurance
– Excess insurance
• An employer that qualifies for self-insurance may still decide
to purchase excess insurance to cover catastrophic losses.
 Railroad Workers & Workers’ Compensation

• Injured railroad workers are not entitled to workers’ compensation. An

injured railroader’s rights to compensation are found in the Federal
Employers Liability Act (FELA). There are several differences between
Worker’s Compensation and the FELA. First, workers’ compensation is a
“no fault” system. This means workers do not have to show an employer’s
negligence caused the injury. Under the FELA, the injured railroad worker
must show that the employer’s negligence contributed to the injury. Second,
workers’ compensation cases are rarely decided by juries, while FELA
cases are often decided by juries.
 Unemployment Insurance
• Unemployment insurance
– Federal-state programs that pay weekly cash
benefits to eligible workers who experience
short-term involuntary unemployment
 Unemployment Insurance
• Financing
– Tax-funded
• FUTA tax
– The Federal Unemployment Tax Act (FUTA)
• SUTA tax
– The State Unemployment Tax Act (SUTA)
– In general, employers pay unemployment taxes
• However, employees in Alaska, New Jersey, and
Pennsylvania are subject to state unemployment taxes.
Example
 Unemployment Insurance
• COVID-19 unemployment benefits
– Unemployment Insurance Relief During
COVID-19 Outbreak
• https://www.dol.gov/coronavirus/unemployment-
insurance
 Unemployment Insurance
• Unemployment insurance
– Regular state unemployment benefits are
typically paid up to 26 weeks after certain
eligibility requirements are met
• During periods of high unemployment, claimants
can receive extended benefits
 Unemployment Insurance
• Unemployment insurance
– Eligibility requirements
• Have qualifying wages and employment during the
base year
– Base year: the first four of the last five quarters preceding
the unemployed worker’s claim for benefits
• Be able and available to work
• Actively seek work
•…
 Medicare
Medicare:
a federal government program established by
the Old Age, Survivors, Disability and Health
Insurance (OASDHI) Act that provides medical
expense benefits to elderly and disabled
persons
– Persons age 65 or older and eligible for Social
Security or Railroad Retirement benefits
– Persons with qualifying disabilities (regardless of age)
– for more information: www.medicare.gov
 Social Security and Medicare
• The Federal Insurance Contributions Act (FICA) tax rate (the
combined Social Security tax rate and the Medicare tax rate), 2020

Taxable wages Tax rate Tax

Social Security $137,700 6.2% $8,537.40
Medicare No limit 1.45% No limit
 Medicare
• Medicare consists of four components:
– Medicare Part A: Hospital Insurance
– Medicare Part B: Medical Insurance
– Medicare Part C: Medicare Advantage
– Medicare Part D: Prescription Drug Coverage
 Medicaid

Medicaid: a joint federal and state program that provides basic medical
expense and nursing home coverage to the low-income population and
certain aged and disabled individuals (www.medicaid.gov)

 Each state is free to customize its Medicaid program as long as the

program satisfies minimum federal requirements.
 Medicaid
• Medicaid expansion
– Meet the household income limit: below 138% of the FPL
(federal poverty level)
• Eligibility in Florida
– https://www.benefits.gov/benefit/1625
– Meet annual household income limits
• Be over the age of 64; or
• Be pregnant or have a child 18 or under; or
• Be blind or disabled; or
• Have a child, parent, or spouse in your household who is
blind or disabled.
 Medicaid Financing
• Federal Medical Assistance Percentage
(FMAP)
– The federal government guarantees matching
funds to states for qualifying Medicaid
expenditures; states are guaranteed at least
$1 in federal funds for every $1 in state
spending on the program.
www.kff.org
 Medicaid Financing
• State Financing of the Non-Federal Share
– States have flexibility in determining the sources of funding for
the non-federal share of Medicaid spending. The primary source
of funding for the non-federal share comes from state general
fund appropriations. Over the past decade, states’ use of other
funds has increased slightly but steadily. This is likely tied at
least in part to states’ increased reliance on provider taxes and
fees to finance the state share of Medicaid.
Medicaid Financing
Medicaid Financing
 Social Security
• Social Security Administration
– www.ssa.gov
• Social Security
– Old-Age, Survivors, and Disability Insurance
(OASDI)
• Types of benefits
– Retirement (old-age) benefits
– Survivor benefits
– Disability benefits
 Social Security
• Eligibility
– Quarters of coverage are the basis for
establishing an insured status under Social
Security
• Three types of insured status
– Fully insured
– Currently insured
– Disability insured
 Social Security
• Eligibility
– To be eligible for benefits under Social Security, an individual must have
credit for a minimum amount of work
• This credit is based on quarters of coverage
• Credit for no more than four quarters of coverage may be earned in
any one calendar year.
Amount of earnings needed to earn one quarter of coverage
(https://www.ssa.gov/oact/COLA/QC.html)
 Social Security
• Three types of insured status
– Fully insured
• A person is fully insured under Social Security if
either of two tests is met
– Test 1
» Requires credit for 40 quarters of coverage
– Currently insured
– Disability insured
 Social Security
• Three types of insured status
– Fully insured
• A person is fully insured under Social Security if either of two
tests is met
– Test 2
» A person who has credit for a minimum of six quarters of
coverage is fully insured if he or she has credit for at least
as many quarters of coverage as there are years elapsing
after 1950 (or after the year in which age 21 is reached, if
later) and before the year in which he or she dies, become
disabled, or reaches age 62, whichever occurs first
– Currently insured
– Disability insured
 Social Security
• Three types of insured status
– Fully insured
• A person is fully insured under Social Security if
either of two tests is met
– Test 2
» A worker who reached age 21 in 1992 and who died
in 2004 would need credit for only __?__ quarters of
coverage to be fully insured
– Currently insured
– Disability insured
 Social Security
• Three types of insured status
– Fully insured
– Currently insured
• If a worker is not fully insured, certain survivors
benefits are still available if a currently insured
status exists
– To be currently insured, a worker must have credit for at
least 6 quarters of coverage out of the 13-quarter period
ending with the quarter in which death occurs
– Disability insured
 Social Security
• Three types of insured status
– Fully insured
– Currently insured
– Disability insured
• To receive disability benefits under Social Security, it is
necessary to be disability insured
– At a minimum, a disability-insured status requires that a worker
» (1) be fully insured
and
» (2) have a minimum amount of work within a recent time
period. For example, workers under age 24 must have
credit for 6 out of the last 12 quarters, ending with the
quarter in which disability begins
 Retirement Benefits
• Full retirement age
– For persons born in 1937 or earlier, the full
retirement age for unreduced benefits is age
65
• but if you were born after 1960, it’s 67
• Early retirement age
– Workers can retire as early as 62 with
reduced benefits
Social Security Full Retirement Age and Reduction in Benefits by Age
(https://www.ssa.gov/benefits/retirement/planner/agereduction.html)
 Retirement Benefits
• Eligible persons
– Retired worker
– Spouse of a retired worker
• The spouse is at least age 62 and has been
married to the retired worker for at least one year
– Unmarried children younger than age 18
– Unmarried disabled children
– Spouse with dependent children younger than
16
 Retirement Benefits
• Eligible persons
– Retired worker
– Spouse of a retired worker
– Unmarried children younger than age 18
– Unmarried disabled children
– Spouse with dependent children younger than 16
• A spouse at any age can receive a monthly benefit if the
spouse is caring for an eligible child younger than age 16
 Dual Benefits
• Eligibility for dual benefits
– In many cases, a person is eligible for more
than one type of Social Security benefit
• For example, a person may be eligible for both a
spouse’s benefit and his/her own retirement benefit
– For dual benefits, only an amount equal to the higher
benefit is paid
 Applying for Social Security
Benefits
• Benefits under Social Security and
Medicare, are not automatically paid on
eligibility but must be applied for
– For more information, go to www.ssa.gov, the
website of the U.S. Social Security
Administration