Defense Issues: Volume 12, Number 22-- Unsnarling a Reserve Insurance Program Snafu
Mr. Chairman and members of the subcommittee, the Department of Defense is pleased to bring the Subcommittee on Military Personnel up to date on one of Congress' and the department's important reserve quality-of-life initiatives, the Ready Reserve Mobilization Income Insurance Program (RRMIIP).
The RRMIIP is the product of years of effort, beginning with 1986, 1991 and 1992 surveys of reservists undertaken by the department with analytic support by RAND, which showed that the potential for income loss resulting from involuntary activation was a major worry for both officers and enlisted personnel. Concerned that potential income loss among involuntarily activated reservists could hurt long-term reserve recruitment and retention in an era of increased reliance on reservists, Congress directed the department to study this issue in fiscal year 1992 and report on the feasibility of an insurance program.
From 1992-1994, RAND completed several analyses assessing the feasibility of providing insurance against reservists' income loss. The ideas in the RAND analyses were the foundation for the RRMIIP. RAND characterized the results of its survey research as follows:
- A representative sample of reservists, including those participating in ODS [Operation Desert Storm], were asked about their interest in insurance protection against economic losses during mobilization. They were offered a choice of buying monthly income supplements ranging from $0 to $20,000 at two monthly premium levels: $0.40 per $100 and $1 per $100. Over 67 percent of enlisted personnel and 55 percent of officers said they would buy mobilization insurance if the monthly cost were $1 per $100 of coverage. Even more -- 73 percent of enlisted personnel and 60 percent of officers -- said they would buy it at a lower price ($0.40 per $100 of coverage). Among those wanting to buy insurance, over 75 percent chose to buy from $500 to $2,000 of monthly benefits.
- The degree of interest in insurance appears more than can be justified by lost income alone. Reservists probably were allowing for additional expenses as well as lost income. Interest was particularly high among junior personnel, and this probably indicates that economic losses to them would have more dire consequences, perhaps because they lack savings or assets.
On the basis of strong reservist interest in income loss insurance, the department worked with this subcommittee and others in Congress to create the RRMIIP, which became law in February 1996 as part of the Fiscal 1996 National Defense Authorization Act (Public Law 104-106).
Both the department and Congress recognized that the RRMIIP was unique, a first attempt at dealing with a complex problem. We realized that there were risks associated with the judgments we made about certain aspects of the program, but felt that the risks were acceptable and the judgments the best we could make.
The following are the basic elements of the RRMIIP:
- The RRMIIP was designed to be a voluntary program administered by the Department of Defense. It is available to all ready reservists and offers coverage against income loss after involuntary activation in monthly amounts ranging from $500 to $5,000 in increments of $500. The cost is $12.20 per month for each $1,000 of coverage.
- Reservists are automatically covered at the RRMIIP basic level of $1,000 per month for the first 60 days after first becoming members of a reserve component or after first being notified of their eligibility, whichever is later. If they do not affirmatively act to complete the enrollment process during this period, they are disenrolled, and they normally would not have a subsequent opportunity to enroll.
In effect, new accessions to the reserve components are given a one-time opportunity to make an insurance decision that will bind them for their entire reserve careers. Benefits to covered reservists do not begin until they have been on active duty for more than 30 days, and reservists may not receive benefits for more than 12 months in any 18-month period. These limitations on coverage were aimed at reducing adverse selection and discouraging volunteers for successive involuntary activations.
- RRMIIP protection is offered on a value basis, as opposed to an indemnity basis. This means that insured reservists need prove only that they were involuntarily activated for covered service, not that they actually incurred the income loss insured against, in order to be entitled to the benefits. Value-form coverage also allows insurance payments to begin as soon as possible after mobilization when the financial impact is likely to be most significant. Value-form coverage also eliminates the costly and administratively burdensome requirement to verify self-employment income or to measure the financial effect of a loss to a civilian business or a professional client base.
- The RRMIIP was intended to cover its expenses entirely from premiums paid by members of the Ready Reserve. The premiums were based on a projected participation level of 40 percent of the Selected Reserve. The program was designed to accumulate sufficient financial reserves to handle the income losses of reservists involuntarily activated for a major regional conflict on the scale of the Persian Gulf War and for smaller military operations.
Just over 24,600 reservists, or about 3 percent of the 900,000-member Selected Reserve, have signed up for the RRMIIP. Most of the enrollees began participating during the initial enrollment period for the RRMIIP (October through December 1996). Unfortunately, this initial enrollment period coincided with the issuance of orders for further activation of reservists for the Bosnia peacekeeping forces of Operation Joint Endeavor. A substantial majority of these reservists elected to purchase income protection coverage, and most of them signed up for the maximum $5,000 monthly benefit.
Input from the services, insurance industry experts, actuaries and reservists has caused us to conclude that there are a number of factors which contributed to the lower than anticipated enrollment.
- First, the coincidence of the initial enrollment period with further activation of reservists for Bosnia led many reservists to believe that the program was designed solely for likely participants in Operation Joint Endeavor.
- Second, the military services' marketing materials, given the short time available to advertise the program, did not sufficiently emphasize the importance of income protection over the whole of reservists' military careers.
- Third, the inability to offer the convenience of payroll deduction and the fact that a member who failed to take action to enroll or decline was automatically denied participation are also believed to be significant factors.
- Finally, large segments of the Selected Reserve (e.g., the National Guard combat divisions) may have concluded that the likelihood of their activation was so remote as to make RRMIIP coverage unnecessary.
Because program enrollment was dramatically lower than the 40 percent of selected reservists that we thought would sign up on the basis of RAND's analysis and reservists' responses to the 1991 and 1992 Department of Defense survey questions about their willingness to buy income protection insurance, we asked RAND to quickly survey a representative sample of reservists who had been eligible to purchase RRMIIP coverage during the initial enrollment period to find out why more reservists had not signed up. Among the 395 reservists surveyed, 27 percent said they did not know about the program, and another 16 percent said they didn't have enough time and/or information to enable them to decide on participation.
In addition to low overall enrollment, the program also suffered what commercial insurers call "adverse selection" -- a phenomenon in which too many people with knowledge of their greater-than-average risk purchase insurance and too few people with knowledge of their lower-than-average risk buy the coverage. The net result of this combination was that before it could collect any appreciable premium income, the RRMIIP fund had incurred an estimated $72 million in losses and related expenses for fiscal year 1997.
The department took quick action as the program's problems became clear.
As the statute requires, the department immediately reduced benefit payments to activated reservists to 4 percent of their benefit entitlements and asked Congress for a special appropriation to cover the RRMIIP fund's deficit.
I am pleased that the request for a special appropriation has been approved by the House and Senate Appropriations committees for inclusion in the Emergency Supplemental Appropriation Bill for Fiscal Year 1997. When the bill is enacted, we will immediately make good all arrears in past benefit payments and make future payments in full.
In addition, the department organized a high-level internal team with representation from all stakeholders to undertake an analysis of RRMIIP's early experience. We employed outside consultants, and the DoD IG [Inspector General] and GAO [General Accounting Office] representatives participated extensively with the study groups while conducting their independent analysis. We wanted to find out what went wrong, why it went wrong and what we could recommend to Congress that would either put the program on a firm financial footing or bring it to an orderly conclusion.
After specialized working groups examined the key elements of the program enrollment, marketing and rates, our senior working group developed a set of conclusions about the RRMIIP:
- The current program's systemic problems -- adverse selection and low overall enrollment -- require the suspension of further enrollments while alternative approaches to reservists' income losses are considered by the department and Congress.
- It is unlikely that a purely voluntary alternative income insurance program could overcome the combination of adverse selection and low overall enrollment.
- Any alternative income protection plan probably would require mandatory participation and a variety of other safeguards against adverse selection in order to be financially viable. ...
- A mandatory income protection program could be considerably less expensive for reservists than the current program.
Working from the conclusions drawn by the senior working group, an executive steering committee first adopted a set of three goals for any changes in the RRMIIP: increase enrollment, reduce adverse selection and stabilize the fund. The steering committee then developed a range of options for presentation to the military services. These options included termination of the RRMIIP and five alternative income protection programs, two voluntary and three with varying degrees of mandatory participation and benefit levels.
The three mandatory alternative programs developed by the steering committee contemplated the utilization of authority to borrow from the U.S. Treasury to even out variations in the fund's experience and to obviate the need for requests to Congress for special appropriations to cover periodic deficits in program resources. The steering committee felt that a large and stable pool of premium-paying reservists would facilitate repayment of treasury loans during periods of program surpluses.
My staff and I briefed the service vice chiefs, the service assistant secretaries and their staffs. I also briefed the comptroller/chief financial officer and the deputy secretary of defense. In all of these briefings, we asked that the decision-makers focus on whether they wanted or needed an income protection program and if so, whether they were willing to commit service funds to support such a program in the event we were to face a future circumstance in which premiums did not cover benefits.
The military services and their reserve components were divided in their willingness to support an alternative program and on the desirability of requiring reservists to purchase income protection insurance. The services also agreed that further study was warranted.
Accordingly, we prepared in mid-April draft legislation that would authorize the secretary of defense to suspend further enrollment in the current program and continue benefit payments only to enrolled members activated for covered service prior to a date to be determined by Congress.
Should Congress approve the proposed legislation, the department would immediately suspend enrollment in the current program. We would also undertake a study to answer the questions we think are central to a well-reasoned determination of the role income protection could play in our efforts to enhance reserve recruitment, retention and quality of life in the years to come.
Our further study of the program will focus on four pivotal questions:
- Do reservists want and need a mobilization income insurance program?
- Are the military departments willing to require reservists' participation in such a program if it is determined that only a mandatory program would be viable?
- Is it feasible to outsource a mobilization income insurance program to the private sector?
- Are there better means of addressing reserve component concerns about reserve recruiting, retention and quality-of-life issues than a mobilization income insurance program?
I thank you again, Mr. Chairman, for this opportunity to present the department's views on the Ready Reserve Mobilization Income Insurance Program.
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html.