PUBLIC REPORT OF MARKET CONDUCT EXAMINATION OF THE
RATING AND UNDERWRITING PRACTICES OF THE
UICI GROUP
(NAIC Group #0264)
AS OF AUGUST 26, 2004
STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
FIELD RATING & UNDERWRITING BUREAU
MARKET CONDUCT DIVISION
Exam Conducted by:
Jerome Tu, Examiner-in-Charge and Senior Insurance Rate Analyst
Mary Lee Weiss, Insurance Rate Analyst

TABLE OF CONTENTS

SALUTATION 11

SCOPE OF THE EXAMINATION 22

METHOD OF DOING BUSINESS 44

ADVERTISING MATERIALS 55

AUTHORIZED CLASSES OF BUSINESS 55

PREMIUM, ANNUITY, AND CLAIM EXPERIENCE STUDY 66

LINES OF BUSINESS REVIEWED 1111

LIFE 1111

HEALTH 1111

POLICY SAMPLE REVIEWED AND OVERVIEW OF FINDINGS 1313

POLICY REVIEW RESULTS 1313

GENERAL PRACTICES REVIEW RESULTS 1616

SUMMARY OF CRITICISMS, INSURER COMPLIANCE ACTIONS, AND TOTAL PREMIUM RETURNED TO CONSUMERS 1717

Market Conduct Division

Field Rating & Underwriting Bureau

September 9, 2005

The Honorable John Garamendi
Insurance Commissioner
State of California
45 Fremont Street
San Francisco, California 94105
Honorable Commissioner:
Pursuant to instructions, and under the authority granted under Sections 730 and 790.04 of the California Insurance Code, an examination was made of the rating and underwriting practices and procedures of the UICI GROUP (NAIC Group #0264), comprised in California of:

MEGA LIFE AND HEALTH INSURANCE COMPANY (NAIC #97055, CDI #2976-9);
MID-WEST NATIONAL LIFE INSURANCE COMPANY OF TENNESSEE (NAIC #66087, CDI #3067-6);
And
CHESAPEAKE LIFE INSURANCE COMPANY (NAIC #61832, CDI #2020-6)
hereinafter referred to individually as MEGA, Mid-West, and CLIC, or collectively as the Companies. Due to the limited premium volume, no policies were reviewed in CLIC. The California Department of Insurance will be referred to as the Department.

This report is made available for public inspection and is published on the California Department of Insurance internet web-site ( www.insurance.ca.gov) pursuant to California Insurance Code Section 12938.

SCOPE OF THE EXAMINATION
The examination covered the rating and underwriting practices of the aforementioned Companies during the period from January 1, 2003 to August 26, 2004. The examination was made to discover, in general, if these and other operating procedures of the Companies conform to provisions of the California Insurance Code (CIC), the California Code of Regulations (CCR), and other applicable insurance law. This report contains only alleged violations of CIC Section 790.03 and its implementing regulations. Any alleged violations of other relevant laws which may result from this examination will be included in a separate report which will remain confidential subject to the provisions of CIC Section 735.5.

To accomplish the foregoing, the examination included:


1. A review of the rates, rating plans, forms, and underwriting rules made or adopted by the Companies for use in California, including a review of records of data, statistics, or information maintained by the Companies in support of or relating to such rates, forms, and rules.
2. A review of the application of such rates, forms, and rules by means of an examination of policy files and related records.
3. A review of any consumer complaints received by the California Department of Insurance in the year prior to the start of the examination.

The examination was conducted in-house at the Department's Los Angeles office.
This report is written in a "report by exception" format. This report does not present a comprehensive overview of the subject insurer's practices. The report contains only a summary of pertinent information about the lines of business examined and of the non-compliant or problematic activities or results that were discovered during the course of the examination, along with the insurer's proposals for correcting the deficiencies. In the event that a non-compliant activity was not discovered during the examination, the insurer remains responsible for correcting that practice. Failure to identify, comment on, or criticize non-compliant activities does not constitute acceptance of such activities.
The violations alleged in this report and any criticisms of practices have not undergone a formal administrative or judicial process.
METHOD OF DOING BUSINESS
The UICI group primarily offers life and health insurance to niche consumer and institutional markets through its subsidiaries. Through its Self Employed Agency Division, UICI provides group life and health insurance to the self-employed market primarily through two dedicated distribution channels, UGA-Association Field Services and Cornerstone America. The products are primarily issued to members of various independent membership associations that act as the master policyholder for such products. The principal membership associations in the self-employed market for which the UICI underwrites insurance are the National Association for the Self-Employed, Americans for Financial Security, and the Alliance for Affordable Services. The associations provide their membership with a number of benefits and products, including life and health insurance underwritten by UICI.

Through its Student Insurance Division, UICI provides tailored group health insurance programs for students enrolled in universities, colleges and kindergarten through grade twelve and markets, administers and underwrites limited benefit insurance plans for entry level, high turnover, hourly employees.


UICI has approximately 451 appointed agents for Mid-West, 476 appointed agents for MEGA and 13 appointed agents for CLIC in California.
ADVERTISING MATERIALS
The examination included a review of UICI's advertising and marketing materials, including a review of the Companies' internet sites at www.uici.net and www.megainsurance.com. These sites provide background information about the Companies', and provides information regarding the products and services offered. This review revealed no violations of law within the scope of this report.
AUTHORIZED CLASSES OF BUSINESS

The Companies are authorized to transact the following classes of business in California:

Class No.	Class of Insurance	MEGA	Mid West	CLIC
1.	Life	X	X	X
6.	Disability	X	X	X

PREMIUM, ANNUITY, AND CLAIM EXPERIENCE STUDY
The following tables show UICI's California premiums, annuity, and claims/benefits paid for life insurance, annuity, and accident and health insurance products for calendar year 2003, based on data from the Annual Statements filed with the California Insurance Department. Life and annuity experience is shown on a separate table from accident and health insurance experience. The "UICI, Consolidated" tables show the experience of all UICI companies, combined.
Life and Annuity Experience
The premium, annuity, and claim experience tables for life insurance is based on data from page 30 of the Annual Statements filed with the California Insurance Department. The Paid Ratio listed below is calculated by dividing the claims and/or benefits paid total by the direct premium and annuities total. This figure is intended to be a simple comparison between the amount of life insurance premium and annuity funds collected and the amount of benefits paid out in a single calendar year. It does not illustrate the fact that life insurance and annuity policyholders generally pay premiums for multiple years prior to any claim or benefit payment being made by the insurer. The Paid Ratio figure is not intended to measure the financial condition of the insurer in any manner.
UICI, CONSOLIDATED
California Premium/Annuity and Claim Paid Experience for Calendar Year 2003

Description	Premiums and Annuities (1)	Description	Claims/ Benefits Paid (2)	Paid Ratio % (2)/(1)
Life Insurance Ordinary Group	$2,885,111 1,181,244	Death benefits Ordinary Group	$1,762,318 190,116
Annuity Considerations Ordinary Group	$520,411 0	Annuity Benefits Ordinary Group	$187,899 0
Deposit-type Funds Ordinary Group	$6,611 0	Surrender Values Ordinary Group	$1,799,603 0
TOTALS	$4,593,377	TOTALS	$3,939,936	86%

MEGA LIFE INSURANCE COMPANY
California Premium/Annuity and Claim Paid Experience for Calendar Year 2003

Description	Premiums and Annuities (1)	Description	Claims/ Benefits Paid (2)	Paid Ratio % (2)/(1)
Life Insurance Ordinary Group	$1,166,377 296,067	Death benefits Ordinary Group	$800,875 168,478
Annuity Considerations Ordinary Group	169,898 0	Annuity Benefits Ordinary Group	94,187 0
Deposit-type contract funds Ordinary Group	5,648 0	Surrender Values Ordinary Group	1,016,025 0
TOTALS	$1,637,990	TOTALS	$2,079,565	127%

MID-WEST LIFE INSURANCE COMPANY OF TENNESSEE
California Premium/Annuity and Claim Paid Experience for Calendar Year 2003

Description	Premiums and Annuities (1)	Description	Claims/ Benefits Paid (2)	Paid Ratio % (2)/(1)
Life Insurance Ordinary Group	$1,533,369 885,177	Death benefits Ordinary Group	$949,943 21,638
Annuity Considerations Ordinary Group	126,803 0	Annuity Benefits Ordinary Group	39,245 0
Deposit-type contract funds Ordinary Group	487 0	Surrender Values Ordinary Group	732,012 0
TOTALS	$2,545,836	TOTALS	$1,742,838	68%

CHESAPEAKE LIFE INSURANCE COMPANY
California Premium/Annuity and Claim Paid Experience for Calendar Year 2003

	Description		Premiums and Annuities (1)		Description		Claims/ Benefits Paid (2)		Paid Ratio % (2)/(1)
	Life Insurance Ordinary Group		$185,365 0		Death benefits Ordinary Group		$11,500 0
	Annuity Considerations Ordinary Group		223,710 0		Annuity Benefits Ordinary Group		54,467 0
	Deposit-type Funds Ordinary Group		476 0		Surrender Values Ordinary Group		51,566 0
TOTALS		$409,551		TOTALS		$117,533		29%

Accident and Health Insurance
The following tables show the California accident and health premium and loss experience for each company for calendar year 2003, based on data from page 30 of the Annual Statement filed with the Department. The loss ratio for each line is calculated by dividing Direct Losses Incurred by Direct Premiums Earned.

UICI GROUP, CONSOLIDATED
California Premium and Loss Experience for Accident and Health for the Year 2003
Line of Coverage	Direct Premiums Written ($)	Direct Premiums Earned ($)	Direct Losses Incurred ($)	Loss Ratio (%)
Group Policies	$140,262,873	$136,702,117	$83,105,701	61	%
Other Individual Policies	146,628	143,826	69,592	48	%
TOTALS	$140,409,501	$136,845,943	$83,175,293	61	%

MEGA LIFE ACCIDENT AND HEALTH INSURANCE COMPANY
California Premium and Loss Experience for Accident and Health for the Year 2003
Line of Coverage	Direct Premiums Written ($)	Direct Premiums Earned ($)	Direct Losses Incurred ($)	Loss Ratio (%)
Group Policies	$83,690,354	$83,251,383	$46,929,545	56	%
Other Individual Policies	78,161	81,771	31,583	39	%
TOTALS	$83,768,515	$83,333,154	$46,961,128	56	%

MID-WEST LIFE ASSURANCE COMPANY OF TENNESSEE
California Premium and Loss Experience for Accident and Health for the Year 2003
Line of Coverage	Direct Premiums Written ($)	Direct Premiums Earned ($)	Direct Losses Incurred ($)	Loss Ratio (%)
Group Policies	$56,141,654	$53,022,669	$36,042,280	68	%
Other Individual Policies	53,415	46,433	30,476	66	%
TOTALS	$56,195,069	$53,069,102	$36,072,756	68	%

CHESAPEAKE LIFE INSURANCE COMPANY
California Premium and Loss Experience for Accident and Health for the Year 2003
Line of Coverage	Direct Premiums Written ($)	Direct Premiums Earned ($)	Direct Losses Incurred ($)	Loss Ratio (%)
Group Policies	$430,865	$428,065	$66,938	16	%
Other Individual Policies	15,052	15,622	7,533	48	%
TOTALS	$445,917	$443,687	$74,471	17	%

LINES OF BUSINESS REVIEWED

The UICI examination included a review of Life and Health business.

GROUP LIFE
Based on the limited premium volume, the examination focused on group life insurance policies issued in Mid-West.
The Mid-West Group Term Life policy (Form #25430) is renewable to age 65 and the annual premium remains level for the first 10 years. The group master policy holder is the Alliance For Affordable Services (AAS).
GROUP HEALTH
Based on the premium volume, the examination focused on the Group Health plans written in MEGA and Mid-West.
The MEGA Preferred Provider Organization (PPO) plan (Form #25877) provides Hospital/Medical - Surgical Expense coverage with the option of obtaining services through a PPO. The group master policy holder is the National Association For the Self-Employed (NASE).
The MEGA Basic Hospital/Surgical Expense plan (Form #25875) provides Hospital/Medical - Surgical Expense coverage. The insured is not limited in his/her choice of hospitals and physicians. The group master policy holder is the National Association For the Self-Employed (NASE).
The Mid-West Freedom Plan (Form #25906) provides Hospital/Medical - Surgical Expense coverage with the option of obtaining services through a PPO. The group master policy holder is the Alliance For Affordable Services (AAS)
POLICY SAMPLE REVIEWED AND OVERVIEW OF FINDINGS

The examiners reviewed 79 in-force policies and 68 terminated and declined policies. In the course of the examination, and within the scope of this report, the examiners identified 0 premium errors, 0 non-premium errors, 0 termination transaction errors and alleged violations of one provision of CIC Section 790.03.

POLICY REVIEW RESULTS
A representative sample of policies issued, declined, withdrawn, replaced, lapsed, and surrendered was reviewed to determine if the Companies were properly and consistently applying their adopted rates, rating plans and underwriting rules at the individual policy level. The policies were selected at random from the Companies' listing of policies issued, declined, withdrawn, replaced, lapsed, rescinded, or surrendered during the period of November 1, 2002 through January 31, 2003. The results of this review are listed below on the In-Force Policies and the Terminated and Declined Transactions tables.
The In-Force Policies table summarizes the number of policies reviewed, the number of policies with premium errors, the number of policies with non-premium errors, and the error ratios by program and company resulting from this examination. In general, policies containing errors that result in premium overcharges are corrected by policy endorsement, and refunds are made to the insured. Policies with errors that result in undercharges are marked for corrective action at the next policy anniversary date. Non-premium errors include documentation, forms and other errors not affecting premium. (Premium errors that result in premium differences under $5 or 1% of the policy premium, whichever is greater, are counted as non-premium errors.)
The Terminated and Declined Transaction table shows the number of termination transactions reviewed per line of business. These include policies that had been declined, withdrawn, replaced, lapsed, rescinded or surrendered. The number of policies with errors noted in the declination or termination transaction is shown, as well as the overall ratio of terminations with errors.
UICI
Policy Review Result Summary Tables
In-Force Policies Reviewed

Program	No. of Policies Reviewed	No. with Rating Errors	Rating Error Ratio %	No. with Non-Rating Errors	Non-Rating Error Ratio %
Group Life Insurance
Mid-West:
Form #25430	6	0	0%	0	0%
Total Life	6	0	0%	0	0%
Health Insurance
MEGA:
Form #25875	31	0	0%	0	0%
Form #25877	12	0	0%	0	0%
Mid-West:
Form #25906	30	0	0%	0	0%
Total Health	73	0	0%	0	0%
TOTALS	79	0	0%	0	0%

Terminated and Declined Transactions

Program	No. of Policies Reviewed	No. with Errors	Error Ratio %
Group Life Insurance
Mid-West:
Form #25430
Declined	5	0	0%
Surrendered	3	0	0%
Cancelled	2	0	0%
Not Taken	1	0	0%
Lapsed	1	0	0%
Rescinded
Total Life	12	0	0%
Health Insurance
MEGA:
Form #25875
Surrendered	4	0	0%
Not Taken	5	0	0%
Lapsed	4	0	0%
Rescinded	5	0	0%
Form #25877
Declined	1	0	0%
Cancelled	1	0	0%
Mid-West:
Form #25906
Rescinded	6	0	0%
Surrender	4	0	0%
Not Taken	15	0	0%
Lapsed	5	0	0%
Quoted	6	0	0%
Total Health	56	0	0%
TOTALS	68	0	0%

GENERAL PRACTICES REVIEW RESULTS

The examination included a review of the rates, rating plans, forms, and the underwriting rules made or adopted by UICI for use in California. One provision of CIC Section 790.03 or its implementing regulations was alleged to have been violated based on the insurer's general practices. A single citation on the following table may be due to a general practice or error trend which affects many policyholders. One practice can also violate multiple laws or occur across multiple companies within an insurer group. The table indicates the provisions of the California Insurance Code and the California Code of Regulations pertaining to CIC Section 790.03 for which violations were alleged during the exam. A description of the practices asserted to be in violation of each law is provided in the final section of this report.

VIOLATION SUMMARY

	Code Citation	Description of Law
1.	CIC § 790.03(b)	Making or disseminating to the public in this state, in any newspaper or publication, or in any other advertising device, a statement regarding the business of insurance that is untrue, deceptive, or misleading is a prohibited act.

SUMMARY OF CRITICISMS, INSURER COMPLIANCE ACTIONS, AND TOTAL PREMIUM RETURNED TO CONSUMERS
During the UICI Group examination, and within the scope of this report, one general practice or error trend was alleged as being in violation of CIC Section 790.03 and its implementing regulations. Each of these practices is summarized below, as is the Companies' response to each criticism. Regardless of the resolutions or actions taken or proposed by the insurer in this report, it is the insurer's obligation to ensure that compliance with California law is maintained continuously.
To date, no premium has been returned to consumers as a result of this examination. As noted below, the dollar amount of additional claims that are paid as a result of the exam findings will be reported to the Department on a quarterly basis beginning December 1, 2005.

1.

The Mid-West Freedom plan and the MEGA PPO and Basic Hospital/Surgical Expense plans require coverage for prescription drugs to be added through a prescription drug rider. However, the prescription drug rider specifically excludes coverage for contraceptives, insulin, prescriptive medications for the treatment of diabetes and Glucagon. By law, any policy that offers prescription drug benefits shall include coverage for the aforementioned prescription items. Additionally, Mid-West and MEGA were clearly aware of the mandated contraceptive benefit as evidenced by an internal regulatory synopsis dated November 30, 1999 describing the law enacted in California. Yet the companies continued to issue policies with prescription drug riders that clearly stated contraceptives were excluded. This can be considered untrue, deceptive and misleading. CIC Section 790.03(b) Resolution: During the examination, UICI agreed to revise the prescription drug rider to remove the exclusions for contraceptives, insulin, prescriptive medicines for the treatment of diabetes, and Glucagon. The revised rider for the Mid-West Freedom plan was filed on July 8, 2004 and implemented on January 3, 2005. The revised riders for the MEGA plans were filed on June 2, 2004 and implemented on August 30, 2004. UICI contends that although the language of the prescription rider excluded the benefits, the Companies have in practice provided the mandated benefits. UICI provided documentation showing that over 10,000 claims for the prescription items in question were paid during the years 2000 through 2004. UICI also asserts that each of the certificates issued in California contains a conformity clause which is intended to amend the certificate to meet the minimum requirements of the state. Finally, the Companies state that there was no intent to distribute documents regarding plan coverage that would be considered untrue, deceptive or misleading. However, to address any concern that insureds may not have been aware of the benefits available for contraceptives and diabetic supplies and as a result may not have filed such claims with the Companies, UICI has stated that it will mail a notice by November 1, 2005 to all insureds who have health benefit plans with prescription riders. The notice will inform the insured of the benefits and invite them to within 90 days submit any claim that the Companies may not have previously received that should have been considered for benefits under this provision of the law, and will also assure that all insureds realize that these prescription items are now covered by their insurance. UICI will make quarterly reports to the Department, beginning December 1, 2005, identifying all claims that are submitted and paid as a result of the mailing.

Last Revised - November 16, 2005
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