Chapter 35: Insurance and Government Systems -- Key Takeaways
Chapter Summary
Insurance and government represent two of the largest and most enduring domains for COBOL programming, collectively employing more COBOL programmers than any other industry sector outside of banking. This chapter explored how COBOL programs manage the complete lifecycle of insurance operations -- policy administration, premium rating, claims processing, reserves calculation, and regulatory reporting -- as well as the massive government systems that administer Social Security, Medicare, Medicaid, tax processing, and veterans' benefits. Both domains share a common characteristic: enormous data volumes processed under strict regulatory oversight, with program correctness mandated by law rather than merely by business preference.
The insurance portion of the chapter covered the architecture of a policy administration system, which tracks every insurance policy from initial application through underwriting, issuance, endorsements, renewals, and eventual cancellation or expiration. Premium calculation was presented as a complex, table-driven process where base rates are modified by dozens of rating factors (age, location, coverage limits, deductibles, risk classification) to produce the final premium. Claims processing was shown as a multi-stage workflow involving initial filing, investigation, adjudication (the determination of coverage and payment amount), payment, and recovery (subrogation). The reserving programs that estimate future claim liabilities were explained as critical to both financial reporting and regulatory solvency requirements.
Government systems present unique challenges of scale, longevity, and public accountability. The Social Security Administration's systems, some of the oldest COBOL programs still in production, process benefits for over 70 million recipients. The IRS processes over 150 million individual tax returns annually using COBOL programs that implement the full complexity of the tax code. State unemployment insurance systems, Medicaid eligibility systems, and veterans' benefits systems all run on COBOL and must comply with both federal and state regulations that change frequently. The chapter emphasized that maintaining these systems requires not only COBOL programming skill but also deep understanding of the regulatory and business rules encoded in the programs.
Key Concepts
- Policy administration systems manage the complete lifecycle of insurance policies: application, underwriting, issuance, endorsements, renewal, cancellation, and expiration, with each state change recorded in a policy history file.
- Premium rating is a table-driven, multi-factor calculation where a base rate is modified by rating factors such as age, gender, location (territory), coverage amount, deductible, risk class, and experience modification; COBOL tables loaded with OCCURS and searched with SEARCH ALL implement these rating structures.
- Claims processing follows a defined workflow: First Notice of Loss (FNOL), investigation, coverage determination, reserve establishment, adjudication, payment calculation, payment issuance, and recovery (subrogation).
- Loss reserves represent the estimated future cost of claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not yet reported (IBNR reserves); COBOL batch programs calculate and update these reserves.
- Regulatory reporting for insurance includes statutory financial statements filed with state insurance departments using formats prescribed by the National Association of Insurance Commissioners (NAIC), particularly the Annual Statement (commonly called the "Yellow Book").
- Government benefit systems determine eligibility through complex rule engines that evaluate income, assets, household composition, employment history, disability status, and other factors against statutory thresholds that vary by state and program.
- Social Security benefit calculations use the Average Indexed Monthly Earnings (AIME) formula and a progressive replacement rate structure (bend points) that COBOL programs implement with table-driven rate lookups.
- Tax processing systems implement the Internal Revenue Code's graduated rate brackets, deductions, credits, and phase-outs as COBOL table-driven computations, with the tables updated annually when Congress changes tax law.
- State Medicaid systems must implement both federal Medicaid rules and state-specific variations, making them among the most complex COBOL applications in government, with eligibility determination programs that evaluate dozens of criteria.
- Batch processing dominates both insurance and government systems, with nightly cycles for claims adjudication, premium billing, benefit payments, and regulatory report generation.
- Audit trail requirements in both domains are extensive; every decision (coverage determination, benefit eligibility, payment calculation) must be traceable to the specific rules and data that produced it.
- Date handling is especially critical in insurance (policy effective dates, claim dates, statute of limitations) and government (benefit eligibility periods, tax years, enrollment windows), requiring careful date arithmetic and calendar-aware processing.
- Electronic Data Interchange (EDI) is heavily used in insurance, particularly the HIPAA-mandated X12 837 (claims), 835 (payment/remittance), and 270/271 (eligibility inquiry/response) transaction sets.
Common Pitfalls
- Applying the wrong state's rating tables: Insurance is regulated at the state level, and premium rates, coverage requirements, and policy forms vary by state. Using the wrong state's rate table produces incorrect premiums and can result in regulatory penalties.
- Not handling policy endorsements as mid-term changes: An endorsement changes the policy terms mid-period and typically requires pro-rata premium adjustment. Programs that treat endorsements as new policies or that fail to adjust the unearned premium reserve correctly will produce inaccurate financial results.
- Incorrect IBNR reserve calculations: Underestimating incurred-but-not-reported reserves can make an insurance company appear more profitable than it actually is, potentially masking insolvency. The actuarial methods (chain-ladder, Bornhuetter-Ferguson) must be implemented precisely.
- Failing to apply annual benefit adjustments: Government benefit programs (Social Security, federal retirement) apply Cost of Living Adjustments (COLAs) annually. Programs that do not correctly apply these adjustments will underpay or overpay beneficiaries.
- Hardcoding eligibility thresholds: Income limits, asset tests, and benefit amounts in government programs change annually through legislative action or regulatory updates. These values must be externalized in parameter files or tables, not embedded in COBOL source code.
- Ignoring retroactive eligibility: Medicaid and other programs can grant eligibility retroactively, requiring the system to reprocess claims and benefits for prior periods. Programs that assume eligibility is always prospective will produce incorrect payment histories.
- Not preserving the rules version that was in effect: When regulatory rules change, the system must apply the rules that were in effect at the time of the transaction, not the current rules. Insurance and government systems need versioned rule tables with effective dates.
- Incomplete subrogation tracking: When a third party is liable for an insurance claim, the insurer has subrogation rights to recover the payment. Programs that do not track subrogation receivables and recoveries will overstate net losses.
Quick Reference
* Insurance policy master record (key fields)
01 POLICY-MASTER-RECORD.
05 POL-NUMBER PIC X(12).
05 POL-TYPE PIC X(03).
88 POL-AUTO VALUE 'AUT'.
88 POL-HOME VALUE 'HOM'.
88 POL-LIFE VALUE 'LIF'.
88 POL-HEALTH VALUE 'HLT'.
05 POL-STATUS PIC X(01).
88 POL-ACTIVE VALUE 'A'.
88 POL-CANCELLED VALUE 'C'.
88 POL-LAPSED VALUE 'L'.
88 POL-EXPIRED VALUE 'E'.
05 POL-EFF-DATE PIC 9(08).
05 POL-EXP-DATE PIC 9(08).
05 POL-PREMIUM PIC S9(07)V99 COMP-3.
* Premium rating with multi-factor table lookup
MOVE WS-BASE-RATE TO WS-CALC-PREMIUM
MULTIPLY WS-AGE-FACTOR(WS-AGE-IDX)
BY WS-CALC-PREMIUM
MULTIPLY WS-TERRITORY-FACTOR(WS-TERR-IDX)
BY WS-CALC-PREMIUM
MULTIPLY WS-COVERAGE-FACTOR(WS-COV-IDX)
BY WS-CALC-PREMIUM
COMPUTE WS-CALC-PREMIUM ROUNDED =
WS-CALC-PREMIUM *
WS-DEDUCTIBLE-FACTOR(WS-DED-IDX)
* Claims adjudication decision
EVALUATE TRUE
WHEN CLM-AMOUNT <= POL-DEDUCTIBLE
SET CLM-DENIED TO TRUE
MOVE 'BELOW DEDUCTIBLE' TO CLM-REASON
WHEN CLM-AMOUNT > POL-COVERAGE-LIMIT
COMPUTE CLM-PAYMENT =
POL-COVERAGE-LIMIT - POL-DEDUCTIBLE
SET CLM-PARTIAL TO TRUE
WHEN OTHER
COMPUTE CLM-PAYMENT =
CLM-AMOUNT - POL-DEDUCTIBLE
SET CLM-APPROVED TO TRUE
END-EVALUATE
* Social Security AIME / PIA calculation
COMPUTE WS-PIA ROUNDED =
(WS-BEND-1-AMT * WS-BEND-1-RATE) +
((WS-AIME - WS-BEND-1-AMT) *
WS-BEND-2-RATE)
IF WS-AIME > WS-BEND-2-AMT
ADD ((WS-AIME - WS-BEND-2-AMT) *
WS-BEND-3-RATE) TO WS-PIA
END-IF
* Government eligibility determination
SET WS-ELIGIBLE TO TRUE
IF WS-HOUSEHOLD-INCOME >
WS-FPL-LIMIT(WS-HH-SIZE)
SET WS-INCOME-EXCEED TO TRUE
SET WS-ELIGIBLE TO FALSE
END-IF
IF WS-COUNTABLE-ASSETS >
WS-ASSET-LIMIT
SET WS-ASSET-EXCEED TO TRUE
SET WS-ELIGIBLE TO FALSE
END-IF
What's Next
Chapter 36 moves to accounting and general ledger systems, the financial backbone of every organization. You will learn how COBOL programs implement double-entry bookkeeping, manage charts of accounts with hierarchical numbering schemes, process journal entries through validation and posting workflows, generate trial balances and financial statements, and orchestrate the period-end closing procedures that produce the financial reports on which stakeholders rely. The general ledger concepts apply across all industries, including insurance and government.