What are Pooled rates?

There are two primary methods used to calculate rates for group insurance, pooled rating and experience rating. Today’s blog post is going to explore pooled rating.

Benefits such as Life, AD&D, Dependant life, LTD and Critical Illness are all typically rated using a pooled approach. This is due to the low claim incidence but high cost claims. For example, a group could go for several years without ever having a life claim, but than suddenly make a life claim for $500k. No group, particularly a small group, is ever going to generate $500k worth of Life premiums, so there is no chance of this one group ever covering the cost of that single claim. To counteract this, the Life premium from several thousand other groups are all ‘pooled’ together and used to cover the cost of all of the pools Life claims. This is a very similar model to other types of insurance, such as property insurance, where the % of customers that make a claim are very small, but the claims themselves are very large.

Rates for pooled benefits are influenced by the overall experience of the pool. This means if the claims experience of the pool was higher than expected, all groups within that pool may see an increase, regardless of their own claims experience or manual rate adjustments.

Manual Rates

To calculate rates for pooled benefits, manual rates are used. These are exactly what they sound like, rates from an underwriting manual. These manual rates are determined by actuaries and are regularly reviewed and updated.

Each employee’s manual rate is calculated and then these are blended together to calculate the overall rate for the class. There are several factors that influence the manual rates. Note that the following is not intended to be an exhaustive list, rather it is a sample of some of the many factors. Also note that the factors used varies between insurance carriers, which means that pooled rates often see far more variance between carriers than experience rated benefits (particularly LTD).

Age

The age of each employee affects their manual rate, with older employees posing greater risk and therefore having higher manual rates. Note that as group benefits are typically sold on a one year renewable contract the rates are reviewed every year, and if nothing else changes in the group all employees will be one year older, thus increasing the pooled rates (presuming no-one has aged past the termination age of each benefit).

Age/Volume distribution

In a group with a flat benefit (for example, a flat $50k life benefit) then all employees have the same volume, and age/volume distribution doesn’t come into play. However, for a group where the volume is based on salary, the age distribution of that volume becomes important.

In an age/volume distribution calculation, a calculation is performed based on how the volume is distributed amongst the group, with higher volumes having a stronger influence on the groups overall rate. This can be particularly impactful if the certs with higher volumes are the older employees, with higher manual rates. Reduction schedules may help by lowering the volumes on older employees.

Gender

The gender of the employees also influences their manual rate. A change in the gender distribution of the group will therefore impact the rates. This can be particularly impactful on small groups, where the loss and replacement of a handful of employees can result in a very different gender distribution.

Occupation

This is particularly important for LTD. Occupation may be factored in at the individual employee level or it may be approximated at the group level (for example the group may be approximately 75% blue collar workers and 25% white collar)