One of the least understood aspects of Group Health Insurance premium calculations is the difference between the different types of ratings insurance companies use when looking at the cost of coverage. Choosing between a Community Rating or an Experience Rating can have a significant impact on the overall cost of the policy, but will also have an effect on the consistency and longevity of the plan’s pricing.
CCW Global is able to provide both Community Rated and Experience Rated group health insurance plans to companies and organizations worldwide.
Community Rated premiums are fairly prevalent throughout the international health insurance industry, and can be commonly found on group health insurance plans where there are no more than 50 members enrolled on the policy.
When an individual purchase a health insurance policy they are placed in a global “community” of all other policyholders of the same age (or within the same age bracket), with the same plan or policy benefits, who have the same coverage area.
The insurer then calculates the average costs of medical treatment for an individual in the group over the course of the year, and then uses this as the basis of the final policy premium. This premium calculation is then applied to all policyholders within the community – meaning that they will all then pay the exact same amount for their policy.
For groups, the community rating for each individual member is added up to arrive at the overall policy premium.
Because the premium for a community rated plan is based on the medical needs of a large group of people claims submitted by a policyholder will not lead to a cost increase of the coverage at renewal.
This is hugely important – under a community rated health insurance plan the policyholder is able to claim as much treatment as they need safe in the knowledge that their claims will not lead to a price increase for the coverage.
Premiums of community rated policies will only increase because of age and average rates of global medical inflation (which averages a rough 10 percent per year). This then means that any premium increases are easily forecasted, and are not the result of any “penalty” to the policyholder for having actually utilized their health insurance coverage.
The major area of concern in relation to Community Rated premiums can be seen in their relatively high starting point. That is to say, the initial purchase price of a Community Rated health insurance policy will typically be high, due to the fact that the community associated with the premium rating already has a history with the insurer.
When compared to an Experience Rated policy, Community Rated plans will normally be more expensive from the start of the coverage.
Experience Rated group health insurance plans are commonly found throughout the international insurance market. From small groups of 3 – 5 individuals all the way through to groups of 50 or more members, almost all insurers and group health insurance plans have the ability to provide experience rated premiums.
It is important to note that at certain limits group health insurance plans must be Experience Rated; this means that for larger groups, an experience rating is the only possible method for calculating the overall premium.
A health insurance policy which is Experience Rated will calculate the plan’s premium based on the “experience,” or history an individual has under the policy.
It is important to note that the “experience” in question is not the individual’s satisfaction with the coverage, or even the length of time they have been enrolled on the policy, but is rather the policyholder’s claims history. Whilst these plans will get more expensive as an individual gets older, the age increases are not as high as those associated with a community rated policy.
For groups, the insurer will look at the group’s entire claims experience under the plan (also known as the plan’s loss ratio) to calculate the policy’s premium.
The immediate benefit of an experience rated premium can be seen upon the initial purchase of the group medical scheme.
Because there is no experience, or history, for the group with the plan (there have been no claims made) the cost of coverage is typically much lower than the initial purchase price of a community rated plan. As such, many groups that are actively attempting to reign in the cost of their health insurance offering will gravitate towards experience rated plans due to their initially attractive low-cost premiums.
The major drawback to an experience rated premium is that the cost of policies which use this type of rating will become significantly more expensive once a claim is made.
This can have a significant impact on larger groups, especially when looking at the longevity of the scheme – if the group is more likely to claim then the cost of coverage under an experience rating will likely become too much to be affordable over the long term and self-insurance may actually be a better option for the group.
Additionally, because the rating is based on the experience of the group, premium increases are far less consistent and transparent than with a Community Rated policy.
If you would like more information about the different rating options available to groups on health insurance plans from CCW Global, or if you would like to learn more about how group health insurance premiums are calculated, please Contact Us to speak with an expert advisor today.
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