Group Insurance Primer

Group Insurance is usually set up as a Yearly Renewable Term policy. Meaning rates are calculated each year.

For Life Insurance, Accidental Death & Dismemberment Insurance, Critical Illness Insurance and Long Term Disability rates are based on the demographics of the group (age, gender, occupations) and the experience of the insurance company’s pool. If the insurance company has had few claims, rates remain stable of the total number of claims goes up rates tend to rise. Additionally, if demographics of a group change significantly, their rates will be affected accordingly. Pooled rates typically don’t tend to be influenced by the claims in any one group, so a life or disability claims usually doesn’t increase your rates as long as the pool stays healthy.

Health Care and Dental Care premiums are also partially based on the pool and demographics, but are greatly influenced by claims experience. Health Care is far more risky than Dental Care, so while it is experience rates it is also partially pooled. Large Health care claims are paid out of a pool similar to life and disability claims, this removes the risk of a catastrophic claim bankrupting the health plan. All non-catastrophic claims, under $5000 or so, are used to calculate claims experience.

Claims experience is simply a tally of the claims paid, compared to the premium collected by the insurance company. The insurance company sets a “Target” each year for how much claims will cost. They then add in their predicted expenses and together this creates the total premium. If the insurance company expect claims to be $10,000 for the year, and it assumes its expenses are 25% of claims, the total premium will be $12,500 for the year. For $12,500 the insurance company promises to pay any and all claims incurred in that year.

You might be thinking, “why pay an extra $2500 when claims are only $10,000?” Well, we can’t predict the future, claims very well may be $10,000 but they could also be $1,000,000. The insurance company is taking that risk, and they want to be compensated for it. Now you may be wondering, “Well if they might have to pay out a million, how do they make any money?” claims could just as easily be $1000, in fact it is far more likely that claims will be less than $10,000. If this is the case the insurance company keeps the difference. Many groups under claim for each one group that over claims. In the long run the insurance company knows the odds and plays to win.

While paying $12,500 in premiums, and collecting $1,000,000 in claims seems like a great deal, it is far more likely that you will pay $12,500 and only collect $8,000 or so in claims, which is not the best deal.
The systems works because people instinctively fear losing, more than they enjoy winning. When you have overpaid for your insurance, you think to yourself “Oh well, at least I was covered if something did happen” you move on and forget the wasted money. The only drawback is that each year, you overpaid and under claimed, and the insurance company asks for a rate increase. So every year you feel like you lose. As previously stated, people don’t like to lose.

Claiming more and “getting your monies worth” doesn’t work because you just get a bigger increase next year. And not claiming at all means that you are overpaying profusely. Lose-lose. So how do you win?

The answer, like many things, lies in moderation. You need to claim as close to that predicted Target as possible. if you hit it exactly, you receive an increase, but not too much. You got exactly what you paid for and were insured in case of a catastrophe. No one likes to pay more for their benefits each year but the fact of the matter is that if you hit your target, you will probably claim more next year simply because health care costs are escalating at an astonishing 15% per year.

So how do you hit your target and get the best bang for your buck? Each year at renewal your advisor looks at your claims and your premiums paid. We argue on your behalf that you either overpaid this year and are deserving of a break, or that you over claimed this year and that you are very sorry and you promise not to do it again. Either way our goal is to mold your premiums to match your claims over a period of time, sometimes it takes three or four years to get it right but over a long enough period of time we will make the premiums and the claims match. This is the best possible situation; you got exactly what you paid for, and had your protection all the way in case something terrible and expensive happened.