Why You Should Pool Your Benefits Plan. Or not.

Jul 20, 2017

directory-973992_640The question is: to pool or not to pool. Maybe it’s not as deep a question as that other famous quote but it’s still a significant decision for most companies when they’re deciding on a benefit plan. There are so many different approaches with varying levels of risk and control. But one of the best choices is a fully pooled plan if you’re an employer with a small company and are looking for some degree of rate predictability.

You’re probably thinking rate predictability sounds good. And it is. But here’s another famous saying...there’s no free lunch. In other words, you have to give something up to get that rate predictability.

There is an underlying assumption upon which all pooled plans are designed. It’s best summed up with the maxim…and yes, here’s another quote: “You may be subsidizing someone else’s claims or, they may be subsidizing yours. Which one are you?” Well, here’s the thing: you will never know for certain. Surprised? The key to that riddle, is what you are giving up, or paying for predictability. So what is a fully pooled underwriting arrangement, exactly?

This is how it works. To determine your rates and annual rate adjustments (usually about 3-7% annually), your insurance company analyzes only the claims experience of an entire cohort or pool of similar companies, not your individual company’s claims experience. This is the distinguishing factor of fully pooled underwriting. The advantage is that it insulates your company to a degree, from rate fluctuations. For example, if your group plan had high claims during the year, but the majority of the other groups in the pool had lower claims, it’s likely your plan’s rate adjustments will remain relatively stable.

However, the converse is also true. If the pool’s aggregate claims were higher than that of your company’s claims in any 12-month period, it’s likely your rates will increase in that benefit year. But, as I stated earlier, your company’s claims history will not be made available to you so you will not ever know if your plan is being subsidized or if you are doing the subsidizing.

Information is what you give up in a pooled plan. There is no reporting or claims data for analysis. This absence of information can blur the line between what is paid in premiums and actual claims. An alternative is self-insurance but then you, as the employer, bear the full financial burden of all claims however relatively high or low claims may be. That’s a significant risk. So giving up some information in return for spreading the risk for gains, losses and rate fluctuations is usually the price smallest companies choose to pay and it is a fundamental principle of insurance.
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