12.2 Group Underwriting and Contribution/Participation
Key Takeaways
- Contributory plans require employees to share in the premium and generally require 75% participation of eligible employees.
- Noncontributory plans are fully employer-paid and require 100% participation of eligible employees.
- Higher participation requirements exist to prevent adverse selection.
- Experience rating sets a group's premium from its own claims history; community rating uses a regional average.
- Credibility weights how much of the group's own experience is used versus the manual rate.
Once a group is eligible, the insurer must decide how it is paid for and how it is priced. The exam heavily tests participation percentages, because they are the primary defense against adverse selection within a group.
Contributory vs. Noncontributory Plans
| Plan type | Who pays premium | Required participation |
|---|---|---|
| Noncontributory | Employer pays 100% | 100% of eligible employees must be covered |
| Contributory | Employee shares the cost | Usually 75% of eligible employees must enroll |
The logic: if employees pay nothing (noncontributory), everyone should be enrolled, so the insurer demands 100%. When employees must pay part of the premium (contributory), some will decline, so the insurer accepts a 75% floor but no lower.
Why Participation Matters
Participation requirements stop adverse selection—the tendency for sicker people to be the most eager to enroll. If only the unhealthy join, claims spike and the pool collapses. Requiring 75% (contributory) or 100% (noncontributory) forces healthy members into the pool, balancing the risk.
Trap: A common wrong answer reverses the figures. Memorize: noncontributory = 100%, contributory = 75%.
Employer Contribution Rules
- Employer contributions toward group health are generally tax-deductible as a business expense.
- Employee-paid premiums may be made pre-tax through a Section 125 cafeteria plan (covered in 12.4).
- Group medical benefits received by an employee are generally not taxable income to the employee.
Group Rating Methods
The insurer prices the group using either community rating or experience rating.
| Method | Basis | Typical use |
|---|---|---|
| Community rating | Average cost of all groups in a region | Small groups; ACA individual/small-group market |
| Experience rating | The specific group's own claims history | Medium and large groups |
| Manual (tabular) rating | Standard rate tables by class | Starting point before adjustment |
Experience Rating and Credibility
For larger groups the insurer blends the group's own claims with the manual rate. Credibility measures how statistically reliable the group's own experience is—larger groups get higher credibility.
Group Premium = (Credibility x Group's Own Claims Rate)
+ ((1 - Credibility) x Manual Rate)
Worked example: A 400-life group is assigned 70% credibility. Its own experience indicates a rate of $500 per member; the manual rate is $600.
Group Premium = (0.70 x $500) + (0.30 x $600) = $350 + $180 = $530 per member.
The more lives in the group, the closer credibility moves toward 100% and the more the group's own experience drives the price.
Underwriting the Group Itself
Even though individuals are not medically underwritten, the group is. The underwriter evaluates characteristics that predict the group's expected claims and stability.
| Group factor | Why it matters |
|---|---|
| Industry/occupation | Hazardous occupations raise expected claims |
| Group size | Larger groups are more statistically predictable |
| Age and gender mix | Older or higher-risk demographics raise costs |
| Geographic location | Regional medical-cost differences |
| Prior claims (loss) experience | Indicates future cost; basis for experience rating |
| Stability/turnover | High turnover invites adverse selection |
The underwriter also confirms the group meets the persistency and minimum-size rules. A group that has existed only to buy insurance, or that is shrinking rapidly, is a poor risk because the healthy members may leave first, leaving a sicker residual pool.
Trend, Loss Ratio, and Renewal
At renewal, the insurer re-rates the group using its emerging experience and a trend factor (expected medical inflation). A key metric is the loss ratio—claims divided by premium.
Loss Ratio = Incurred Claims / Earned Premium
Worked example: A group pays $1,000,000 in annual premium and generates $850,000 in incurred claims. Its loss ratio is $850,000 / $1,000,000 = 85%. If the insurer targets a 75% loss ratio, the group is running unprofitably, and the renewal premium will rise (subject to credibility) to bring the expected ratio back toward target. A group consistently below target may earn a rate reduction.
Probationary Periods and Minimum Group Size
Group health underwriting also relies on structural safeguards that the exam tests directly. A minimum group size (often two or more for small-group rules, larger for full experience rating) ensures the law of large numbers applies. A probationary period for new hires defers coverage long enough to discourage someone from taking a job purely to obtain immediate treatment.
| Safeguard | Effect on adverse selection |
|---|---|
| Minimum participation (75%/100%) | Keeps healthy lives in the pool |
| Minimum group size | Makes claims statistically predictable |
| Probationary/waiting period | Deters insurance-motivated hiring |
| Active-work requirement | Confirms the member is a true working employee |
Together these rules let the insurer waive individual medical underwriting while still controlling the overall risk. When a group fails to meet participation after issue—say enrollment slips below 75% on a contributory plan—the insurer may re-rate or non-renew, because the protective balance has broken down.
Contributory Versus Noncontributory Participation Rules
The most-tested group-underwriting numbers concern participation. In a noncontributory plan the employer pays the entire premium, so 100% of eligible employees must be covered — this eliminates adverse selection because no one self-selects out. In a contributory plan employees share the cost, and insurers historically require at least 75% participation of eligible employees to issue the group.
The logic is that high participation dilutes the impact of a few high-claim members. Worked example: an employer with 100 eligible employees on a contributory plan generally needs at least 75 to enroll for the carrier to offer group rates and forgo individual medical underwriting. Group coverage is underwritten on the characteristics of the group as a whole — its size, industry, age and gender mix, and claims experience — not on each member's health.
A group health plan is fully paid for by the employer. What participation level does the insurer require?
Using a credibility of 60%, group claims rate of $400, and manual rate of $500, the blended group premium per member is: