12.2 Group Underwriting and Contribution/Participation
Key Takeaways
- Contributory plans (employees pay part of the premium) require at least 75% participation of eligible employees; noncontributory plans (employer pays 100%) require 100% participation.
- Experience rating sets premiums from the group's own claims history and is used for larger groups; community and manual rating are used for smaller groups.
- Larger groups have higher credibility, so more of their own claims experience is blended into the rate.
- Higher required participation lowers adverse selection because healthy employees cannot opt out cheaply.
- Employer-paid group health premiums are generally tax-deductible to the employer and not taxable income to the employee.
Group premiums are built from a rating method and protected by participation requirements. The exam expects you to know the 75% / 100% thresholds and to compute a simple experience-rated premium.
Rating Methods
| Method | Basis | Typical Use |
|---|---|---|
| Community rating | Same rate for everyone in a region | Small groups, individual ACA market |
| Manual rating | Standard tables by industry/age | Small to mid-size groups with no usable history |
| Experience rating | The group's own claims history | Larger groups (more credible) |
The larger and more stable a group, the more credible its experience, so a greater share of the final premium comes from its own claims rather than the manual rate.
Worked Experience-Rating Example
A group's claims last year were $800,000. The manual-rate premium for a similar group is $1,000,000. The group's credibility is 70%.
Blended premium = (Credibility x Group claims) + ((1 - Credibility) x Manual rate)
= (0.70 x $800,000) + (0.30 x $1,000,000)
= $560,000 + $300,000
= $860,000
The healthier-than-average claims pull the premium below the $1,000,000 manual rate, but only to the extent the group's experience is credible.
Contributory vs. Noncontributory Plans
Whether employees help pay drives the minimum participation the insurer demands.
| Feature | Contributory | Noncontributory |
|---|---|---|
| Who pays | Employer AND employee share | Employer pays 100% |
| Minimum participation | 75% of eligible employees | 100% of eligible employees |
| Adverse-selection risk | Higher (some opt out) | Lower (all in) |
| Employee cost | Payroll deduction (pre-tax if Section 125) | None |
Memorize: 75% participation for contributory, 100% for noncontributory. A plan that pays the full premium can demand everyone enroll; a plan that charges employees must accept that some decline, but requires 75% so the healthy do not all opt out.
Why Participation Rules Control Adverse Selection
Adverse selection is the tendency of higher-risk people to seek coverage more than lower-risk people. If only the sick enrolled, claims would outrun premiums. Requiring 75% (or 100%) participation forces a healthy spread of risks into the pool, keeping it insurable.
Quick Tax Note
Employer contributions toward group health are generally deductible to the employer as a business expense and are not taxable income to the employee, which is a major advantage of group coverage over individually purchased policies.
Credibility and Group Size
Credibility measures how statistically reliable a group's own claims are. A 10-person group can swing wildly from one bad year, so insurers trust its history little (low credibility) and lean on the manual rate. A 5,000-person group is statistically stable, so its own experience dominates (high credibility).
| Group Size | Rating Approach | Credibility |
|---|---|---|
| Under 50 | Community or manual | Low |
| 50-500 | Blended experience | Moderate |
| 500+ | Full experience | High |
If credibility is 100%, the blended formula collapses to the group's own claims; if credibility is 0%, the premium equals the manual rate. Every blended answer must fall between the group claims figure and the manual rate, never outside that range, which is a quick sanity check on exam math.
Underwriting Factors the Insurer Weighs
Even without individual exams, the group underwriter evaluates objective traits to set the manual rate before experience adjustment.
- Industry and occupation hazard - a roofing contractor's group costs more than an accounting firm's.
- Average age and gender mix - older groups generate more claims.
- Group size and turnover - high turnover can mean adverse selection as the sick stay and the healthy leave.
- Geographic location - regional medical-cost differences.
- Plan design - richer benefits and lower cost-sharing raise the rate.
Probationary Period and Premium Impact
A longer probationary (waiting) period before new hires can enroll lowers cost two ways: it screens out very short-term workers and delays the start of premium liability. The ACA caps the waiting period at 90 days. On the exam, watch for the distinction between this employer-side waiting period (eligibility) and a benefit-side elimination period found in disability coverage (a deductible measured in time before benefits begin).
Participation and Contribution Requirements
To prevent adverse selection, group plans impose participation floors tied to who pays the premium:
- Noncontributory plan — employer pays 100% of the premium; 100% of eligible employees must be covered (no one opts out, so no anti-selection).
- Contributory plan — employer and employee share the premium; typically at least 75% of eligible employees must enroll.
Worked example: A firm has 40 eligible employees on a contributory plan requiring 75% participation. At least 30 employees must enroll for the group to qualify. If only 26 enroll, the insurer can decline or re-rate the group because the under-participation signals adverse selection.
Experience vs. Community Rating
Group premiums are set by a rating method. Community rating charges all groups in an area the same base rate regardless of their own claims (used in ACA small-group and individual markets). Experience rating adjusts a group's premium based on its own claims history — favorable for large, healthy groups. Blended/manual rating uses standard tables for groups too small to be credible on their own experience. Matching group size to the appropriate rating method (small group → community/manual; large group → experience) is a recurring exam item.
A group's prior-year claims were $600,000, the manual-rate premium is $1,000,000, and the group's credibility is 60%. Using blended experience rating, what is the premium?
A noncontributory group health plan requires what minimum participation of eligible employees?