12.2 Group Underwriting and Contribution/Participation

Group Underwriting Principles

Group underwriting evaluates the group as a whole, not each individual. The insurer looks at the group's size, age and gender distribution, industry/occupational hazard, geographic location, prior claims experience, and the stability of the group. Because risk is spread across many lives, healthy and unhealthy members alike are insured at a blended rate, and individual evidence of insurability is generally not required for timely enrollees.

Two underwriting tools control the two great enemies of group pricing — adverse selection and administrative cost: the participation requirement and the contribution requirement. The exam frequently tests how these differ between contributory and noncontributory plans.

Contributory vs. Noncontributory Plans

• Noncontributory plan — the employer pays 100% of the premium; employees pay nothing. Because everyone is automatically in, 100% participation is required. Adverse selection is minimal, so this is the safest design for the insurer.
• Contributory plan — employees pay part of the premium. Because some employees may opt out, insurers require a minimum participation percentage of eligible employees. The traditional rule is at least 75% of eligible employees must enroll in a contributory plan.

The participation requirement prevents a situation where only the sickest employees bother to enroll, which would destroy the risk pool.

Rating Methods: Experience vs. Community vs. Manual

How the insurer sets the group's premium depends largely on group size:

• Community rating — everyone in a geographic area pays the same base rate regardless of the group's own claims. The ACA requires adjusted community rating for individual and small-group markets, allowing variation only by limited factors (age 3:1 max, tobacco, geography, family size).
• Manual (class) rating — used for smaller groups with little credible claims history; the insurer applies standard rates from its rate manual based on the group's demographics and industry.
• Experience rating — used for large groups (commonly 500+ lives) whose own claims history is statistically credible. Premiums reflect the group's actual past claims; good claims experience earns lower renewals.

Large groups are typically experience rated because their claims data is credible; small groups are manually/community rated because their data is not.

Worked Example: Meeting the 75% Participation Rule

An employer has 40 eligible employees and offers a contributory plan. The insurer requires 75% participation. Minimum enrollees needed: 0.75 × 40 = 30 employees. If only 26 enroll, the group fails the requirement and the insurer can decline or re-rate the case.

Now suppose the plan were noncontributory (employer pays 100%): all 40 are automatically covered, satisfying the 100% requirement and giving the cleanest risk pool.

Worked Example: Experience-Rating Renewal

A 600-life group paid $1,200,000 in premium and generated $900,000 in incurred claims — a loss ratio of 75% ($900,000 ÷ $1,200,000). Because the group is large enough to be experience rated and ran favorably, the insurer is likely to offer a flat or reduced renewal. A small 12-life group with the same $900,000 in claims would instead be manually/community rated, since 12 lives are not statistically credible.

Worked Example: Blended Credibility

A 200-life group has only partial credibility — say the insurer assigns it 60% credibility. If the group's own data supports a rate of $400/month and the manual rate is $500/month, the blended rate is (0.60 × $400) + (0.40 × $500) = $240 + $200 = $440/month. As the group grows toward full credibility, more weight shifts to its own $400 experience, showing why large groups are essentially fully experience rated while tiny groups lean on the manual.

Groups are re-rated at each annual anniversary: the insurer compares incurred to expected claims, adjusts for medical-cost trend and demographic shifts, and issues a renewal rate within the rating factors the law permits.

Blended and Stop-Loss Considerations in Rating

Mid-size groups are often blended-rated: the insurer credibility-weights the group's own experience against manual rates. As the group grows, more weight shifts to its own experience. Insurers also evaluate the expected loss ratio — the share of premium projected to be paid as claims. A group running a low loss ratio is profitable and earns favorable renewals; a group consistently above the target loss ratio faces rate increases or non-renewal at the contract anniversary.

The ACA medical loss ratio (MLR) rule requires insurers to spend at least 80% of premium (small group/individual) or 85% (large group) on claims and quality, or rebate the difference to policyholders — a number that occasionally appears on the national exam.

Common Traps

• Do not confuse contribution with participation. Contribution = who pays the premium (employer alone vs. shared). Participation = the percentage of eligible employees who must enroll.
• A noncontributory plan needs 100% participation; a contributory plan typically needs at least 75%.
• Experience rating is for large groups (credible data); manual/community rating is for small groups.
• Group underwriting evaluates the group, not individuals; timely enrollees need no evidence of insurability, but late entrants can be required to prove insurability.
• Under ACA adjusted community rating for small groups, premiums may vary only by age (3:1 max), tobacco use, geographic area, and family size — never by the individual's health status or gender.