Basics of Benefits Pooling
Employee benefits (and insurance in general) has a lot of jargon. Often, the industry jargon makes it difficult to really understand what’s happening with your employee benefits. ‘Benefits pooling’ is a great example – many people have a vague understanding of it, but what does it mean? How does it work? Are you interested in learning the basics, in straight terms? Then read on.
What is Benefits Pooling?
Benefits pooling is a more specific version of risk pooling. It’s basically the essence of insurance. What it means is that losses are shared equally with a pool (group) of many others, and the risk is transferred to an insurer. When it comes to employee benefits, an insurer collects a premium from each plan sponsor in order to assume their risk; the premiums are pooled together to create a fund to pay potential future losses/claims. In this way, the risk of higher than anticipated claims is transferred from one to many, and that risk is shared by all plan sponsors in the pool. This spreads the cost of the losses across the member pool.
Insurers do a lot of math. They calculate the rate of claims that they expect members in the pool will sustain, then they calculate a premium to charge each plan sponsor. They look at the demographics of the group, the industry that the group is in, and past claims experience (if available). They want to be confident that the premium they’re receiving is worth assuming the risk.
Sometimes, the premium paid by the plan sponsor is insufficient to cover the cost of claims and other plan-related costs. When this happens, the group has unfavourable or adverse experience. It means the group’s claims were higher than anticipated, and as a result next time premiums are calculated they’ll be paying more.
Types of Employee Benefits Pooling
There are different ways that your employee benefits plan can involve pooling. Your employee benefits advisor or broker are best suited to advise you on what type of pooling is right for your particular organization.
- Pooling for entire groups
This is the simplest type of pooling. The entire employee benefits plan is pooled with other employee benefits plans from other organizations. The risk for all benefits is transferred to the insurer. In a typical plan with extended health, dental, disability and life insurance benefits, all these benefits would be pooled.
Pooling an entire employee benefits plan is usually best for small groups. It protects the plan sponsor because it is difficult to predict claims experience for a small group. For example, a group of 10 people would likely be pooled, as even a slight increase in claims would have a big impact on the group’s experience.
- Pooling for specific categories of benefits
In this scenario, some, but not all benefits are pooled. Typically, benefits that are more predictable are not pooled, while benefits that are higher risk (less predictable) are pooled. For example, in a group with 200 people, extended health and dental might not be pooled, while long-term disability and life insurance might be pooled.
The reason the plan sponsor may choose not to pool more predictable benefits is because then they may have an opportunity for financial gain if claims are lower than predicted. Benefits like long-term disability and life insurance are difficult to predict and the claim values are much higher – for this reason these benefits are more likely to be pooled.
- Pooling at claim category level
The last way that benefits can be pooled is at the benefit level. This means choosing specifics within a benefit category. For example, within extended health, the group may choose to pool the prescription drug coverage if that coverage is unlimited. The reason for this is because if one or several claims are made for a high-cost specialty drug it could have catastrophic consequences on the company’s ability to pay the claim.
Out of country benefits are another example; just like high-cost specialty drugs, out of country claims are difficult to predict, occur infrequently and can be very, very large. Pooling those risky benefits protects the plan sponsor. This type of pooling is usually only used in very large groups (over 1,000 plan members, as an example).
Why Pool Benefits?
The main reason to pool benefits is to manage risk. If an employer chose not to insure or pool any employee benefits coverage, they would be required to pay all the claims. If claims were a bit higher than anticipated, the company would have to come up with the money to pay them. If claims were a lot higher than anticipated, they would still have to come up with the money to pay the claims, but it would be a lot harder. Not insuring is risky, so pooling with others helps spread the risk.
Typically, insurers combine groups with favorable experience together with groups with adverse experience. The result is the high and low risk help offset each other. This moderates premiums for all groups. An individual group’s premiums are still calculated based on their claims experience and level of risk, even within the pool.
Good Advice is Key
Are you interested in learning which type of benefits pooling is the best fit for your organization and your level of risk? Review your options with one of our licensed advisors on the phone, or contact us for a comparison quote.