But if that were true, General Motors' rates would be free. The only thing that a large group is guaranteed is that more of its claims experience will be used to determine its rates. Underwriters use the term "credibility" when discussing how much claims experience is blended with manual rates to generate rates.
The following credibility table shows how claims experience is used, as a percentage, for each core benefit typically offered (medical, dental, short-term disability [STD], long-term disability [LTD] and life).
The credibility table for medical is more complex than what is indicated above due to Georgia laws governing underwriting formulas for groups with fewer than 50 employees. In addition, the medical table can vary based on HMO, POS, PPO and even self-funded plans.
Although the medical credibility table can vary, the answer is still the same. The bigger you are in the number of covered employees, the more your claims experience is going to drive your rates. The inverse is also true -- the smaller the group, the less claims experience is used, resulting in manual rates driving most or all of your rates.
Manual rates are generated using your company's demographics (age, gender, industry, location, number of singles and family contracts) and the plan design selected.
Each carrier uses slightly different credibility factors, and, in turn, their renewal formulas will be different. Knowing the carrier's renewal formula will help you pick the best carrier for your company.
Although some renewal formulas can be as many as 30 lines of calculations, the core formula that determines 85 percent of your renewal rates is ((claims experience rates x trend) x credibility) + ((manual rates x trend) x inverse of credibility) = rates (new or renewal).
Here are some things to remember the next time you are renewing and reviewing your benefits.
* Ask each carrier to provide a copy of its renewal formula in writing. They will look at you with a blank look because very few people ever ask for it.
* If your medical claims experience is poor, pick a carrier that uses less claims experience and more manual rates.
* If your claims experience is good (lower than a 75 percent loss ratio), then pick a carrier that uses more claims experience. Remember that going with a carrier with higher claims experience is a gamble, as forecasting claims experience is not an exact science.
* If your life or LTD (long-term disability) carrier states that your renewal was based on claims experience, challenge it using this credibility table. Some carriers still try to use claims experience, even when the formula does not call for it.
* If your company employs fewer than 100 people and shopping your STD (short-term disability) benefits and your claims experience has been poor, don't give the carriers your claims experience. Carriers may ask for STD claims, but you don't have to give it to them. Tell them to use just manual rates, and you should get a better quote.
Knowing your carrier's renewal formula and the formulas from the carriers quoting on your business is a gigantic advantage in leveraging the best rates.
Bruce Bishop (email@example.com) is the director of marketing and managing partner of KYBA Benefits. KYBA Benefits provides consulting and administrative services to more than 400 corporate accounts ranging in size from 20 employees to more than 7,000. Reach Bishop at (770) 425-6700 or (800) 874-2244, ext. 205.