What Is Composite Rate?

The composite rate is an insurance premium established by reviewing the average risk profile for a group as opposed to the profile of a single insured individual. This rate indicates that all members of the group pay the same insurance premiums to be insured against a certain danger. In simple terms, when an insurer creates a new policy, it agrees to protect the insured against a specific threat or danger so long as the insured pays the premium costs of coverage.

Determining the actual composite rate is critical to ensuring that the policy isn’t unprofitable. For example, if the insurance company charges a reduced rate, and several claims arise, the insurance company may lose money. However, if the insurance company charges a proper premium, then irrespective of how many claims arise, the insurance company can profit from charging such premiums. There are several methods to determining what the composite rate should be. The method utilized is wholly dependent on whether the rate is being assigned to a single peril, such as health insurance for a single person (member-level rating), or for a group, such as health insurance for a large company with many employees (composite-level rating).

In order to identify the rate for a person, the health insurance company will look at:

  • The individual’s risk profile
  • The individual's age
  • Whether or not the individual smokes or drinks
  • Where the individual lives
  • The medical history of the individual
  • The probability of claims being made by the individual, based on all of the aforementioned criteria

In order to determine the rate for a group, the health insurance company will look at the risk profile for the entire group and then come up with an average based on the number of people who will be buying insurance. By using the average, the rate for all individuals under the plan will be the same, regardless of how risky each individual’s profile is.

The following groups of people benefit from composite rate plans:

  • Older individuals, even if such individuals are currently healthy
  • Less healthy people, regardless of age
  • Those with children or significant others who may have medical issues

Composite rates are determined by looking at the types of enrollment for each individual under the group plans, which could include:

  • Employee only
  • Employee and spouse
  • Employee and child
  • Employee, spouse, and child

Composite Rate Quotes and Adjustments

After the composite rate is provided to the member group, it may be adjusted again come the following year when it is time to renew. For those enrolling during the open enrollment period, generally through an employer, the rate will be based on the employee list that the insurance company has at the time the renewal packet is created. Therefore, the insurance company may not have the risk profile for the new employee at the time of open enrollment. This can benefit the new employee significantly. However, keep in mind that the rate can, in fact, be adjusted if any employees decline health insurance coverage. This is to take into account fewer enrollees.

Take, for example, 10 employees working for a company who all pay $100/month in health insurance premiums. Therefore, the total cost paid to the health insurance company on a monthly basis is $1,000. However, let’s assume that only 8 of the 10 employees enroll in coverage, now reducing the monthly amount to $800. The insurance carrier will need to adjust the rate as a result of two employees declining coverage. Therefore, the initial quote will be adjusted to reflect such change. In addition, if an employee declines coverage for a dependent or spouse, the rate will also be adjusted due to the fact that the initial coverage assumption was more than what the insurer will end up receiving.

Mid-Year and Composite Rates

Regardless of what happens mid-year, the composite rates will not change. Therefore, if the demographic for the company changes and additional people are hired, this will not change the rate. However, keep in mind that, come open enrollment, this rate will in fact change to adjust to the number of employees working for the company and the number of spouses and children for each employee. Therefore, insurers will expect 100 percent enrollment, along with enrollment of all spouses and children. However, it is common for not all employees to enroll. This could be because the employee is covered under his or her spouse’s coverage. Furthermore, an employee may not request coverage for a child because the child is covered under the spouse’s health insurance. Another example of this would be a large company employing tens of thousands of people. Assume that, throughout the year of coverage, the company loses 100 employees and hires another 500 employees. Regardless of how large the changes are in number of employees, the composite rate will not change.

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