Composite Rate

Composite Rate is an insurance premium paid by the policyholder based on the risk profile of the group to which he belongs (not on the risk profile considered individually). "Composite rates generally refer to premium rates that are group-specific and allow for the same premium for all employees, regardless of age". The creation of a policy by the insurance company means the undertaking to pay compensation in the event of an accident (as a result of a certain risk) to the policyholder.

Composite Rates division

The rates for health insurance for employees is fixed but varies depending on their family circumstances. At the end of 2014, a complex premium methodology was implemented, based on which an employee may submit applications as: a single member, member and spouse, member and children (up to 26 years old) or member and family. This means that, for example, an employee who registers with his spouse goes to a group that includes all those declared such status. All employees in this group pay the same rate, regardless of their place of residence, age or state of health. The same situation is repeated with other groups.

Determining Individual or Composite Rates

Insurance companies use different methods when determining the premium amount for a policy, depending on whether a given insurance premium is assigned separately to a person, subject (rate based on an individual risk level) or group (creating a general rate, used in companies employing many employees). " A composite rate is calculated initially on the basis of a survey of the separate exposures in each rate class, for each coverage by applying the appropriate manual rate. The sum of the products of these exposures and rates is then divided by the selected exposure base to determine the composite rate for the risk". The individual rate is calculated based on the individual risk profile. Factors that are taken into account are: age, place of residence and tobacco use.

Advantages of Composite Rates

In order to determine the composite rate, one exposure base is used. This technique is different from the multiple exposure base method used in standard risk assessment process. "Composite rating is advantageous because of its simplicity and efficiency requiring as it does the auditing of only one exposure base". This approach provides a number of benefits such as:

• simplifying the process of calculating premiums
• facilitating and accelerating the audit process
• facilitating cost allocation for specific projects

Disadvantages of Composite Rates

Ignoring individual factors when classifying insurers into risk groups causes that the difference in the amount of individual risk is neglected. The compound rate benefits older people. Younger people, due to the lower level of risk, require a much lower insurance policy. Despite the fact that such policies save money, a minority decides on the individual choice of the insurance company. This is due to the fact that employers present a plan that provides tax benefits from insurance and allows for significant time savings.

Examples of Composite Rate

1. Workers' Compensation: Workers' compensation is a type of insurance that provides employees with benefits for work-related injuries and illnesses. The premium rate for workers' compensation is determined by a composite rate, which is based on the employee's job classification and the employer's history of claims.
2. Business Owners' Policy: A Business Owners' Policy (BOP) is a package of insurance coverage that includes property insurance, liability insurance, and other types of coverage tailored to meet the needs of small businesses. Premiums for BOPs are based on a composite rate, which takes into account the business's overall risk profile.
3. Auto Insurance: Auto insurance premiums are determined by a composite rate, which takes into account the driver's age, driving record, credit score, and the type of vehicle being insured.

Other approaches related to Composite Rate

Composite Rate is not the only approach used when it comes to pricing insurance premiums. Other approaches include:

• Age-based rating, which assesses the risk of a policyholder based on their age and other factors such as gender, marital status, etc.
• Experience-based rating, which assesses the risk of a policyholder based on their history of claims.
• Territory-based rating, which assesses the risk of a policyholder based on the geographic area they are located in.
• Class-based rating, which assesses the risk of a policyholder based on their occupation or other classifications.

In summary, Composite Rate is one of many approaches used to price insurance premiums. Other approaches include age-based rating, experience-based rating, territory-based rating, and class-based rating. Each approach takes into account different factors when assessing the risk of a policyholder.

Footnotes

Composite Rate — recommended articles

Substandard risk — Cafeteria plan — Indirect labor costs — Automatic Premium Loan — Guaranteed renewable — Removal cost — Income limits — Floater policy — Depreciation rate

References

• Kingsdale J. Hegemann M. (2013),Premium Allocation and Employer Contribution Strategies for SHOP, State Health Reform Assistance Network Charting the Road to Coverage, Issue Brief
• Lucia K. and MacCartee B. (2013) Recommendations of the Working Group on Employer and Employee Choice to the District of Columbia Health Benefit Exchange Authority, DC Health Benefit Exchange Authority
• "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" (1977), Hearings, reports and prints of the Senate Committee on Commerce, Science, and Transportation U.S. Government Printing Office, Washington
• Tomczyk T. Giesa K. Fritchen B. Mueller R. (2014), 2015 Notice of benefit and payment parametres final rule Oliver Wayman, Usa

Author: Magdalena Łach