# 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”[1]. 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[2].

## 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[3][4].

## 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”[5]. 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[6].

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[7]. “Composite rating is advantageous because of its simplicity and efficiency requiring as it does the auditing of only one exposure base”[8]. This approach provides a number of benefits such as[9]:

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

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[10].

## Footnotes

1. Lucia K. and MacCartee B. 2013, p.23
2. Lucia K. and MacCartee B. 2013
3. Lucia K. and MacCartee B. 2013
4. Tomczyk T. Giesa K. Fritchen B. Mueller R. 2014
5. "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" 1977, p.207
6. "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" 1977
7. "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" 1977
8. "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" 1977, p.207
9. "United States. Congress. Senate. Committee on Commerce, Science, and Transportation" 1977
10. Kingsdale J. Hegemann M. 2013

## References

Author: Magdalena Łach