Fully pooled is the underwriting method used for all group benefits for small groups. It is also typically the underwriting method used for those benefits that have low incidence of claim but the claim amount is high, irrespective of the size of group.
It is typical that group life insurance, accidental death and dismemberment, and long term disability benefits are underwritten under a fully pooled basis for groups up to 200 to 300 employees for most insurance carriers, which is the point where experience-rating is used to some degree.
Under a fully pooled underwriting arrangement, the insurance carrier does not review the claims experience of any one particular group, however focuses on analyzing the experience for their entire block of business to determine required premium rates and rate adjustments annually. Insurance companies will aggregate the claims experience of similar groups into a pool and derive a pooled rate.
The claims experience of each individual group does not provide enough credible data to derive a rate so by combining the claims experience of many small groups into one pool, applying a credibility factor to that pool's experience, and blending with the insurance carriers block of business, a credible premium rate can be determined.
The key distinguishing factor of the fully pooled underwriting method is that each individual group's past claims experience is not used in determining the rate or rate adjustment. If one group's plan experience has been unfavorable in any one 12-month period after the plan's inception, but the majority of the groups in the pool have favourable claims experience, then it is likely that the plan's premium rates will remain stable or decrease in that benefit year.
On the other hand, if the pool's claims experience in aggregate is unfavourable, then the plan's premium rates may be subject to an increase in that benefit year even if the individual group had positive claims experience.
The insurance company's manual rates (or book rates) are used in determining the rate or rate adjustment annually. Manual rates are premium rates established based on an analysis of the insurance company's entire block of business (the pool), and the average claim incurred for each grouping based on the demographic and geographic profile of the group including age, sex, occupational class and geography. The manual rate is also based on the group's own demographics particularly for the group life insurance and long term disability benefits.
A plan underwritten on a fully pooled basis does not share in the financial gains or losses attributed to the plan. There is no financial accounting of premium and claims, and as such the insurance company retains the risk for surpluses and deficits under the plan. The individual group's liability is limited to the cost of the premium. Once the premium is paid, regardless of the financial performance of the program, the insurance company must pay all eligible claims. This type of plan is also referred to as non-refund accounting.