Prospective rating is similar to fully pooled in all aspects except premium renewal rating. The key difference lies in that prospectively rated groups have a either a portion or all of their claims experience used in determining premium rates. Renewal rates are determined by reviewing historical claims experience and then applying the rate adjustment prospectively or to future policy periods.
Employers whose group benefits plans have experienced positive claims results will benefit from this type of underwriting arrangement as their premium rates will generally be lower than other groups. Conversely, this underwriting approach allows the insurance company to select those poorly performing groups and apply higher premium rates.
If a group is large enough, and has had coverage in force for a long enough period, the insurance company will base that group's future premium rates entirely on the group's own claims experience. Experience-rating can be applied to groups as small as 20 lives for some benefits, however, for smaller groups the group's claims experience is not considered fully credible and is therefore blended with the insurance company's manual rates.
Similar to a fully pooled underwriting arrangement, the plan is fully insured and all liability for the performance of the plan (surplus or deficit) is the responsibility of the insurance company. The employer's liability is limited to the cost of the premium.