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X-Ell Employee Benefits, LLC |
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Carrier Rating
Methodology |
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NJ Small Employer (2-50) Reform Law Summary |
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Reform laws require all
insurance carriers offering small group health benefits coverage in New
Jersey to abide by specific underwriting standards. Most of the actuarial weights or risk
measures can be left to the discretion of the carrier, but the factors used
in determining risk are clearly defined within the legislation. There are
only four basic factors that carriers can use in formulating rates for an
employer: · Age · Gender · Geography of the employer’s home office (physical
location) · Enrollment status of the covered employees (single,
husband/wife, family, parent/child(ren)) *those waiving coverage
may be included in initial rate calculations in order to conservatively
assess risk and avoid adverse selection. Age has a significant impact on
quoted rates. Generally, the average
age is assessed on the eligible or covered group as a whole. The older the group as a whole, the higher
the group's rates will be.
Furthermore, as the group becomes progressively older, all other
things remaining the same, the premium costs will increase. Gender plays an important role
in determining health risks. Carriers
use statistical and trend data to better understand the risk discrepancies
between males and females. For example,
females are obviously bare children, predominantly in certain age categories,
and this will carry a greater weight in tabulating risk. Certain diseases become more prevalent in
aging males than aging females. This
affects claims costs, therefore the risks assigned to males within certain
age grouping. Again, the group is
lumped together to formulate an overall risk associated with the gender mix. Enrollment status recognizes the
risk associated with single enrollees versus those enrolling both themselves
and dependents. Child dependents
typically help dampen risk since the incidence of costly claims is lower. A spouse may raise the risk factor
slightly, or may have little impact. Geography refers to the physical
location of the company, not the employees' residences. Carriers can rate small businesses based on
the county they preside in. Geography
is independent of the other factors and remains constant (as a percentage)
regardless of group size, age-mix, gender-mix, or enrolled employees and
dependents. Statistical data collected
by the carrier is used to assign heavier risk to certain counties based on
demographics, mortality rates, etc. Age, gender, and enrollment
status are not necessarily independent factors. Each effects the other. So age by itself,
though is holds a certain level of risk, will also be persuaded by the fact
that it pertains to a male or a female, or a single male as compared to a
male with covered dependents. (Again, health conditions do not effect rates
and are not calculated into the risk.)
The actuarial weight assignments, however, are regulated by the
State. Once again, the purpose of the
regulation is to promote fair competition and cherry picking. The risk that a carrier assigns to its most
undesirable risk cannot be more than two times, (2:1 ratio) that of its most
favorable risk. For example, a carrier
cannot assign a risk to its highest rated group that is more than 200% of the
premiums charged to its lowest rated group. When Reform first began in 1994,
that risk ratio was permitted to be 3:1. In January, 1995, the 2:1 ratio was
implemented. Currently, the State is
conducting studies to determine the effects of moving to a pure 1:1 ratio
where all employers are charged the same price for a given product. When rates are based on a 1:1 rating methodology, they
are called "community rates."
Basically, this means that the carrier files a rate with the State
that is valid for all small employers regardless of the four risk factors
specific to any one employer. In other words, the rate is the rate. Though the 1:1 rating method is not yet
mandatory, a carrier currently can opt to file rates in this manner. Most carriers use the 2:1 risk
ratio measures. Therefore, they will
require an employer to provide a census of the company reporting the physical
location and the demographic factors specific to each eligible or covered
employee (age, gender, and enrollment status). Again, each employer will receive a unique
rate quote based on their location and employee census. Since those rates are specific to that
employer, they are referred to as "composite rates." Composite rates simply mean that the
employer will be provided with rates for each of the following categories
after the group's aggregate risk has been determined: · Single (or employee) · Husband & Wife (or employee and spouse) · Family (or employee, spouse, and children) · Parent & Child(ren) (or employee and children) This categorization of rates is
appropriately referred to as "four-tiered rating." Every single employee enrolling under the
plan will be have the same rate, regardless of age or gender; every family
will have the same rate regardless of age or gender, etc. Community rates also provide
four tiers of rates. But as previously
mentioned, they are universal for all small employers and are not specific to
any one employer. Accordingly,
carriers offering community rates will not require a census or location to
calculate rates. They will merely
provide their current rate sheet to the employer that lists the premiums
associated with the plans being offered and the options within each of those
plans. Finalized rates (community or
composite) are non-negotiable and must be filed with the State quarterly, or
upon change. Rates are guaranteed for
one year from final carrier approval (NOTE: changes made to the plan, or
additional plans offered after the inception date of the original contract
are only valid until the original contract anniversary date and will be
re-rated along with the original policy).
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1680 Route 23 North, Suite 310, Wayne, NJ 07470 |