February 2024 Group Benefits Pooling Explained

I often get questions from clients wanting to understand the concept of insurance pooling and it’s no surprise. There are a lot of layers to pooling with different definitions and implications, from pooled benefits and pooled claims to pooled plans, so we’re going to dive in (pun intended!) with a two-part series on pooling over the next couple of months. Pooling is ultimately a way for the insurance company of protect against risk and we’ll explore that in a bit more detail next time when we look at pooled benefits and claims.

Today we’re digging into the more general definition of pooled plans and how they compare to experience rated plans. These two concepts essentially describe the way that an insurance company prices a benefits plan. An experience rated plan has its rates based on the group plan’s actual experience, meaning that the insurer looks at past claims made in the plan to determine its rates. In comparison, the idea behind plan pooling is that the insurer brings multiple company plans together in a larger pool and then determines the rate for all clients based on the overall experience of the entire pool.

Companies who are part of a pooled plan benefit from economies of scale by being part of that larger group. There is great stability in a pooled plan since the pool is so big and rate fluctuation is less extreme. This level of stability is often seen as the best advantage to being part of a pooled plan even though it can be a bit more expensive up front compared to an experience rated plan.

Pooled plans are often preferred by smaller groups who want to be able to budget and maintain consistency in their rates year over year. On the other hand, experience rated plans are prone to higher rate fluctuation because if one single person in an organization makes a big claim, this can account for a large proportion of the overall experience rating.

That said, experience rated plans are generally less expensive up front and allow for more customization which is very beneficial when it comes to plan design. An experience rated plan can be fully customized to suit an organization’s needs, whereas pooled plans have fewer options when it comes to plan design. This is purposeful on the part of the insurer, as this minimizes risk by keeping the pool stable and consistent across the many companies that are grouped together. 

Although this lack of customization is certainly a downside, rates tend to be less volatile in a pooled plan which means that there is less risk of a big rate jump that results in a required change to a company’s plan design.  This is sometimes seen as a great upside to smaller companies who do not want to revisit elements of their plan design on a regular basis – because as we all know, it’s never fun to take something away from someone that they’ve previously had access to!

It's important to understand that a pooled plan does still take experience rating into account though, and this can have an impact on a group’s rates. Pooled plans generally have pools within pools that are partially experience rated, which means that companies aren’t necessarily swimming in as big of a pool as they might think. If an organization has lower use in their own benefits plan, then it’s highly likely that what they pay into the pool is actually subsidizing higher users in their pool. There is a lack of transparency here in that a group does not really get the full picture of their own claim experience and that of the entire pool. This is especially evident when we compare pooled plans to experience rated plans, which are completely based on the company’s specific usage of its own benefits plan.

As you can see, there are a lot of nuances to how these types of plans are managed, and each has its own pros and cons. When looking at a pooled plan vs. an experience rated plan, it really comes down to a company’s specific situation and needs. If you’re not sure which is right for you, that’s where a benefits advisor can help! Shannon is available to help you evaluate, analyze, and compare the different options so you can choose the right plan for your organization.