With new options available for entrepreneurial organizations that include total pooling, we thought it would be a good idea to talk about the benefits and risks to using a completely pooled benefit plan option.
What is pooling? Comfort in numbers.
Pooling is a concept that means sharing or spreading risk among a larger number of plan participants in order to gain rate stability or “comfort in numbers”. Pooling in the insurance industry occurs on a number of levels:
Pooled benefits:One of the most common types of pooling is in the form of pooled benefits like life insurance, accidental death & dismemberment, critical illness insurance, travel insurance, and dependent life insurance.
These are benefits that would typically represent larger claims (if a plan member passed away during his working years) or needed emergency travel assistance abroad. Insurers would not typically try to recoup the cost of those claims through the premiums collected from a particular plan sponsor; they would be pooled across an entire block of the insurers’ business.
Pricing of pooled benefits is based on age, gender, occupation, etc. of the plan members within a particular company.
Large claim pooling:Most insurers have a large-claim pooling limit so that if one plan member claims over $10,000 on drugs or extended health care expenses, anything in excess of that $10,000 would be pooled with the insurer’s whole block.
Large claim pooling is especially relevant for benefit plans with unlimited drug maximums.
EP3 Pooling:In 2012, the Canadian Life and Health Insurance Association (CLHIA) introduced a new drug pooling program to relieve some of the cost pressures emerging for small and medium-size companies. If high-cost drugs hit a particular plan for two years or more, the cost of these prescriptions would be shared by the entire group of over 23 participating companies.
Total pooling:Some benefit plans offer plan sponsors total shelter from their claims experience. Even dental and extended health care claims would be spread among many companies in the pool.
The potential benefits of pooling are clear:
- Not being exposed as an individual company or plan sponsor to large and infrequent claims such as life insurance claims,
- Increased rate stability from year to year
- The ability to offer employees important drug coverage that they could not obtain on their own through large-claim pooling limits
But what are the drawbacks of using a pooled approach?
Pricing in pooled benefit plans tends to be removed from that group’s own experience. With that, a plan sponsors aren’t provided with any detailed claim information. That information can offer insight into a group’s state of being and potential strategies to improve the health and wellness of their team.
Consider these examples
- A company had never offered paramedical services like massage therapy, physiotherapy or chiropractic care. When they left their pool, the most utilized drug classification was muscle relaxants and pain killers. They found that by introducing paramedical coverage into the plan, employees became less reliant on pharmaceutical pain management.
- A company had been with a completely pooled program for many years but had never really communicated the benefits plan to employees. By leaving the pooled program, they saved 30% of their premium costs and a further 10% thereafter.
Because pricing is typically based on the performance of the entire block, plan sponsors will never know if their group is using their benefits. In a pooled situation, employees under-utilizing their benefits will be paying for the groups that are over-utilizing their benefits.
When neither employees nor employers are impacted by benefits consumption choices, the value of these programs can be eroded.
Finally, lack of detailed utilization data means that plan sponsors can’t negotiate rates with their provider.
What’s the right move for me?
In many cases, large-claim pooling makes a lot of sense. For companies that are continually buffeted by benefit increases, additional pooling may be an option to consider.
Pooling is typically limited to smaller organizations. Employers with fewer than 10 employee lives have the most choices, but new programs in the marketplace are offering completely pooled programs to larger organizations as well.
This post originally appeared on the Vital Partners Inc. website.
FAQs
Risk pooling suggests that demand variability is reduced if one aggregates demand across locations because as demand is aggregated across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another.
What is an example of risk pooling? ›
Risk pooling can be used in a wide variety of inventory control decisions. For example: the problem of choosing between separate warehouses that independently service their local areas versus one that is centralized and services all areas is easily resolved by thinking of the problem in terms of risk pooling.
What are the benefits of a pooling agreement? ›
In summary, pooling agreements can significantly enhance the negotiating power of their members, leading to better deals, stronger market presence, and increased competitiveness. This collective strength is a key advantage that can contribute to the success and growth of the involved parties.
What is earning pooling of risk in insurance? ›
risk pooling in Insurance
Risk pooling allows an insurance carrier to provide an income stream via an immediate annuity, even with its costs and expenses, far more cheaply than a person could on his or her own. Risk pooling is the practice of sharing all risks among a group of insurance companies.
What is the risk pooling strategy? ›
What is meant by risk pooling? Risk pooling in the supply chain is a method of mitigating risks associated with demand variation by putting all business supply chains in one flow. The technique is based on putting all eggs in one basket by having a single warehouse serving several markets.
What are the advantages and disadvantages of risk pooling? ›
Risk pooling is a widely used strategy in the insurance industry, and it has both advantages and disadvantages. While it can lead to lower premiums and ease of administration, it can also limit coverage options and lead to adverse selection.
What are the three kinds of risk pooling? ›
There are essentially four classes of approach to risk pooling [7] : 1) no risk pool, 2) unitary risk pool, 3) fragmented risk pools, 4) integrated risk pools, and below are their definitions: 1) no risk pool: When there is no risk pooling, individuals are responsible for meeting their own health care costs as they ...
What is the main disadvantage of risk pooling? ›
Most Common Concerns With Risk Pooling
One drawback of risk pooling is that members have no control over the underlying loss control and claims management of other pool members from whom they are assuming losses.
What's the meaning of pooling? ›
the act of sharing or combining two or more things: the pooling of resources. pooling of interests. ACCOUNTING.
What is a pooling plan? ›
Businesses using Internet of Things (IoT) technology face the challenge of managing connectivity costs for an increasing number of devices. Pooled data plans offer an effective solution by allowing multiple devices to share a single data allowance, reducing costs and optimizing data usage.
Insurance pooling is a practice wherein a group of small firms join together to secure better insurance rates and coverage plans by virtue of their increased buying power as a block. This practice is primarily used for securing health and disability insurance coverage.
What is risk pooling and risk sharing? ›
Risk pooling is the process of combining assets and liabilities across employers to produce large, risk sharing pools. Risk sharing pools dramatically reduce or eliminate large fluctuations in an employer's retirement contribution rate caused by unexpected demographic events.
In what way does pooling risks spread the risk? ›
Risk pooling allows to reduce possible variations of one's wealth by subdividing the global variance of the pool among all the participants (Borch, 1962). Yet, the risk pooling is not only linked to the individual risk, but also to the insurer's risk, which is the risk of ruin.
What is risk pooling vs risk premium? ›
The “risk premium” strategy used an investment portfolio to meet all three goals. The “risk pooling” strategy was an integrated strategy whereby an income annuity was used to meet spending goals and an investment portfolio was used to support liquidity and legacy.
What is an example of insurance pooling? ›
Typically, benefits that are more predictable are not pooled, while benefits that are higher risk (less predictable) are pooled. For example, in a group with 200 people, extended health and dental might not be pooled, while long-term disability and life insurance might be pooled.
What is an example of product pooling? ›
For example, a retail company might pool inventory across its stores to ensure that all stores have access to the products they need, even if demand is higher in some stores than others.
What is an example of pooling of losses in insurance? ›
Pooling spreads the cost of losses between a number of policyholders. Take household contents insurance against fire, for example. When the risk of a fire is pooled, the large cost to the few who suffer from a fire is spread between all members of the pool.
What are the different types of risk pooling in supply chain? ›
The pooling mechanism refers to the way of managing and allocating inventory or capacity across different echelons in the supply chain. There are different pooling mechanisms, such as centralized control, decentralized control, or hybrid control.
