Insurance companies renew group term life year by year and may adjust premiums up or down at that time or guarantee an upper limit for a specific period of time (e.g., for two or three years). Experience rating means that premiums (and/or dividends) in the future are based at least in part on the number of deaths and administrative costs in administering the specific employer’s actual group rather than by the experience of a larger pool of employers. Experience rating should be considered where the group is large, the employees covered in the group are young, and a steady number of young healthy individuals come into the plan, leading to below-average claims.
Competition for group sales may have some effect on the size of employer that is experience rated and the amount of the ratings. Group term premiums are recalculated annually and based on the average age of the group, which is then adjusted for the aggregate experience. Usually, experience ratings are based on claims and expense experience of groups of 200 or more employees. Premiums of smaller employers will typically be based on the experience of a large pool of employers covered by similar master contracts. In a pooled rate situation, a uniform rate is applied to all the groups in the pool.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM