Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
~ Investopedia
Whew, what a mouthful. Bet you didn’t think you’d see a heavy-duty definition like that kicking around this blog!
We got that out of the way for all you jargon junkies who like formal definitions. For the rest of us who like plain language read on! We’ve got an easy-to-understand explanation of pooled insurance and how it can fit with your group benefits.
Are health and dental benefits insurance?
Let’s clear this up right off the bat. True insurance is designed for low probability, high-cost events. It protects from those catastrophes that you hope never happen.
Health and dental costs, on the other hand, are low and predictable. They can usually be budgeted for and rarely result in a significant loss.
This means that group health and dental benefits are really transactional costs, not true insurance.
Now that we know the difference, how does insurance work?
Paying for protection
Let’s say you want to provide financial support for your plan members in case of illness, disability, or death. You could pay these costs on your own, but there’s a risk that a huge expense would be too much for your organization to handle.
Instead, you can pay an insurance company to take on the risk that something catastrophic will happen and pay out the claim if it does. This way, you can provide support for your plan members while only paying predictable monthly premium costs. Premiums are protection against the risk of catastrophic loss.
It’s the same as your own personal life insurance. Your family likely couldn’t handle the major expenses they would have if you were gone. So you pay insurance premiums to protect them and guarantee financial support if you pass away. Predictable payments now to guard against future risk.
So how do insurance companies decide what these premiums should be? It starts with the actuaries.
Caution: data scientists at work
Actuaries are data experts who work at insurance companies and analyze risk. They may not be the most fun at parties, but their attention to science and data allows insurance companies to estimate the probability and severity of catastrophic losses.
Said another way – they have a good idea when something catastrophic may happen, they just don’t know who it will happen to.
Actuaries use their heaps of data to determine how much you should pay in premiums in order for the insurance company to feel comfortable they could pay the illness, disability, or life claim if one of your plan members needed the financial support you promised.
Sharing the risk
As you can imagine, it could cost a lot to protect all your plan members. If the insurance company only had your funds to pay claims the actuaries would ask for awfully high premiums in order to cover their potential costs (fun fact: that’s why health and dental insurance premiums are so high).
Instead, insurance companies group a huge number of plans together in what’s called a pool. The risk of something happening to an individual gets spread over all of the participants in the pool, and the insurance company can use premiums from the whole pool to pay any claims.
This helps decrease the risk for any given group and lets you pay lower premiums.
The bottom line
There you go, pooled insurance is just sharing risk with other organizations so you can give your plan members the support they deserve while paying lower premiums.
It really is the right tool for the job when you want to offer plan members peace of mind.
When you need pooled insurance (like Life, Critical Illness, Accidental Death and Dismemberment, or Disability Insurance) our Growth Team can get competitive rates from our insurance partners, then blend this Peace of Mind coverage with a Health Spending Account or Enhanced Health Blend.
We’re standing by to build the perfect plan for your team. Just get in touch!
