The pricing of group insurance is dependent on many factors including:
- the level and frequency of claims
- the credibility given to the claims experience
- the plan design
- the composition of the group (age, gender, occupation, geographic region)
- the insurer's administrative expenses for servicing the plan
- the reserve requirements
- the insurer's targeted profit margin
- applicable taxes
All the above items are known entities with the exception of the level and frequency of claims. Differences in pricing amongst insurers result from their assumptions regarding future levels of claims, non-claims costs or retention, reserve requirements, and the method used for calculating renewal rate adjustments.
Group insurance pricing is also influenced by the underwriting method or level of risk taken on by the insurer. Several funding and financial arrangements are available, each resulting in a different level of risk for the insurer and the insured. Shifting the risk from the insurer to the insured reduces the insured's potential liability and therefore effects the pricing.
An understanding of the manner in which renewal rates are calculated and the underwriting methods available is important to ensuring that the plan is priced appropriately and at an acceptable level of risk.