As an organization contemplating group medical coverage (GMC), you might have encountered different types of endorsement methods. This post helps to make sense of these endorsement methods.
Key Takeaways
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Pro-Rata: The “Pay-as-you-go” Model: This is the most employee-friendly method. If a new hire joins on Day 180 of a 365-day policy, the company only pays approximately 50% of the annual premium.
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Short-Period Scale: The Cancellation Penalty: If a company decides to shut down a policy early, insurers use a “Short-Scale” to retain a higher portion of the premium. This prevents companies from cancelling a policy after a high-claim period to avoid paying for the full year.
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Protecting the Loss Ratio: Insurers often see cancellation requests when claims exceed 100%. The short-period scale acts as a financial guardrail, ensuring the insurer can cover the high claims already processed.
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The “300-Day” Rule: On many short-scales, if a policy has been in force for more than 300 days, the insurer will retain 100% of the premium, even if you cancel it a month early.
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Negotiation is Key: While short-scales are standard, larger groups can often negotiate a “Pro-rata Refund” clause at the time of purchase. This is a vital “check” to perform during the procurement phase.
Insurers frequently use two types of endorsements methods in the case of group medical insurance:
Pro-rata
As the name suggests, pro-rata means proportionate. In this endorsement method, the insurer charges a premium only for the number of days a member is enrolled in the policy. Once a member leaves the group, the insurer refunds the premium for the number of days remaining in the policy.
To better understand how pro-rata works, let us look at an example. Let us assume that the annual premium for an employee is Rs 10,000.
Group insurance providers follow the pro-rata scale when an employee joins a group or the insurer decides to terminate the insurance. So, if an employee joins after six months in 12-month insurance, then the premium they pay will be 50%, which is Rs 5,000. Similarly, if the insurer decides to close insurance after nine months, they will refund three months of premium, that is, Rs 2,500.
Short-period scale
The short-period scale penalizes the early closure of insurance. Its aim is to reduce the policy loss ratio. This is because the risk is not distributed equally during the policy tenure. Also, typically, the insurer receives closure requests when loss ratios are over 100%. Thus, the closure of a policy before the date of expiry will result in a fine. Different insurers calculate the fine differently.
A representation of the short-period endorsement scale in group medical insurance:
| Covered for (number of days) | Percentage of premium (%) |
| X > 300 | 100 |
| 240 < X < 300 | 90 |
| 180 < X < 240 | 80 |
| 120 < X < 180 | 70 |
| 90 < X < 120 | 60 |
| 60 < X < 90 | 50 |
| 30 < X < 60 | 40 |
| X < 30 | 25 |
| Note: X = number of days the policy is in force | |
This is one possible short-scale but variations of this also exist.
Let us use the same example as above to understand how short-scale works. Here, we assume that the client makes a request to terminate the insurance after nine months, i.e., 270 days. Then, as per the short-scale above, they will get only 10% of their premium back and the insurer will retain the remaining 90%. An individual member premium of Rs 10,000, means that the client will get Rs 1,000, while the insurer will retain Rs 9,000. This is one possible short-scale but variations of this also exist.
Summary: Pro-Rata vs. Short-Period Scale
This short-scale operates across most commercial insurances if the customer asks for closure. In some cases, the insurer may agree to a pro-rata refund, but the group must clarify this before purchasing the insurance.
Frequently Asked Questions (FAQs)
Q1: What exactly is an “Endorsement” in group insurance?
A) An endorsement is any change made to the policy after it has started. This includes adding a new employee, removing someone who left the company, or correcting a name or birth date.
Q2: If an employee leaves after 2 months, do I get the full 10 months of premium back?
A) If your policy follows the Pro-rata method for exits, yes. The insurer will calculate the exact number of days the employee was covered and refund the balance. However, if the policy has a “No-Refund” clause for exits, you might not get any money back.
Q3: Why is the Short-Period Scale so expensive for the customer?
A) Insurers incur significant administrative and setup costs at the start of a policy. Additionally, risk isn’t spread evenly throughout the year. The short-scale ensures the insurer is compensated for the risk they took during the months the policy was active.
Q4: Can I add my newborn baby (arriving in June) on a Pro-rata basis?
A) Yes. In a GMC policy, adding a dependent is a “Mid-term Addition.” You will pay the premium from the date of the baby’s birth until the end of the policy year, calculated proportionately.
Q5: Is GST also refunded during a Pro-rata exit?
A) Yes. When an insurer issues a refund (credit note) for the premium, the corresponding GST (18%) is also reversed and credited back to the company.
About The Author
Mayank Sharma
MBA Finance
He is a professional who brings extensive knowledge and expertise to the field of group health insurance. He has dedicated 7years to helping individuals and businesses navigate the complexities of insurance. Having worked closely with numerous clients and insurance providers, he deeply understands the nuances of group health insurance policies. With a reputation for providing insightful and informative content, he leverages his industry experience to educate readers about the importance of group health insurance and its benefits. Through their articles, Mayank Sharma aims to empower individuals and businesses to make informed decisions about their healthcare coverage, ultimately promoting healthier and more secure communities.
