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.
Insurers frequently use two types of endorsements methods in the case of group medical insurance:
As the name suggests, pro-rata means proportionate. In this endorsement method, the insurer charges 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%, that 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.
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 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%. On an individual member premium of Rs 10,000, this 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.
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.