INSURANCE POOLING

Insurance pooling is a practice wherein a group of small firms join together to secure better insurance rates and coverage plans by virtue of their increased buying power as a bloc. This practice is primarily used for securing health and disability insurance coverage.

Small business enterprises have long complained that insurers hand out discounts to big clients, who have substantial purchasing power and large numbers of employees, and that those insurers too often try to make up those discount losses by hiking rates for their smaller clients. Unable to buy good coverage on their own, smaller companies were forced to rely on pooling plans created and managed by trade associations or other affiliated business groups, or pass on providing coverage altogether. In recent years, however, another alternative, in which private businesses band together and organize their own pools, has emerged. Distinct entities have been created to address both health and disability coverage needs.

HEALTH INSURANCE POOLS Health insurance coverage has long been a difficult benefit for many small businesses to incorporate into their compensation packages. Premiums for even modest health packages constitute a significant outlay for small businesses, and increases in premiums and deductibles attributable to employee illness forced many owners with the unpleasant choice of placing their business at financial risk or ending health insurance for their employees. "Insurers had come to evaluate small firms separately by such factors as claims experience, worker's health status, and even type of business," explained Nation's Business. "As a result, many small companies couldn't buy health insurance at any price. Those that did have coverage lived in fear of a single serious illness because it could trigger skyrocketing rates or cancellation of coverage."

Health insurance pools, which are also sometimes called insurance purchasing alliances or health-insurance purchasing co-ops, were created to address this problem. They provide group health policies exclusively to small businesses. Rules governing these alliances vary from state to state, with some states offering eligibility to sole proprietorships and others providing coverage to businesses with up to 100 employees. On average, however, these health insurance pools target employers of 3 to 50 people.

Small businesses that join one of these pools can typically count on the following benefits: 1) A community premium rate that is significantly lower than any individual rate it could demand, because the membership gains collective leverage that forces insurance carriers to modify premium and deductible demands; 2) In many cases, premium increases are capped for the first several years of the policy; 3) Centralized administration of the policy among all of companies covered under it, which results in savings in work hours and paperwork; 4) Standard rates and benefits that do not fluctuate according to company size or work force health history; and 5) selection of plans from multiple insurers (some plans allocate plan selection power exclusively with employers, while others allow workers to select from a menu of plans).

First tried in California in the early 1990s, these types of pools could be found in 15 states by the late 1990s. In addition, several more states are slated to open their doors to such pooling strategies over the next few years. Analysts warn, however, that the rules and regulations governing health insurance pools vary considerably from state to state, and note that the laws of a number of states make it unlikely that these alliances will make an appearance within their borders any time soon. "Because they are usually locally based and privately operated, health co-ops or alliances have evolved quite differently in the 15 states where they are functioning," explained Stephen Blakely in Nation's Business. "For instance, California's co-op plan is run by an independent state agency that defines the benefits and negotiates with insurers. Florida and Texas have less state control and permit more autonomy among alliances. In New York and some other states, local business-sponsored health alliances operate on their own…. Some states havelong-standing laws expressly prohibiting businesses from coming together to obtain insurance. Other states have not enacted laws that would enable small firms to buy health insurance regardless of their workers' health status, that would limit insurance-rate variability between companies of similar size and labor characteristics, and that would prohibit insurers from canceling small groups' coverage without cause."

DISABILITY INSURANCE POOLS Disability insurance pools, also called risk-purchasing groups, operate under the same guiding principles as health insurance alliances—by joining together into one single negotiating group, small businesses can increase their bargaining power when dealing with insurers. These groups are usually composed of companies that hail from the same industry sector, and thus face many of the same disability risks.

These disability insurance pools arose in the aftermath of the 1986 Risk Retention Act, which was passed by Congress in an effort to address the growing inability of small business owners to obtain liability insurance because of its rapidly growing cost. "Risk-retention groups enable companies in the same industry, such as plastics or chemicals, to cut insurance costs by forming what are, in effect, mini insurance companies to self-insure against liability claims," explained Lynn Woods in Nation's Business. "Riskpurchasing groups, on the other hand, permit group purchasing of liability coverage."

Interestingly, insurance companies have been among the biggest boosters of this new type of disability coverage arrangement. Woods pointed out that "insurance companies find risk-purchasing groups attractive prospects because the companies can save costs in two ways—by using a single agent or broker for multiple states and by tailoring a policy for a group based on a similar level of risk."

INSURANCE POOLING

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