What Is Composite Rating in Insurance?
Insurance companies use several methods to determine premiums when issuing a group insurance policy. One common method is called a composite rating.
Definition
A composite rating is attained by averaging all of the risks in an insurance plan, and then using that average to determine individual premiums. Under a composite rating, premiums are the same for each insured.
Purpose
Under a composite rating plan, all insureds can receive the same benefits at the same price. Also, this type of rating facilitates easier audits and administration of the group policy.
Types of Insurance
A composite rating is most commonly used for group health and life insurance policies.
Calculation
Averaging is achieved by adding the age-related risks of all plan members, and dividing that amount by the total number of insureds. In some cases, health risks are also averaged.
Disadvantages
Younger plan members pay a comparatively higher rate for coverage than they would under a banded (individual) rating plan. Liikewise, older insureds pay a proportionally smaller amount for insurance benefits.
