Insurers are in the business of pricing risk. The premiums you pay are based on the insurer's assumption of your likelihood to make a claim. Whether you have a life insurance policy and the insurer is predicting the risk of you passing away, or it's estimating the chance your car will get stolen when pricing your auto policy, the general principle is the same. The risk level your insurer assigns to you is referred to as a rating.
Individual vs. Composite
Insurers have two ways of assigning ratings. One way is to insure every person or item separately on the basis of its own risk level. The other is to lump everything together and create a single rate for everything. This second type of rating is a composite rating. Composite ratings are frequently used in business, and in some cases, they directly impact you.
Individual Health Insurance
If you've ever gone to buy your own health insurance, you've seen that there are many variables that determine what you pay. One of the key variables is your age. Generally, the older you are, the more you pay. When you set up a family insurance plan, though, you may end up with a composite rating for age. For instance, if your insurer charges your rate based on a younger spouse, you've been composite-rated -- both of you pay at a single rate.
Employer-Provided Health Insurance
Employer policies are sometimes composite-rated. That way, the employer pays a set flat rate across its work force. Eliminating age rating allows employers to have a better handle on their health care costs because adding a 25-year old employee costs the same as adding a 63-year old one. It also makes it easier for the employer to offer the same employee contribution for insurance regardless of the employee's age.
Composite Auto Insurance
If your employer offers you a car, it may be benefiting from composite auto insurance. Composite rating for auto insurance can simplify managing insurance for large companies. It allows them to pay a fixed rate regardless of the vehicle and to have the same coverage on every vehicle in the fleet.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.