Why it matters at renewal
Credibility decides how much your own claims move your rate. If your claims run above the carrier's manual rate, more credibility means a bigger increase. If they run below, more credibility means a smaller one.
This applies to experience-rated groups. ACA small groups (usually under 50 employees) are priced on the carrier's whole pool, so credibility doesn't come into play.
Worked example
The same group as the Experience Rating example: trended claims of $673.42 PMPM against a manual rate of $650.00. This example uses a common square-root rule, credibility = √(members ÷ 1,000), with full credibility at 1,000 members.
| Group size | Credibility | Blended claims PMPM |
|---|---|---|
| 100 members | 31.6% | $657.40 |
| 180 members | 42.4% | $659.93 |
| 400 members | 63.2% | $664.80 |
| 500 members | 70.7% | $666.56 |
| 1,000 members | 100% | $673.42 |
Going from 100 to 400 members only doubles credibility. That's the square root at work.
Read the transcript
When a carrier prices your renewal, how much do your own claims count? For a group of a hundred and eighty, about forty-two percent.
That weight is called credibility. The rest goes to the manual rate, the carrier's standard price for a group like yours. Here, six seventy-three from your claims and six fifty from the manual blend to six sixty.
Credibility grows with size, but slowly. In this example, a hundred members gets about thirty-two percent, and full credibility starts at a thousand. To double your credibility, you need four times the people.
Why it matters. This group's claims ran above the manual rate, so every ten points of credibility adds about six thousand dollars a year. For a group running below the manual rate, the same ten points would save money.
So ask your carrier three things. What credibility did you give us? How do you calculate it? And how would our renewal change at ten points more or less? Find out more at actuariallysound dot com.
Common misunderstandings
Questions to ask your carrier or broker
- What credibility did you assign us?
- How do you calculate it, and at what size is a group fully credible?
- How would our renewal change at 10 points more or less credibility?