How benefit plans are funded can depend entirely on the size of the organization and the firms risk tolerance. The flow of money in and out of plans, and co-ordinating these costs with the insurance company are at times limited by governing insurance rules and the law of numbers.

Funding options can be easily understood as a continuum from lowest to highest risk and exposure levels. As the funding methodology moves closer to an ASO basis, the plan sponsor holds more of the risk associated with claims exposure.  At the same time, charges, reserves and expenses are generally lower and could offer significant cost savings.

Common funding alternatives are:

Fully Pooled – funds are pooled with the insurance company’s block of business to guarantee predictable rates and costs. Experience is generally not a factor in rate setting, and manual tables govern most of the cost process. Best for Life, AD&D and LTD benefits.

Experience Rating – actual premium and claims patterns over 2–3 years determines predictable costs for the following year. A groups actual experience is considered relatively credible for premium setting.

Experience Rated-Refund Accounting – a financial accounting approach whereby dollar for dollar premium, claims, reserves, and expenses are accounted for generating surplus or deficits at the end of a given time period.

ASO - Administrative Services Only (ASO), whereby the policyholder assumes the full responsibility for all claims (with or without some pooling protection). Under this approach, there are usually no IBNR reserve requirements and expenses are lower because the insurer does not charge a risk charge. Furthermore, there are no potential deficits, since all claims are funded by the policyholder annually.

Annual reviews of funding options include:

• Assessment of pooling provisions
• Review of best funding approach
• Risk tolerance
• Annual benefits budgeting
• Financial audits
• Surplus and/or deficit allocation