How insurance premiums are determined
For most types of insurance, the rate you pay is determined by risk. For example, if you buy auto insurance, your premium is based on numerous factors. Age and address are factors, but the insurance company also looks into your personal records – have you been in accidents in the past; have you been cited for a driving offense; do you owe money on the vehicle? By asking these types of questions, the company is trying to assess the chances of you making claims.
The pricing structure is similar for home, life and almost every other type of insurance available.
The exception is health insurance, where your personal records are not part of the equation. Your health, medical history or gender cannot affect the rate you pay.
To determine your rates, you become part of a community of similar people, and rates are established by the makeup of the whole group. To put you in an appropriate group, health insurers will ask:
- Your age
- Where you live
- Whether you use tobacco
Based on those few questions, the entire group will pay the same insurance premium for the same insurance policy.
The entire process is overseen by the federal government, and one of the reforms they are making for 2018 is the structure of the "communities" for kids. From the CMS:
Child Age Rating: We are finalizing updates to the child age rating structure to better reflect the health risk of children and to provide a more gradual transition when individuals move from age 20 to 21. Specifically, we establish one age band for individuals age 0 through 14, and then single-year age bands for individuals age 15 through 20, effective for plan years or policy years beginning on or after January 1, 2018. We are finalizing child rating factors that, overall, are higher than the current child rating factor and more accurately reflect health care costs for children.
In making this change, the government is trying to decrease "sticker shock" for young adults attempting to purchase health coverage.
For more information about how this works, check out these BCBSND videos: