For large group medical plans, insurers typically set premiums using:

Why A is correct

Large groups generate a statistically credible volume of claims, so insurers use experience rating: the group's own past loss experience is the primary driver of its premium. A group with better-than-average experience earns a lower rate, while a group with heavy claims history pays more, reflecting its expected future costs. This approach works because the law of large numbers makes a large group's claims relatively predictable from year to year. Small groups, in contrast, lack credible individual experience and are commonly priced through community rating or similar pooling methods that spread risk across all groups in an area.

Why the other options are wrong

• B) Community rating pools all insureds in a defined geographic area so that the healthy subsidize the sick and rates do not follow one group's claims. It is characteristic of the small-group and individual markets, not large-group experience rating.
• C) The age of the oldest member is not the rating basis for a large group. Pricing weighs the group's claims experience, demographics, industry, and benefit design, not a single member's age.
• D) Premiums are not fixed by the state. Insurers file their rates with regulators, but for large groups the group's own claims experience drives the negotiated price.

Memory hook

Experience rating = your group's past claims set your group's future premium.

Why B is correct

Experience rating sets a group's premium according to the claims history of that specific group. It is typically used for large groups, where the group's own past claims are a statistically credible predictor of future claims. Small groups and individuals lack enough exposure of their own to be credibly experience-rated, so they are usually priced through community rating, which spreads risk over all insureds in a defined community.

Why the other options are wrong

• A) Community rating ignores a single group's own claims and uses the experience of the entire community; it is used for small groups and individuals.
• C) A retrospective dividend plan adjusts premiums after the year based on actual claims, but it is a refund mechanism, not the pricing basis described.
• D) Modified community rating blends community factors such as age and geography; it is not based on the group's own claims experience.

Memory hook

Experience rating = your own claims set your price. Community rating = everyone's claims set your price.