DEFINITION of ‘Insurance Consortium’
A group of businesses or organizations that join together to provide insurance coverage. Insurance consortiums allow for economies of scale and increased efficiencies, since the groups that are part of the consortium can spread out the cost of administration and can obtain better discounts through volume.
BREAKING DOWN ‘Insurance Consortium’
Insurance consortiums are found in both the private and public sectors. They allow groups that would typically self-fund or purchase commercial policies to pool resources in order to obtain better rates. This is especially important with health insurance, since healthcare spending has grown rapidly for several decades. Companies and organizations that are unable to control healthcare costs will find themselves devoting a larger proportion of their budgets to insurance, and limiting the amount of funds that could instead be devoted to growth-drivers.
Insurance consortiums can come in several forms. A fully-insured consortium purchases a contract from an insurance company that is responsible for collecting premiums and administering the plan. A self-funded consortium pools together financial resources from member organizations to cover claims. It collects premiums and also administers the plan itself. In order to protect itself from severe claims, a self-funded consortium typically purchases an insurance policy to cover losses over a certain limit.
For example, a school district that has faced several years of rapidly-increasing premiums is struggling to keep the same level of coverage for its employees. It has the choice of cutting back coverage or passing along the higher premiums to employees in the form of higher co-pays. Other school districts throughout the state are also facing similar problems. Rather than change benefits, the school districts pool funds together to purchase health insurance policies. It is able to contain the growth of premiums through its scale since it is able to spread risk over a larger number of employees. It is also able to reduce the cost of administering the insurance plans by centralizing the procurement and monitoring processes.