Insurance Consortiums: Definition, Functions, and Examples

An insurance consortium is a group of businesses or organizations that join together to provide insurance coverage. Teaming up allows for economies of scale and increased efficiencies since the groups that are part of the consortium can spread out the cost of administration and obtain better discounts through volume.

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, where costs have grown rapidly, forcing companies and organizations to devote a larger proportion of their budgets to insurance, siphoning away funds that could instead be devoted to growth drivers.

Insurance consortiums are generally governed by a board of directors (B of D) that meet several times a year—usually quarterly. The nature of the board depends on the type of consortium. When possible, it will feature voting members from each participating business or organization, thus giving every representative a voice. An administrator is also usually employed, potentially from a third party, to take care of the consortiums’ day-to-day functions.

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, on the other hand, 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.

A school district has faced several years of rapidly-increasing premiums and, as a result, is struggling to maintain the same level of coverage for its employees. It has the choice of continuing to spend more on insurance, 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 facing similar problems. Rather than change benefits, the school districts pool funds together to purchase health insurance policies. More specifically, the Ohio Municipal League (OML) and South Central Ohio Insurance Consortium (SCOIC) formed a partnership in 2017 to create an insurance consortium. The consortium is called the South Central Ohio Insurance Consortium.

There are many benefits to joining an insurance consortium, as well as a handful of caveats. A notable drawback is the risk that a self-funded consortium finds the claims it is responsible for paying suddenly surpassing the premiums it collects. Under this type of scenario, the consortium may register a financial loss and struggle to stay afloat. The prospect of a sharp fluctuation in claims payable means that purchasing additional stop-loss insurance, which caps the amount the self-funded consortium is responsible for paying, is a necessary additional cost. Another potential hindrance is a legal requirement to maintain a reserve fund. These funds are necessary to ensure there is adequate cash on hand to cover unexpected losses. Sometimes regulators can be excessively strict, though, demanding that a seemingly unreasonable sum of money be put aside.

In recent years, insurance consortiums have banded together to adopt new technologies that offer lower costs for members. One example is blockchain. The record-keeping technology behind the Bitcoin network is capable of creating a source of easily shareable data that is largely free from information discrepancies and the need for reconciliation. The market for blockchain in health insurance is predicted to grow at a compound annual growth rate (CAGR) of more than 70% from 2020 to 2027. According to Research And Markets, the market for blockchain in health insurance is expected to witness the fastest growth rate across applications, thanks to its ability to reduce IT and operational costs in insurance processes and wipe out healthcare-related frauds that cost the industry billions of dollars each year. Doing so enables them to contain the growth of premiums through scale since they are able to spread risk over a larger number of employees. By teaming up, the school districts are also able to reduce the cost of administering the insurance plans by centralizing the procurement and monitoring processes.

The board of directors in an insurance consortium typically meets several times a year to govern the consortium’s operations. It may include voting members from each participating business or organization to ensure representation and decision-making.

Insurance consortiums offer benefits such as economies of scale, increased efficiencies, and better discounts through volume purchasing. This enables participants to obtain insurance coverage at lower costs compared to individual policies.

The main types of insurance consortium are fully-insured consortiums and self-funded consortiums. Fully-insured consortiums purchase insurance contracts from providers, while self-funded consortiums pool financial resources to cover claims and administer plans themselves.