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stop loss medical insurance - If you are a small business owner or operator and wish to get an explanation of methods premiums are priced for the company, then please read on. There are basically two ways these premiums may be calculated.

Group Insurance Pricing

The pricing (rate making) process in group insurance policies are essentially the same as pricing in other industries. The insurer must generate enough revenue to cover the cost of its claims and expenses and contribute to the surplus of the company. It differs for the reason that the price of a group insurance strategy is initially determined on the basis of expected future events and may also be subject to experience rating in order that the final price to the contract holder can be established only after the coverage period ends. Group insurance pricing include two steps.

(1) The resolution of a unit price, referred to as a rate or premium rate for each unit of benefit (e.g., $1,000.00 of life insurance, $1 of daily hospital benefit, or $1 of monthly income disability benefit)

(2) The resolution of the total price or premium which will be paid by the contract holder its the coverage purchased. The method of group insurance rate making differs according to whether manual rating or experience rating is utilized. In the case of manual rating, the premium rate is determined independently of a particular groups claim experience. When experience rating can be used, the past claims connection with a group is considered in determining future premiums for that group and/or adjusting past premiums following a coverage period is finished. As in all rate making, the key objective for all types of group insurance policies are to develop premium rates that are adequate, reasonable, and equitable.

Manual Rating

san francisco - Inside the manual rating process, premium rates have established yourself for broad classes of group insurance business. Manual rating can be used with small groups for which no credible individual loss experience is accessible. This lack of credibility exist because the size of the group is really that it is impossible to determine whether the experience is because of random chance or perhaps is truly reflective from the risk exposure. Manual rating is also used to establish the initial premiums for larger groups which can be subject to experience rating, specially when a group is being written for the first time. In all but the largest groups, experience rating is used to combine manual rates and also the actual experience of confirmed group to determine the final premium. The relative weights depend upon the credibility with the groups own experience. Manual premium rates (also referred to as tabular rates) are quoted in the company's rate manual. As outlined above earlier, these manual rates are put on a specific group insurance case so that you can determine the average premium rate for that case that will then be multiplied by the number of benefit units to acquire a premium for the group. The rating process necessitates the determination of the net premium rate, the amount necessary to meet the cost of expected claims. For just about any given classification, this really is calculated by multiplying the probability (frequency) of your claim occurring from the expected amount (severity) with the claim.

The second step up the development of manual premium rates may be the adjustment of the net premium rates for expenses, a danger charge, and a contribution to profit or surplus. The word retention, frequently used regarding the group insurance, usually is defined as the excess of premiums over claim payments and dividends. It includes charges for (1) the stop-loss coverage, (2) expenses, (3) a risk charge, and (4) a contribution for the insurer's surplus. The sum of these changes usually is reduced through the interest credited to certain reserves (e.g., the claim reserve and then any contingency reserves) the insurer holds to pay future claims under the group contract. For large groups, a formula is usually applied that is in line with the insurers average claim experience. The formula varies from the size of a group as well as the type of coverage involved. Insurance firms that write a big volume of any given form of group insurance depend on their own experience in determining the regularity and severity of future claims. In which the benefit is a fixed sum, as in life insurance, the expected claim will be the amount of insurance. For many group health benefits, the expected claim is really a variable that depends on such factors because the expected length of disability, the expected duration of a hospital confinement, or even the expected amount of reimbursable expenses. Firms that do not have enough past data for reliable future projections may use industry wide sources. The major source for such U.S. industry wide details are the Society of Actuaries. Insurers should also consider whether to establish a single manual rate level or develop select or substandard rate classifications on objective standards associated with risk characteristics with the group such as occupation and type of industry. These standards are largely independent of the groups past experience.

The adjustment with the net premium rate to provide reasonable equity is complex. Some factors such as premium taxes and commissions vary with the premium charge. Concurrently, the premium tax minute rates are not affected by the dimensions of the group, whereas commission rates decrease because the size of a group increases. Claim expenses tend to vary with the number, not the dimensions of claims. Allocating indirect expenses is always a difficult process as is the determination of the chance charge. Community-rating systems, developed originally by Blue Cross Blue Shield, in many cases are defined to limit the demographic along with other risk factors being recognized. They typically ignore most or every one of the factors necessary for rate equity and may even be as simple as one rate applicable to people with families. There is little actuarial rationale for charging all groups the identical rate regardless of the expected morbidity. Community rating continues to be mandated in some jurisdictions. It is then a matter of public policy instead of an actuarial pricing question.

Experience Rating

bay area - Experience rating is the procedure whereby a contract holder is given the financial benefit or held financially in charge of its past claims experience in insurance-rating calculations. Probably the major reason for using experience rating is competition. Charging identical rates for those groups regardless of their experience would lead to adverse selection with employers with good experience searching for insurance companies that offered lower rates, or they would turn to self funding as a way to reduce cost. The insurer that did not consider claims experience would, therefore, be left with only the poor risk. This is why Blue Cross Blue Shield needed to abandon community rating for group insurance cases above a certain size. The starting place for prospective experience rating may be the past claim experience for any group. The incurred claims for a given period include those claims which have been paid and those in process of being paid. In evaluating the quantity of incurred claims, provision is usually made for catastrophic claim pooling. Both individual and aggregate stop loss limits are established by which exceptionally large claims (above these limits) are not charged to the group's experience. The "excess" servings of claims are pooled for those groups and an average charge is accounted for in the pricing process. The approach would be to give weight towards the individual groups own experience for the extent that it is credible. In determining the claims charge, a credibility factor, usually in line with the size of the group (dependant on the number of insured lives insured) as well as the type of coverage involved, is used. This factor can vary from zero to 1 depending on the actuarial estimates of expertise credibility and other considerations including the adequacy of the contingency reserve put together by the group.

In effect, the claims charge is a weighted average of (1) the incurred claims at the mercy of experience rating and (2) the expected claims, with all the incurred claims being assigned a weight equal to the credibility factor and also the expected claims being assigned to a weight equal to one without the credibility factor. The incurred claims susceptible to experience rating are after consideration of any stop-loss provisions. Where the credibility factor is one, the incurred claims subject to experience rating could be the same as the claims charge. In such cases, the expected claims underlying the objective rates will not be considered. Thus, when companies insure a small grouping of substantial size, experience rating reflects the claim levels caused by that group's own unique risk characteristics. It is common practice to offer to the group the financial benefit of good experience and hold them financially in charge of bad experience after each policy period. When experience happens to be better than was expected in prospective rating assumptions, the surplus can either be accumulated in a account called a premium stabilization reserve, claim fluctuation reserve, or contingency reserve or even the excess can simply be refunded. The refund is either known as a dividend (mutual company) or even an experience rating refund (stock company).

The net result of the experience rating process is generally called the contract holder account balance, representing the final balance caused by the individual contract holder. As pointed out earlier this balance or perhaps a portion of the balance can be refunded to the contract holder. The adequacy from the group's premium stabilization reserve influences dividend or rate adjustment decisions.