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stop loss medical insurance - If you are a small business owner or operator and wish to get an explanation of how premiums are priced for your company, then please keep reading. There are basically two ways these premiums can be calculated.

Group Insurance Pricing

The pricing (rate making) process in group insurance coverage is essentially the same as pricing in other industries. The insurance company must generate enough revenue to pay for the cost of its claims and expenses and give rise to the surplus of the company. It differs in that the price of a group insurance strategy is initially determined based on expected future events and may also be subject to experience rating so that the final price to the contract holder can be determined only after the coverage period has ended. Group insurance pricing include two steps.

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

Manual Rating

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

The second step up the development of manual premium rates will be the adjustment of the net premium rates for expenses, a risk charge, and a contribution to profit or surplus. The term retention, frequently used associated with group insurance, usually is defined as the excess of premiums over claim payments and dividends. It consists of charges for (1) the stop-loss coverage, (2) expenses, (3) a danger charge, and (4) a contribution for the insurer's surplus. The sum of these changes usually is reduced from the interest credited to a particular reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to cover future claims underneath the group contract. For giant groups, a formula is normally applied that is depending on the insurers average claim experience. The formula varies from the size of a group and also the type of coverage involved. Insurance companies that write a big volume of any given type of group insurance count on their own experience in determining the frequency and severity of future claims. The location where the benefit is a fixed sum, as in life insurance, the expected claim may be the amount of insurance. For most group health benefits, the expected claim can be a variable that depends on such factors since the expected length of disability, the expected time period of a hospital confinement, or perhaps the expected amount of reimbursable expenses. Firms that do not have enough past data for reliable future projections are able to use industry wide sources. The main source for such U.S. industry wide data is the Society of Actuaries. Insurers also needs to consider whether to begin a single manual rate level or develop select or substandard rate classifications on objective standards associated with risk characteristics of the group such as occupation and kind of industry. These standards are largely independent of the groups past experience.

The adjustment from the net premium rate to supply reasonable equity is complex. Some factors for example premium taxes and commissions vary with all the premium charge. At the same time, the premium tax minute rates are not affected by how big the group, whereas commission rates decrease since the size of a group increases. Claim expenses have a tendency to vary with the number, not the dimensions of claims. Allocating indirect expenses is always a difficult process as is the determination of the risk charge. Community-rating systems, developed originally by Blue Cross Blue Shield, tend to be defined to limit the demographic and other risk factors being recognized. They typically ignore most or every one of the factors necessary for rate equity and could be as simple as one rate applicable to the people with families. If you don't actuarial rationale for charging all groups the identical rate regardless of the expected morbidity. Community rating may be mandated in some jurisdictions. This will make it a matter of public policy rather than an actuarial pricing question.

Experience Rating

bay area - Experience rating is the method whereby a contract holder is offered the financial benefit or held financially accountable for its past claims experience with insurance-rating calculations. Probably the primary reason for using experience rating is competition. Charging identical rates for all groups regardless of their experience would result in adverse selection with employers with good experience seeking out insurance companies that offered lower rates, or they would turn to self funding in an effort to reduce cost. The insurance company that did not consider claims experience would, therefore, have only the poor risk. This is why Blue Cross Blue Shield were required to abandon community rating for group insurance cases above a certain size. The place to start for prospective experience rating will be the past claim experience to get a group. The incurred claims for a given period include those claims which were paid and those in technique of being paid. In evaluating how much incurred claims, provision is usually made for catastrophic claim pooling. Both individual and aggregate stop-loss limits are established where exceptionally large claims (above these limits) usually are not charged to the group's experience. The "excess" areas of claims are pooled for all groups and an average charge is included in the pricing process. The approach is to give weight for 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 (determined by the number of insured lives insured) and also the type of coverage involved, is used. This factor can vary from zero to at least one depending on the actuarial estimates of expertise credibility and other considerations including the adequacy of the contingency reserve produced by the group.

In effect, the claims charge can be 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 equal to the credibility factor and the expected claims being used on a weight equal to one minus the credibility factor. The incurred claims susceptible to experience rating need consideration of any stop loss provisions. Where the credibility factor is one, the incurred claims susceptible to experience rating could be the same as the claims charge. In such cases, the expected claims underlying the prospective rates will not be considered. Thus, when companies insure a group of substantial size, experience rating reflects the claim levels caused by that group's own unique risk characteristics. It has become common practice to offer to the group the financial benefit of good experience and hold them financially accountable for bad experience at the end of each policy period. When experience actually is better than was expected in prospective rating assumptions, the surplus can either be accumulated within an account called a premium stabilization reserve, claim fluctuation reserve, or contingency reserve or the excess can simply be refunded. The refund is either called a dividend (mutual company) or an experience rating refund (stock company).

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

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