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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 your company, then please read on. 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 insurer must generate enough revenue to cover the cost of its claims and expenses and give rise to the surplus of the company. It differs because the price of a group insurance product is initially determined on the basis of expected future events and may even also be subject to experience rating so that the final price to the contract holder can be established only after the coverage period ends. Group insurance pricing consist of 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 coverage, $1 of daily hospital benefit, or $1 of monthly income disability benefit)

(2) The determination of the total price or premium that will be paid by the contract holder it really is the coverage purchased. The approach to group insurance rate making differs according to whether manual rating or experience rating is used. In the case of manual rating, the premium rate is determined independently of the particular groups claim experience. When experience rating is utilized, the past claims experience of a group is considered in determining future premiums for your group and/or adjusting past premiums after having a coverage period ends. As in all rate making, the primary objective for all types of group insurance coverage is to develop premium rates which can be adequate, reasonable, and equitable.

Manual Rating

san francisco - Inside the manual rating process, premium rates are in place for broad classes of group insurance business. Manual rating can be used with small groups for which no credible individual loss experience can be obtained. This lack of credibility exist because the size of the group is definately that it is impossible to determine whether the experience is a result of random chance or is truly reflective with the risk exposure. Manual rating can 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 can be used to combine manual rates as well as the actual experience of a given group to determine the final premium. The relative weights rely on the credibility with the groups own experience. Manual premium rates (also called tabular rates) are quoted inside a company's rate manual. As pointed out above earlier, these manual rates are put on a specific group insurance case so that you can determine the average premium rate for the case that will then be multiplied through the number of benefit units to obtain a premium for the group. The rating process requires the determination of the net premium rate, which is the amount necessary to fulfill the cost of expected claims. For any given classification, this can be calculated by multiplying the probability (frequency) of a claim occurring by the expected amount (severity) with the claim.

The second step in 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 phrase retention, frequently used regarding the group insurance, usually is described 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 to the insurer's surplus. The sum of these changes usually is reduced through the interest credited to particular reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to pay future claims beneath the group contract. For large groups, a formula is usually applied that is depending on the insurers average claim experience. The formula varies through the size of a group and the type of coverage involved. Insurance companies that write a sizable volume of any given form of group insurance rely on their own experience in determining the regularity and severity of future claims. The location where the benefit is a fixed sum, such as life insurance, the expected claim will be the amount of insurance. For the majority of group health benefits, the expected claim can be a variable that depends on such factors because the expected length of disability, the expected time period of a hospital confinement, or even the expected amount of reimbursable expenses. Businesses that do not have enough past data for reliable future projections may use industry wide sources. The key source for such U.S. industry wide data is the Society of Actuaries. Insurers must also consider whether to set up a single manual rate level or develop select or substandard rate classifications on objective standards linked to risk characteristics with the group such as occupation and kind of industry. These standards are largely independent of the groups past experience.

The adjustment with the net premium rate to supply reasonable equity is complex. Some factors including premium taxes and commissions vary with all the premium charge. Simultaneously, the premium tax minute rates are not affected by the dimensions of the group, whereas commission rates decrease since the size of a group increases. Claim expenses tend to vary with the number, not how big claims. Allocating indirect expenses is usually a difficult process as they are the determination of the danger charge. Community-rating systems, developed originally by Blue Cross Blue Shield, are often defined to limit the demographic as well as other risk factors being recognized. They typically ignore most or every one of the factors necessary for rate equity and may be as simple as one rate applicable to people with families. If you don't actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating continues to be mandated in some jurisdictions. It is then a matter of public policy as opposed to an actuarial pricing question.

Experience Rating

bay area - Experience rating is the method whereby a contract holder is given the financial benefit or held financially in charge of 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 lead to adverse selection with employers with good experience looking for insurance companies that offered lower rates, or they'd turn to self funding as a way to reduce cost. The insurance company that did not consider claims experience would, therefore, have only the poor risk. This is the reason Blue Cross Blue Shield needed to abandon community rating for group insurance cases over a certain size. The starting place for prospective experience rating may be the past claim experience to get a group. The incurred claims for a given period include those claims which have been paid and those in process 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) are not charged to the group's experience. The "excess" portions of claims are pooled for many groups and an average charge is accounted for in the pricing process. The approach is always to give weight to the individual groups own experience for the extent that it is credible. In determining the claims charge, a credibility factor, usually based on the size of the group (based on the number of insured lives insured) and the type of coverage involved, is utilized. This factor may differ from zero to 1 depending on the actuarial estimates of expertise credibility and other considerations including the adequacy of the contingency reserve developed by the group.

In effect, the claims charge can be a weighted average of (1) the incurred claims subject to experience rating and (2) the expected claims, with all the incurred claims being assigned a weight equal to the credibility factor and the expected claims being assigned to a weight equal to one without the credibility factor. The incurred claims subject to experience rating are after consideration of any stop loss provisions. Where the credibility factor is but one, the incurred claims subject to experience rating will be the same as the claims charge. In these instances, 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 as a result of that group's own unique risk characteristics. It has become common practice to offer to the group the financial good thing about good experience and hold them financially responsible for bad experience at the conclusion of each policy period. When experience actually is better than was expected in prospective rating assumptions, the extra can either be accumulated in an account called a premium stabilization reserve, claim fluctuation reserve, or contingency reserve or perhaps the excess can simply be refunded. The refund is either called a dividend (mutual company) or an experience rating refund (stock company).

The net result of the experience rating process is normally called the contract holder 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.