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stop loss medical insurance - If you are a small business owner or operator and want 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 is essentially the same as pricing in other industries. The insurance company must generate enough revenue to cover the cost of its claims and expenses and bring about the surplus of the company. It differs because the price of a group insurance strategy is initially determined on the basis of expected future events and could also be subject to experience rating so the final price to the contract holder can be determined only after the coverage period is finished. Group insurance pricing consist of two steps.

(1) The determination of a unit price, termed as a rate or premium rate for each and every 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 resolution of the total price or premium which will be paid by the contract holder it really is the coverage purchased. The approach to group insurance rate making differs based on whether manual rating or experience rating can be used. In the case of manual rating, the premium rates are determined independently of your particular groups claim experience. When experience rating is used, the past claims experience of a group is considered in determining future premiums for the group and/or adjusting past premiums following a coverage period has ended. 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 - Within the manual rating process, premium rates have established yourself for broad classes of group insurance business. Manual rating is used with small groups which is why no credible individual loss experience is accessible. This lack of credibility exist because the size of the group is such that it is impossible to find out whether the experience is due to random chance or perhaps is truly reflective from the risk exposure. Manual rating is also used to establish the initial premiums for larger groups that are subject to experience rating, particularly if a group is being written the very first time. In all but the largest groups, experience rating is utilized to combine manual rates and the actual experience of confirmed group to determine the final premium. The relative weights depend on the credibility from the groups own experience. Manual premium rates (also called tabular rates) are quoted in 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 from the number of benefit units to secure a premium for the group. The rating process necessitates the determination of the net premium rate, the amount necessary to satisfy the cost of expected claims. For any given classification, this really is calculated by multiplying the probability (frequency) of the claim occurring by the expected amount (severity) with the claim.

The second step up the development of manual premium rates will be the adjustment of the net premium rates for expenses, a danger charge, and a contribution to learn 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 certain reserves (e.g., the claim reserve and then for any contingency reserves) the insurer holds to cover future claims under the group contract. For large groups, a formula is normally applied that is depending on the insurers average claim experience. The formula varies by the size of a group and also the type of coverage involved. Insurance companies that write a sizable volume of any given kind of group insurance depend on their own experience in determining the frequency and severity of future claims. The location where the benefit is a fixed sum, as with life insurance, the expected claim is 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 amount 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 major source for such U.S. industry wide data is the Society of Actuaries. Insurers must also consider whether to establish 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 in addition to 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 because the size of a group increases. Claim expenses have a tendency to vary with the number, not how big claims. Allocating indirect expenses is definitely a difficult process out of the box the determination of the risk charge. Community-rating systems, developed originally by Blue Cross Blue Shield, are often defined to limit the demographic and other risk factors being recognized. They typically ignore most or all the factors necessary for rate equity and could be as simple as one rate applicable to those with families. There is little actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating may be mandated in some jurisdictions. This makes it 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 with insurance-rating calculations. Probably the major reason for using experience rating is competition. Charging identical rates for those groups regardless of their experience would result in adverse selection with employers with good experience looking for 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, be left with 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 for any group. The incurred claims for any given period include those claims which were paid and those in technique of being paid. In evaluating the amount of incurred claims, provision is normally made for catastrophic claim pooling. Both individual and aggregate stop-loss limits are established in which exceptionally large claims (above these limits) are not charged to the group's experience. The "excess" areas of claims are pooled for those groups and an average charge is accounted for in the pricing process. The approach is to give weight towards the individual groups own experience towards the extent that it is credible. In determining the claims charge, a credibility factor, usually based on the size of the group (determined by the number of insured lives insured) and the type of coverage involved, is utilized. This factor can vary from zero to 1 depending on the actuarial estimates of experience credibility and other considerations including the adequacy of the contingency reserve developed by the group.

In effect, the claims charge is really a weighted average of (1) the incurred claims susceptible to experience rating and (2) the expected claims, with the incurred claims being assigned a weight equal to the credibility factor and the expected claims being assigned to a weight equal to one minus the credibility factor. The incurred claims at the mercy of experience rating need consideration of any stop loss provisions. Where the credibility factor is but one, the incurred claims susceptible to experience rating will be the same as the claims charge. In such instances, the expected claims underlying the mark rates will not be considered. Thus, when companies insure a group of substantial size, experience rating reflects the claim levels resulting from that group's own unique risk characteristics. It is now common practice to give to the group the financial good thing about good experience and hold them financially in charge of bad experience at the conclusion of each policy period. When experience actually is better than was expected in prospective rating assumptions, the excess can either be accumulated within 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 termed as a dividend (mutual company) or perhaps an experience rating refund (stock company).

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