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stop loss medical insurance - If you are a small business owner or operator and would like to get an explanation of how premiums are priced for your 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 coverage is essentially the same as pricing in other industries. The insurer must generate enough revenue to pay the cost of its claims and expenses and give rise to the surplus of the company. It differs for the reason that the price of a group insurance strategy is initially determined based on expected future events and may even also be subject to experience rating so the final price to the contract holder can be determined only after the coverage period ends. Group insurance pricing contain 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, $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 for all of the coverage purchased. The way of group insurance rate making differs based on whether manual rating or experience rating is utilized. In the case of manual rating, the premium minute rates are determined independently of a particular groups claim experience. When experience rating is used, the past claims experience with a group is considered in determining future premiums for that 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 is to develop premium rates which can be adequate, reasonable, and equitable.

Manual Rating

san francisco - Within the manual rating process, premium rates are established for broad classes of group insurance business. Manual rating is utilized with small groups that no credible individual loss experience is available. This lack of credibility exist since the size of the group is such that it is impossible to find out whether the experience is because of random chance or is truly reflective of the risk exposure. Manual rating is also used to establish the initial premiums for larger groups that are subject to experience rating, specially when a group is being written the first time. In all but the largest groups, experience rating is utilized to combine manual rates and the actual experience of certain group to determine the final premium. The relative weights rely on the credibility from the groups own experience. Manual premium rates (also called 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 to be able to determine the average premium rate for your case that will then be multiplied from the number of benefit units to acquire a premium for the group. The rating process necessitates the determination of the net premium rate, which is the amount necessary to satisfy the cost of expected claims. For any given classification, this is calculated by multiplying the probability (frequency) of a claim occurring from the expected amount (severity) of the claim.

The second step in the development of manual premium rates is the adjustment of the net premium rates for expenses, a risk charge, and a contribution to learn or surplus. The phrase retention, frequently used in connection with group insurance, usually is defined as the excess of premiums over claim payments and dividends. It contains 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 by the interest credited to certain reserves (e.g., the claim reserve and then any contingency reserves) the insurer holds to pay for future claims beneath the group contract. For giant groups, a formula is generally applied that is based on the insurers average claim experience. The formula varies through the size of a group and also the type of coverage involved. Insurance companies that write a sizable volume of any given form of group insurance count 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 many group health benefits, the expected claim can be a variable that depends on such factors since the expected length of disability, the expected duration of a hospital confinement, or even the expected amount of reimbursable expenses. Businesses 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 details are 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 of the group such as occupation and type of industry. These standards are largely in addition to the groups past experience.

The adjustment of the net premium rate to offer reasonable equity is complex. Some factors including premium taxes and commissions vary with all the premium charge. At the same time, the premium tax rate is not affected by the dimensions of 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 chance charge. Community-rating systems, developed originally by Blue Cross Blue Shield, are often defined to limit the demographic along with other risk factors being recognized. They typically ignore most or all of the factors necessary for rate equity and may even be as simple as one rate applicable to people with families. There is little change actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating continues to be mandated in some jurisdictions. This makes it 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 emerges 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 searching for insurance companies that offered lower rates, or they'd turn to self funding as a way to reduce cost. The insurer that did not consider claims experience would, therefore, have 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 will be the past claim experience for any group. The incurred claims to get a given period include those claims which were paid and those in process of being paid. In evaluating the amount of incurred claims, provision is generally 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" areas of claims are pooled for many groups and an average charge is taken into account in the pricing process. The approach is always to give weight towards the individual groups own experience to the extent that it is credible. In determining the claims charge, a credibility factor, usually depending on the size of the group (dependant on 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 expertise credibility and other considerations like the adequacy of the contingency reserve produced by the group.

In effect, the claims charge is really a weighted average of (1) the incurred claims at the mercy of experience rating and (2) the expected claims, with the incurred claims being assigned a weight equal to the credibility factor and also the expected claims being allotted to a weight equal to one without the credibility factor. The incurred claims susceptible to experience rating need consideration of any stop-loss provisions. Where the credibility factor is but one, the incurred claims at the mercy of 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 several substantial size, experience rating reflects the claim levels resulting from that group's own unique risk characteristics. It is now common practice to offer to the group the financial advantage of 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 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 called a dividend (mutual company) or perhaps an experience rating refund (stock company).

The web 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 above earlier this balance or perhaps a portion of the balance may be refunded to the contract holder. The adequacy from the group's premium stabilization reserve influences dividend or rate adjustment decisions.