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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 your company, then please continue reading. 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 pay for the cost of its claims and expenses and contribute to the surplus of the company. It differs in that the price of a group insurance product is initially determined based on expected future events and may also be subject to experience rating so the final price to the contract holder can be determined only after the coverage period has ended. 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 insurance coverage, $1 of daily hospital benefit, or $1 of monthly income disability benefit)

(2) The resolution of the total price or premium that'll be paid by the contract holder for all of the coverage purchased. The method of group insurance rate making differs according to whether manual rating or experience rating can be used. In the case of manual rating, the premium rates are determined independently of a particular groups claim experience. When experience rating can be used, the past claims experience with a group is considered in determining future premiums for that group and/or adjusting past premiums after having a coverage period has ended. As in all rate making, the primary objective for all types of group insurance 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 that no credible individual loss experience is accessible. This lack of credibility exist since 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 with the risk exposure. Manual rating can also be used to establish the original premiums for larger groups that are subject to experience rating, specially when a group is being written the very first time. In all but the largest groups, experience rating can be used to combine manual rates and the actual experience of a given group to determine the final premium. The relative weights depend on 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 pointed out above earlier, these manual rates are put on a specific group insurance case in order to determine the average premium rate for your case that will then be multiplied by 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 satisfy the cost of expected claims. For almost any given classification, this is calculated by multiplying the probability (frequency) of a claim occurring through the expected amount (severity) with the claim.

The second part of 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 understood to be 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 towards 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 then for any contingency reserves) the insurer holds to pay future claims under the group contract. For giant groups, a formula is usually 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 kind of group insurance count on their own experience in determining the frequency and severity of future claims. In which the benefit is a fixed sum, as in life insurance, the expected claim may 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 time period of a hospital confinement, or perhaps 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 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 with the net premium rate to supply reasonable equity is complex. Some factors including premium taxes and commissions vary with all the premium charge. Concurrently, the premium tax rates are not affected by how big the group, whereas commission rates decrease since the size of a group increases. Claim expenses often vary with the number, not how big claims. Allocating indirect expenses is usually a difficult process out of the box 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 could be as simple as one rate applicable to people with families. There is little actuarial rationale for charging all groups the same rate regardless of the expected morbidity. Community rating may be mandated in some jurisdictions. This will make 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 accountable for its past claims experience in insurance-rating calculations. Probably the primary reason for using experience rating is competition. Charging identical rates for many groups regardless of their experience would lead to 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 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 to get a given period include those claims that have been paid and those in process of being paid. In evaluating the amount of 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 those groups and an average charge is accounted for in the pricing process. The approach is to give weight for 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 (dependant on the number of insured lives insured) and the type of coverage involved, can be used. This factor can differ from zero to at least one 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 is a weighted average of (1) the incurred claims susceptible to experience rating and (2) the expected claims, with the incurred claims being assigned fat loss equal to the credibility factor as well as the expected claims being allotted to a weight equal to one without the credibility factor. The incurred claims at the mercy of experience rating need consideration of any stop-loss provisions. Where the credibility factor is one, the incurred claims subject to experience rating would be the same as the claims charge. In such cases, 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 has become common practice to offer to the group the financial advantage of good experience and hold them financially in charge of bad experience at the end of each policy period. When experience turns out to be better than was expected in prospective rating assumptions, the surplus can either be accumulated in an 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 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 attributed to the individual contract holder. As outlined above earlier this balance or even 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.