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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 that 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 insurance company must generate enough revenue to pay the cost of its claims and expenses and bring about 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 could also be subject to experience rating so that the final price to the contract holder can be discovered only after the coverage period has ended. Group insurance pricing contain two steps.

(1) The determination of a unit price, termed as a rate or premium rate for every 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 determination of the total price or premium that will be paid by the contract holder its 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 minute rates are determined independently of your 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 following a coverage period has ended. As in all rate making, the main objective for all types of group insurance is to develop premium rates which are adequate, reasonable, and equitable.

Manual Rating

san francisco - In the manual rating process, premium rates are in place 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 as the size of the group is such that it is impossible to find out whether the experience is due to random chance or is truly reflective from the risk exposure. Manual rating can 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 as well as the actual experience of confirmed group to determine the final premium. The relative weights rely on the credibility of the groups own experience. Manual premium rates (also called tabular rates) are quoted in the company's rate manual. As outlined above earlier, these manual rates are placed on a specific group insurance case so that you can 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 fulfill 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 may 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 described 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 through the interest credited to a particular reserves (e.g., the claim reserve and then any contingency reserves) the insurer holds to pay future claims under the group contract. For large groups, a formula is generally applied that is in line with 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 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 with life insurance, the expected claim will be the amount of insurance. For the majority of group health benefits, the expected claim is a variable that depends on such factors as the expected length of disability, the expected time period of a hospital confinement, or even 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 should also consider whether to set up a single manual rate level or develop select or substandard rate classifications on objective standards related to risk characteristics of the group such as occupation and kind of industry. These standards are largely independent of the groups past experience.

The adjustment of the net premium rate to provide reasonable equity is complex. Some factors such as premium taxes and commissions vary with the premium charge. Concurrently, the premium tax rate is 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 definitely a difficult process as they are 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 and other risk factors being recognized. They typically ignore most or all 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 continues to be mandated in some jurisdictions. This will make it a matter of public policy as opposed to an actuarial pricing question.

Experience Rating

bay area - Experience rating is the process whereby a contract holder emerges the financial benefit or held financially responsible for its past claims experience with insurance-rating calculations. Probably the major 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 looking for insurance companies that offered lower rates, or they'd turn to self funding in an effort to reduce cost. The insurer that did not consider claims experience would, therefore, be left with only the poor risk. This is the reason Blue Cross Blue Shield were required 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 a group. The incurred claims for a given period include those claims which were paid and those in procedure for 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 in which exceptionally large claims (above these limits) usually are not charged to the group's experience. The "excess" portions of claims are pooled for those groups and an average charge is taken into account 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 used. This factor can differ from zero to 1 depending on the actuarial estimates of experience credibility and other considerations including the adequacy of the contingency reserve put together 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, using the incurred claims being assigned a equal to the credibility factor and the expected claims being allotted to 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 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 objective rates will not be considered. Thus, when companies insure several substantial size, experience rating reflects the claim levels caused by that group's own unique risk characteristics. It is common practice to give to the group the financial good thing about good experience and hold them financially responsible for bad experience after each policy period. When experience turns out to be 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 even an experience rating refund (stock company).

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