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stop loss medical insurance - If you are a small business owner or operator and want to get an explanation of how premiums are priced for the company, then please read on. There are basically two ways these premiums could 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 cover 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 could also be subject to experience rating so that the final price to the contract holder can be determined only after the coverage period is finished. Group insurance pricing contain two steps.

(1) The resolution of a unit price, referred to as a rate or premium rate for each and 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 way of group insurance rate making differs depending on whether manual rating or experience rating is utilized. In the case of manual rating, the premium rates are determined independently of the particular groups claim experience. When experience rating is used, the past claims connection with a group is considered in determining future premiums for your group and/or adjusting past premiums following a coverage period is finished. As in all rate making, the primary objective for all types of group insurance policies are to develop premium rates which are adequate, reasonable, and equitable.

Manual Rating

san francisco - In the manual rating process, premium rates are established for broad classes of group insurance business. Manual rating is used with small groups that no credible individual loss experience is available. This lack of credibility exist as the size of the group is really that it is impossible to find out whether the experience is because of random chance or perhaps is truly reflective from the risk exposure. Manual rating is also used to establish the original premiums for larger groups that are subject to experience rating, particularly when a group is being written the very first time. In all but the largest groups, experience rating is utilized to combine manual rates and also the actual experience of certain 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 inside a company's rate manual. As pointed out earlier, these manual rates are placed on a specific group insurance case so that you can determine the average premium rate for that case that will then be multiplied by the number of benefit units to obtain 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 through the expected amount (severity) of the claim.

The second part of 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 in connection with group insurance, usually is understood to be 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 towards the insurer's surplus. The sum of these changes usually is reduced by the interest credited to particular reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to cover future claims beneath the group contract. For big groups, a formula is generally applied that is based 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 sizable volume of any given type of group insurance rely on their own experience in determining the regularity and severity of future claims. In which the benefit is a fixed sum, such as life insurance, the expected claim may be the amount of insurance. For the majority of group health benefits, the expected claim can be a variable that depends on such factors as the expected length of disability, the expected amount of a hospital confinement, or even the expected amount of reimbursable expenses. Firms that do not have enough past data for reliable future projections can use industry wide sources. The key source for such U.S. industry wide data is the Society of Actuaries. Insurers also needs to consider whether to begin 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 kind of industry. These standards are largely in addition to the groups past experience.

The adjustment of the net premium rate to supply reasonable equity is complex. Some factors including premium taxes and commissions vary with the premium charge. Concurrently, the premium tax minute rates are not affected by how big the group, whereas commission rates decrease since the size of a group increases. Claim expenses have a tendency to vary with the number, not how big claims. Allocating indirect expenses is usually 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 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 actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating has been mandated in some jurisdictions. It is then a matter of public policy instead of an actuarial pricing question.

Experience Rating

bay area - Experience rating is the method whereby a contract holder is offered 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 many groups regardless of their experience would result in adverse selection with employers with good experience seeking out 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, 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 above a certain size. The place to start for prospective experience rating will be the past claim experience for 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 quantity 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" servings of claims are pooled for many groups and an average charge is taken into account in the pricing process. The approach is 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 in line with the size of the group (dependant on the number of insured lives insured) as well as the type of coverage involved, can be used. This factor can vary from zero to 1 depending on the actuarial estimates of experience credibility and other considerations such as 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 all the incurred claims being assigned a weight equal to the credibility factor and also the expected claims being used on a weight equal to one minus the credibility factor. The incurred claims susceptible to experience rating want consideration of any stop loss provisions. Where the credibility factor is a, the incurred claims subject to experience rating would be the same as the claims charge. In such cases, the expected claims underlying the prospective rates will not be considered. Thus, when companies insure a small grouping of substantial size, experience rating reflects the claim levels caused by that group's own unique risk characteristics. It is now common practice to give to the group the financial benefit of good experience and hold them financially in charge of bad experience at the conclusion of each policy period. When experience turns out to be better than was expected in prospective rating assumptions, the excess can either be accumulated in a 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 an experience rating refund (stock company).

The internet result of the experience rating process is normally called the contract holder account balance, representing the final balance caused by the individual contract holder. As outlined above 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.