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stop loss medical insurance - If you are a small business owner or operator and wish to get an explanation of the way premiums are priced for the company, then please keep reading. There are basically two ways these premiums can 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 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 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 ends. Group insurance pricing include two steps.

(1) The determination of a unit price, known as 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 its 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 rate is determined independently of a particular groups claim experience. When experience rating is utilized, the past claims experience with a group is considered in determining future premiums for your group and/or adjusting past premiums following a coverage period ends. As in all rate making, the primary objective for all types of group insurance coverage is to develop premium rates that are adequate, reasonable, and equitable.

Manual Rating

san francisco - Inside the manual rating process, premium rates are established for broad classes of group insurance business. Manual rating is used with small groups for which no credible individual loss experience can be obtained. This lack of credibility exist since the size of the group is really that it is impossible to determine whether the experience is due to random chance or is truly reflective of the risk exposure. Manual rating can also be used to establish the original premiums for larger groups that are subject to experience rating, particularly when a group is being written the first time. In all but the largest groups, experience rating can be used to combine manual rates and the actual experience of confirmed group to determine the final premium. The relative weights rely 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 earlier, these manual rates are placed 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 obtain a premium for the group. The rating process necessitates the determination of the net premium rate, the amount necessary to fulfill the cost of expected claims. For any given classification, this can be calculated by multiplying the probability (frequency) of your claim occurring by the expected amount (severity) from 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 word retention, frequently used in connection 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 to 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 cover future claims beneath the group contract. For giant groups, a formula is usually applied that is based on the insurers average claim experience. The formula varies from the size of a group and the type of coverage involved. Insurance firms that write a sizable volume of any given kind 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, as in life insurance, the expected claim may be the amount of insurance. For most group health benefits, the expected claim is really a variable that depends on such factors since the expected length of disability, the expected duration of a hospital confinement, or perhaps the expected amount of reimbursable expenses. Firms that do not have enough past data for reliable future projections can 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 linked to risk characteristics from 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 provide reasonable equity is complex. Some factors for example premium taxes and commissions vary with the premium charge. Concurrently, the premium tax rates are not affected by the size of the group, whereas commission rates decrease as 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 usually a difficult process out of the box the determination of the risk 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 the people with families. If you don't actuarial rationale for charging all groups 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 of insurance-rating calculations. Probably the major reason for using experience rating is competition. Charging identical rates for all groups regardless of their experience would cause adverse selection with employers with good experience seeking out insurance companies that offered lower rates, or they might turn to self funding as a way to reduce cost. The insurance company that did not consider claims experience would, therefore, have only the poor risk. For this reason Blue Cross Blue Shield were required to abandon community rating for group insurance cases over a certain size. The starting point for prospective experience rating may be the past claim experience to get a group. The incurred claims for any given period include those claims that have been paid and those in process of being paid. In evaluating how much incurred claims, provision is normally made for catastrophic claim pooling. Both individual and aggregate stop-loss limits are established where exceptionally large claims (above these limits) aren't charged to the group's experience. The "excess" portions of claims are pooled for many groups and an average charge is included in the pricing process. The approach is always to give weight for the individual groups own experience to 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) and also the type of coverage involved, is utilized. This factor may differ from zero to 1 depending on the actuarial estimates of expertise credibility and other considerations including the adequacy of the contingency reserve put together by the group.

In effect, the claims charge can be a weighted average of (1) the incurred claims subject to experience rating and (2) the expected claims, with the incurred claims being assigned a equal to the credibility factor as well as the expected claims being assigned to a weight equal to one without the presence of credibility factor. The incurred claims subject to experience rating want consideration of any stop loss provisions. Where the credibility factor is one, the incurred claims at the mercy of experience rating will be the same as the claims charge. In such cases, the expected claims underlying the objective 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 common practice to offer to the group the financial good thing about good experience and hold them financially responsible for 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 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 generally called the contract holder account balance, representing the final balance attributed to the individual contract holder. As pointed out above earlier this balance or perhaps 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.