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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 methods premiums are priced for the 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 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 on such basis as 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 has ended. 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 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 its the coverage purchased. The way of group insurance rate making differs depending on whether manual rating or experience rating is used. 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 the group and/or adjusting past premiums after 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 that are 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 can be used with small groups for which no credible individual loss experience can be obtained. This lack of credibility exist as the size of the group is definately that it is impossible to ascertain whether the experience is a result of random chance or perhaps is truly reflective with the risk exposure. Manual rating can be used to establish the original premiums for larger groups which 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 also the actual experience of a given group to determine the final premium. The relative weights depend upon the credibility with the groups own experience. Manual premium rates (also known as tabular rates) are quoted inside a company's rate manual. As pointed out above earlier, these manual rates are placed on a specific group insurance case in order to determine the average premium rate for that case that will then be multiplied from the number of benefit units to acquire a premium for the group. The rating process requires the determination of the net premium rate, the amount necessary to meet the cost of expected claims. For just about any given classification, this is calculated by multiplying the probability (frequency) of a claim occurring through the expected amount (severity) from the claim.

The second part of the development of manual premium rates may be the adjustment of the net premium rates for expenses, a danger charge, and a contribution to profit or surplus. The word retention, frequently used regarding the 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 to the insurer's surplus. The sum of these changes usually is reduced through 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 usually 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 firms that write a sizable volume of any given type of group insurance rely on their own experience in determining how often and severity of future claims. Where the benefit is a fixed sum, as in life insurance, the expected claim will be the amount of insurance. For the majority of group health benefits, the expected claim is really a variable that depends on such factors since the expected length of disability, the expected amount of a hospital confinement, or the expected amount of reimbursable expenses. Companies 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 should also consider whether to establish a single manual rate level or develop select or substandard rate classifications on objective standards related to risk characteristics with 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 provide reasonable equity is complex. Some factors including 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 because the size of a group increases. Claim expenses have a tendency to vary with the number, not the size of claims. Allocating indirect expenses is usually a difficult process as they are the determination of the risk 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 the factors necessary for rate equity and may be as simple as one rate applicable to those with families. If you don't actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating continues to be mandated in some jurisdictions. It is then 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 is given the financial benefit or held financially responsible for its past claims experience of insurance-rating calculations. Probably the primary reason for using experience rating is competition. Charging identical rates for those groups regardless of their experience would lead to adverse selection with employers with good experience looking for insurance companies that offered lower rates, or they might 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 why Blue Cross Blue Shield had to abandon community rating for group insurance cases above a certain size. The starting point for prospective experience rating is the past claim experience for any group. The incurred claims to get a given period include those claims which were paid and those in procedure for 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 where exceptionally large claims (above these limits) usually are not 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 towards the extent that it is credible. In determining the claims charge, a credibility factor, usually in line with the size of the group (determined by the number of insured lives insured) as well as the type of coverage involved, is used. This factor can differ from zero to one 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 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 fat loss equal to the credibility factor as well as the expected claims being allotted to a weight equal to one minus the credibility factor. The incurred claims subject to experience rating are after consideration of any stop-loss provisions. Where the credibility factor is but one, the incurred claims susceptible to experience rating would 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 a small grouping of substantial size, experience rating reflects the claim levels resulting from that group's own unique risk characteristics. It is now common practice to give to the group the financial advantage of good experience and hold them financially responsible for bad experience at the end of each policy period. When experience actually is 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 perhaps an experience rating refund (stock company).

The net result of the experience rating process is generally called the contract holder balance, representing the final balance attributed to the individual contract holder. As pointed out earlier this balance or 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.