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stop loss medical insurance - If you are a small business owner or operator and want to get an explanation of the way 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 the cost of its claims and expenses and contribute to the surplus of the company. It differs because the price of a group insurance strategy is initially determined on such basis as expected future events and may also be subject to experience rating so the final price to the contract holder can be established only after the coverage period ends. Group insurance pricing consist of two steps.

(1) The resolution of a unit price, referred to as a rate or premium rate for 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 that'll be paid by the contract holder its the coverage purchased. The way of group insurance rate making differs based on whether manual rating or experience rating is used. In the case of manual rating, the premium rates are 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 after having a coverage period ends. As in all rate making, the primary objective for all types of group insurance policies are to develop premium rates which can be 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 can be obtained. This lack of credibility exist as the size of the group is really that it is impossible to ascertain whether the experience is due to random chance or perhaps is truly reflective with the risk exposure. Manual rating is also used to establish the initial premiums for larger groups which 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 the actual experience of confirmed group to determine the final premium. The relative weights depend upon the credibility from the groups own experience. Manual premium rates (also referred to as tabular rates) are quoted inside a company's rate manual. As outlined above earlier, these manual rates are applied to a specific group insurance case so that you can determine the average premium rate for the case that will then be multiplied by the number of benefit units to secure a premium for the group. The rating process involves the determination of the net premium rate, which is the amount necessary to meet the cost of expected claims. For almost any given classification, this can be calculated by multiplying the probability (frequency) of your claim occurring through the expected amount (severity) of the claim.

The second step up 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 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 by the interest credited to particular reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to cover future claims underneath the group contract. For giant groups, a formula is usually applied that is in line with the insurers average claim experience. The formula varies through the size of a group as well as the type of coverage involved. Insurance firms that write a large volume of any given form of group insurance depend on their own experience in determining the frequency and severity of future claims. The location where the benefit is a fixed sum, as in life insurance, the expected claim is the amount of insurance. For many group health benefits, the expected claim is really a variable that depends on such factors as the expected length of disability, the expected time period of a hospital confinement, or perhaps the expected amount of reimbursable expenses. Companies that do not have enough past data for reliable future projections can use industry wide sources. The main source for such U.S. industry wide information is the Society of Actuaries. Insurers also needs to consider whether to set up a single manual rate level or develop select or substandard rate classifications on objective standards related to risk characteristics from the group such as occupation and type of industry. These standards are largely in addition to the groups past experience.

The adjustment from the net premium rate to provide reasonable equity is complex. Some factors for example premium taxes and commissions vary using the premium charge. At the same time, 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 definitely a difficult process out of the box the determination of the chance 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 could be as simple as one rate applicable to people with families. If you don't actuarial rationale for charging all groups the identical rate regardless of the expected morbidity. Community rating has been 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 method whereby a contract holder is given the financial benefit or held financially in charge of its past claims experience in 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'd turn to self funding in an effort to reduce cost. The insurance company that did not consider claims experience would, therefore, be left with only the poor risk. For this 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 is the past claim experience to get a group. The incurred claims for any given period include those claims which were paid and those in procedure for being paid. In evaluating the amount of incurred claims, provision is normally 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 always 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 depending on the size of the group (based on the number of insured lives insured) as well as the type of coverage involved, can be used. This factor can differ from zero to at least one depending on the actuarial estimates of experience credibility and other considerations like 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 subject to experience rating and (2) the expected claims, with all the incurred claims being assigned a weight equal to the credibility factor and the expected claims being assigned to a weight equal to one without the presence of credibility factor. The incurred claims subject to experience rating need consideration of any stop loss provisions. Where the credibility factor is but one, the incurred claims susceptible to experience rating could 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 a group 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 accountable for bad experience after each policy period. When experience actually is better than was expected in prospective rating assumptions, the extra can either be accumulated in a 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 even 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 related 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 of the group's premium stabilization reserve influences dividend or rate adjustment decisions.