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stop loss medical insurance - If you are a small business owner or operator and want to get an explanation of methods premiums are priced for the company, then please continue reading. There are basically two ways these premiums could 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 bring about the surplus of the company. It differs in that the price of a group insurance strategy is initially determined on such basis as expected future events and could also be subject to experience rating in order that the final price to the contract holder can be established only after the coverage period has ended. Group insurance pricing consist of 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 which will be paid by the contract holder its the coverage purchased. The method of group insurance rate making differs according to 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 can be used, the past claims connection with a group is considered in determining future premiums for the group and/or adjusting past premiums after a coverage period has ended. As in all rate making, the main objective for all types of group insurance coverage is to develop premium rates that are adequate, reasonable, and equitable.

Manual Rating

san francisco - Within the manual rating process, premium rates are in place for broad classes of group insurance business. Manual rating is utilized with small groups for which no credible individual loss experience is accessible. This lack of credibility exist because the size of the group is such that it is impossible to ascertain whether the experience is due to random chance or perhaps is truly reflective of the risk exposure. Manual rating can be used to establish the original premiums for larger groups which are subject to experience rating, particularly when a group is being written for the first time. In all but the largest groups, experience rating is used to combine manual rates and also the actual experience of certain 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 pointed out earlier, these manual rates are applied to a specific group insurance case so that you can determine the average premium rate for your case that will then be multiplied through the number of benefit units to secure a premium for the group. The rating process necessitates the determination of the net premium rate, which is the amount necessary to meet the cost of expected claims. For any given classification, this can be calculated by multiplying the probability (frequency) of your claim occurring from the expected amount (severity) with the claim.

The second step in the development of manual premium rates will be the adjustment of the net premium rates for expenses, a risk charge, and a contribution to learn or surplus. The word retention, frequently used regarding the 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 risk 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 then for any contingency reserves) the insurer holds to cover future claims underneath the group contract. For big groups, a formula is generally 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 providers that write a large volume of any given type of group insurance rely on their own experience in determining how often 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 most group health benefits, the expected claim can be a variable that depends on such factors since the expected length of disability, the expected time period of a hospital confinement, or even the expected amount of reimbursable expenses. Companies 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 details are 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 associated with risk characteristics of 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 offer reasonable equity is complex. Some factors such as premium taxes and commissions vary with all the premium charge. Concurrently, the premium tax rates are not affected by the dimensions of the group, whereas commission rates decrease because the size of a group increases. Claim expenses tend to vary with the number, not the size of claims. Allocating indirect expenses is usually a difficult process as is the determination of the risk charge. Community-rating systems, developed originally by Blue Cross Blue Shield, tend to be defined to limit the demographic as well as other risk factors being recognized. They typically ignore most or every one of the factors necessary for rate equity and may even be as simple as one rate applicable to those 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. It is then a matter of public policy rather than an actuarial pricing question.

Experience Rating

bay area - Experience rating is the process whereby a contract holder emerges the financial benefit or held financially in charge of its past claims experience with insurance-rating calculations. Probably the primary 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 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. This is why Blue Cross Blue Shield needed 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 for a group. The incurred claims for a given period include those claims which have been paid and those in procedure for being paid. In evaluating the quantity of incurred claims, provision is normally made for catastrophic claim pooling. Both individual and aggregate stop-loss limits are established by which exceptionally large claims (above these limits) usually are not charged to the group's experience. The "excess" servings 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 to 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) and the type of coverage involved, is used. This factor can vary 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 at the mercy of experience rating and (2) the expected claims, with the incurred claims being assigned a weight equal to the credibility factor and the expected claims being used on a weight equal to one without the credibility factor. The incurred claims at the mercy of experience rating need consideration of any stop-loss provisions. Where the credibility factor is but one, the incurred claims subject to experience rating could be the same as the claims charge. In these 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 has become common practice to offer to the group the financial advantage of good experience and hold them financially responsible for bad experience after each policy period. When experience actually is 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 known as a dividend (mutual company) or perhaps an experience rating refund (stock company).

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