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stop loss medical insurance - If you are a small business owner or operator and wish to get an explanation of how premiums are priced for your 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 policies are essentially the same as pricing in other industries. The insurance company must generate enough revenue to pay 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 product is initially determined on the basis of expected future events and may 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 contain two steps.

(1) The determination of a unit price, known as rate or premium rate for each 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 determination 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 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 that group and/or adjusting past premiums after having a coverage period is finished. 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 - Within the manual rating process, premium rates are established for broad classes of group insurance business. Manual rating is utilized with small groups that no credible individual loss experience is available. This lack of credibility exist since the size of the group is really that it is impossible to determine whether the experience is a result of random chance or is truly reflective of the risk exposure. Manual rating is also used to establish the first 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 used to combine manual rates as well as the actual experience of a given group to determine the final premium. The relative weights depend on the credibility of the groups own experience. Manual premium rates (also known as tabular rates) are quoted in a company's rate manual. As pointed out above earlier, these manual rates are placed on a specific group insurance case to be able to 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, 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 by the expected amount (severity) from the claim.

The second step up 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 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 towards the insurer's surplus. The sum of these changes usually is reduced from the interest credited to particular reserves (e.g., the claim reserve and then any contingency reserves) the insurer holds to cover future claims beneath the group contract. For giant groups, a formula is generally applied that is depending on the insurers average claim experience. The formula varies from the size of a group as well as the type of coverage involved. Insurance companies that write a big volume of any given kind of group insurance rely on their own experience in determining the frequency and severity of future claims. In which the benefit is a fixed sum, as in 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 because 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 may use industry wide sources. The key source for such U.S. industry wide details are the Society of Actuaries. Insurers should also consider whether to set up a single manual rate level or develop select or substandard rate classifications on objective standards related to risk characteristics of the group such as occupation and type of industry. These standards are largely independent of 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 using the premium charge. Simultaneously, the premium tax rates are not affected by the size of the group, whereas commission rates decrease since the size of a group increases. Claim expenses tend to vary with the number, not the size of claims. Allocating indirect expenses is definitely 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 and other risk factors being recognized. They typically ignore most or all the factors necessary for rate equity and may even be as simple as one rate applicable to people with families. There is little change actuarial rationale for charging all groups exactly the same rate regardless of the expected morbidity. Community rating may be mandated in some jurisdictions. This makes it a matter of public policy instead of an actuarial pricing question.

Experience Rating

bay area - Experience rating is the process whereby a contract holder is given the financial benefit or held financially accountable for 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 looking for 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 needed to abandon community rating for group insurance cases over a certain size. The place to start for prospective experience rating will be the past claim experience for any group. The incurred claims to get a given period include those claims which have been paid and those in procedure for 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 in which exceptionally large claims (above these limits) usually are not charged to the group's experience. The "excess" areas of claims are pooled for many groups and an average charge is included in the pricing process. The approach is always to give weight towards the individual groups own experience to the extent that it is credible. In determining the claims charge, a credibility factor, usually depending on the size of the group (determined by 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 including the adequacy of the contingency reserve developed 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, using the incurred claims being assigned fat loss 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 but one, the incurred claims at the mercy of experience rating would be the same as the claims charge. In these instances, the expected claims underlying the prospective rates will not be considered. Thus, when companies insure a group of substantial size, experience rating reflects the claim levels as a result of 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 end of each policy period. When experience happens 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 even 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 web 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 earlier this balance or perhaps a portion of the balance can be refunded to the contract holder. The adequacy with the group's premium stabilization reserve influences dividend or rate adjustment decisions.