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stop loss medical insurance - If you are a small business owner or operator and wish to get an explanation of methods premiums are priced for that 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 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 give rise to the surplus of the company. It differs because the price of a group insurance product is initially determined on the basis of expected future events and may even also be subject to experience rating in order that 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, termed as a 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 determination 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 your particular groups claim experience. When experience rating can be used, 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 is finished. As in all rate making, the key objective for all types of group insurance policies are to develop premium rates that are adequate, reasonable, and equitable.

Manual Rating

san francisco - Inside the manual rating process, premium rates have established yourself for broad classes of group insurance business. Manual rating is utilized with small groups for which no credible individual loss experience is available. This lack of credibility exist as the size of the group is really that it is impossible to determine whether the experience is because of random chance or perhaps is truly reflective of the risk exposure. Manual rating can also be used to establish the initial premiums for larger groups which are subject to experience rating, particularly if 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 confirmed group to determine the final premium. The relative weights depend upon the credibility with the groups own experience. Manual premium rates (also called tabular rates) are quoted in the company's rate manual. As pointed out above earlier, these manual rates are placed on a specific group insurance case so that you can 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 involves the determination of the net premium rate, which is the amount necessary to meet the cost of expected claims. For just about any given classification, this really is calculated by multiplying the probability (frequency) of a claim occurring by the expected amount (severity) with the claim.

The second part of the development of manual premium rates is 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 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 risk charge, and (4) a contribution for the insurer's surplus. The sum of these changes usually is reduced by the interest credited to certain reserves (e.g., the claim reserve and then for any contingency reserves) the insurer holds to cover future claims beneath the group contract. For large groups, a formula is normally applied that is based on the insurers average claim experience. The formula varies from the size of a group as well as the type of coverage involved. Insurance providers that write a large volume of any given kind of group insurance depend on their own experience in determining the regularity and severity of future claims. The location where the benefit is a fixed sum, as with life insurance, the expected claim is 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 duration of a hospital confinement, or even the expected amount of reimbursable expenses. Companies that do not have enough past data for reliable future projections may use industry wide sources. The major source for such U.S. industry wide information is the Society of Actuaries. Insurers also needs to consider whether to begin a single manual rate level or develop select or substandard rate classifications on objective standards linked to 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 with the net premium rate to provide reasonable equity is complex. Some factors including premium taxes and commissions vary using the premium charge. Simultaneously, the premium tax rate is not affected by the size of 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 always a difficult process out of the box the determination of the danger charge. Community-rating systems, developed originally by Blue Cross Blue Shield, tend to be 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. There is little change 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 rather than an actuarial pricing question.

Experience Rating

bay area - Experience rating is the procedure whereby a contract holder is offered the financial benefit or held financially accountable for 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 cause adverse selection with employers with good experience looking for 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 above a certain size. The starting point for prospective experience rating will be the past claim experience to get a group. The incurred claims for 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 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 many groups and an average charge is accounted for in the pricing process. The approach would be 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 based on the size of the group (dependant on the number of insured lives insured) and the type of coverage involved, is 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 put together by the group.

In effect, the claims charge can be a weighted average of (1) the incurred claims susceptible to experience rating and (2) the expected claims, using 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 credibility factor. The incurred claims susceptible to experience rating want consideration of any stop-loss provisions. Where the credibility factor is a, the incurred claims subject to 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 common practice to offer to the group the financial good thing about good experience and hold them financially in charge of bad experience after each policy period. When experience turns out to be 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 the excess can simply be refunded. The refund is either known as a dividend (mutual company) or even an experience rating refund (stock company).

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