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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 the way premiums are priced for that company, then please read on. 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 method is initially determined based on expected future events and could also be subject to experience rating in order that the final price to the contract holder can be determined only after the coverage period ends. Group insurance pricing consist of two steps.

(1) The determination 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, $1 of daily hospital benefit, or $1 of monthly income disability benefit)

(2) The determination of the total price or premium that will be paid by the contract holder it really is the coverage purchased. The method of group insurance rate making differs depending on whether manual rating or experience rating is utilized. In the case of manual rating, the premium minute 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 that group and/or adjusting past premiums after having a coverage period has ended. As in all rate making, the main objective for all types of group insurance is to develop premium rates which are adequate, reasonable, and equitable.

Manual Rating

san francisco - Inside the manual rating process, premium rates are in place for broad classes of group insurance business. Manual rating is used with small groups that no credible individual loss experience is available. This lack of credibility exist as the size of the group is definately that it is impossible to determine whether the experience is due to random chance or is truly reflective with the risk exposure. Manual rating can also be used to establish the first premiums for larger groups that 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 on the credibility with the groups own experience. Manual premium rates (also referred to as tabular rates) are quoted in a company's rate manual. As pointed out 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 through the number of benefit units to secure a premium for the group. The rating process requires 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 is calculated by multiplying the probability (frequency) of the claim occurring from 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 danger charge, and (4) a contribution towards the insurer's surplus. The sum of these changes usually is reduced from the interest credited to a particular reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to pay for future claims underneath the group contract. For giant groups, a formula is normally applied that is depending on the insurers average claim experience. The formula varies by the size of a group and the type of coverage involved. Insurance companies that write a sizable volume of any given kind of group insurance depend on their own experience in determining the frequency and severity of future claims. Where the benefit is a fixed sum, such as 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 as the expected length of disability, the expected time period of a hospital confinement, or the expected amount of reimbursable expenses. Firms 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 information is the Society of Actuaries. Insurers must also consider whether to begin 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 kind of industry. These standards are largely in addition to the groups past experience.

The adjustment of the net premium rate to offer reasonable equity is complex. Some factors including premium taxes and commissions vary with all the premium charge. Concurrently, the premium tax rates are not affected by how big the group, whereas commission rates decrease as 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 as they are the determination of the chance 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 be as simple as one rate applicable to people with families. There is little actuarial rationale for charging all groups the same rate regardless of the expected morbidity. Community rating has been mandated in some jurisdictions. This makes it a matter of public policy as opposed to an actuarial pricing question.

Experience Rating

bay area - Experience rating is the procedure whereby a contract holder emerges 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 many groups regardless of their experience would result in adverse selection with employers with good experience searching for insurance companies that offered lower rates, or they might 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. For this 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 a group. The incurred claims for any given period include those claims which were paid and those in process of 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 where exceptionally large claims (above these limits) usually are not charged to the group's experience. The "excess" portions of claims are pooled for all groups and an average charge is accounted for in the pricing process. The approach is 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 depending on the size of the group (dependant on the number of insured lives insured) and also 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 such as the adequacy of the contingency reserve developed 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 also 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 one, the incurred claims at the mercy of experience rating would be the same as the claims charge. In such instances, the expected claims underlying the objective rates will not be considered. Thus, when companies insure a small grouping 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 give to the group the financial good thing about 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 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 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 caused by the individual contract holder. As pointed out above earlier this balance or perhaps 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.