Cigna Health Plan - Group health guarnatee Premiums
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If you are a small business owner or operator and want to get an explanation of the way premiums are priced for the company, then please read on. There are basically two ways these premiums can be calculated.
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How is Group health guarnatee Premiums
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Group guarnatee Pricing
The pricing (rate making) process in group guarnatee is essentially the same as pricing in other industries. The guarnatee business must generate enough revenue to cover the cost of its claims and expenses and conduce to the surplus of the company. It differs in that the price of a group guarnatee goods is initially considered on the basis of improbable future events and may also be field to taste rating so that the final price to the covenant holder can be considered only after the coverage period has ended. Group guarnatee pricing consist of two steps.
(1) The determination of a unit price, referred to as a rate or superior rate for each unit of advantage (e.g., ,000.00 of life insurance, of daily hospital benefit, or of monthly revenue disability benefit)
(2) The determination of the total price or superior that will be paid by the covenant holder for all of the coverage purchased.
The approach to group guarnatee rate production differs depending on whether by hand rating or taste rating is used. In the case of by hand rating, the superior rate is considered independently of a singular groups claim experience. When taste rating is used, the past claims taste of 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 original objective for all types of group guarnatee is to create superior rates that are adequate, reasonable, and equitable.
Manual Rating
In the by hand rating process, superior rates are established for broad classes of group guarnatee business. by hand rating is used with small groups for which no credible personel loss taste is available. This lack of credibility exist because the size of the group is such that it is impossible to determine whether the taste is due to random chance or is truly reflective of the risk exposure. by hand rating is also used to create the introductory premiums for larger groups that are field to taste rating, particularly when a group is being written for the first time. In all but the largest groups, taste rating is used to consolidate by hand rates and the actual taste of a given group to determine the final premium. The relative weights depend on the credibility of the groups own experience. by hand superior rates (also called tabular rates) are quoted in a company's rate manual. As pointed out earlier, these by hand rates are applied to a definite group guarnatee case in order to determine the average superior rate for the case that will then be multiplied by the amount of advantage units to get a superior for the group. The rating process involves the determination of the net superior rate, which is the amount necessary to meet the cost of improbable claims. For any given classification, this is calculated by multiplying the probability (frequency) of a claim occurring by the improbable amount (severity) of the claim.
The second step in the improvement of by hand superior rates is the adjustment of the net superior rates for expenses, a risk charge, and a contribution to behalf or surplus. The term retention, often used in relationship with group insurance, normally 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 risk charge, and (4) a contribution to the insurer's surplus. The sum of these changes normally is reduced by the interest credited to clear reserves (e.g., the claim support and any contingency reserves) the insurer holds to pay future claims under the group contract. For large groups, a method is normally applied that is based on the insurers average claim experience. The method varies by the size of a group and the type of coverage involved. guarnatee clubs that write a large volume of any given type of group guarnatee rely on their own taste in determining the frequency and severity of future claims. Where the advantage is a fixed sum, as in life insurance, the improbable claim is the amount of insurance. For most group health benefits, the improbable claim is a variable that depends on such factors as the improbable distance of disability, the improbable period of a hospital confinement, or the improbable amount of reimbursable expenses. clubs that do not have enough past data for reliable future projections can use industry wide sources. The major source for such U.S. industry wide data is the society of Actuaries. Insurers must also consider whether to create a singular by hand rate level or create pick or substandard rate classifications on objective standards connected to risk characteristics of the group such as work and type of industry. These standards are largely independent of the groups past experience.
The adjustment of the net superior rate to contribute cheap equity is complex. Some factors such as superior taxes and commissions vary with the superior charge. At the same time, the superior tax rate is not affected by the size of the group, whereas commission rates decrease as the size of a group increases. Claim expenses tend to vary with the number, not the size of claims. Allocating indirect expenses is always a difficult process as is the determination of the risk charge. Community-rating systems, industrialized originally by Blue Cross Blue Shield, are often defined to limit the demographic and other risk factors being recognized. They typically ignore most or all of the factors necessary for rate equity and may be as uncomplicated as one rate applicable to those with families. There is wee actuarial rationale for charging all groups the same rate regardless of the improbable morbidity. society rating has been mandated in some jurisdictions. This makes it a matter of group course rather than an actuarial pricing question.
Experience Rating
Experience rating is the process whereby a covenant holder is given the financial advantage or held financially accountable for its past claims taste in insurance-rating calculations. Probably the major presuppose for using taste rating is competition. Charging selfsame rates for all groups regardless of their taste would lead to adverse selection with employers with good taste seeking out guarnatee clubs that offered lower rates, or they would turn to self funding as a way to sell out cost. The guarnatee business that did not consider claims taste would, therefore, be left with only the poor risk. This is why Blue Cross Blue Shield had to abandon society rating for group guarnatee cases above a clear size. The beginning point for prospective taste rating is the past claim taste for a group. The incurred claims for a given period consist of those claims that have been paid and those in process of being paid. In evaluating the amount of incurred claims, provision is normally made for catastrophic claim pooling. Both personel and compound stop loss limits are established in which exceptionally large claims (above these limits) are not charged to the group's experience. The "excess" portions of claims are pooled for all groups and an average payment is accounted for in the pricing process. The approach is to give weight to the personel groups own taste to the extent that it is credible. In determining the claims charge, a credibility factor, normally based on the size of the group (determined by the amount of insured lives insured) and the type of coverage involved, is used. This factor can vary from zero to one depending on the actuarial estimates of taste credibility and other considerations such as the adequacy of the contingency support industrialized by the group.
In effect, the claims payment is a weighted average of (1) the incurred claims field to taste rating and (2) the improbable claims, with the incurred claims being assigned a weight equal to the credibility factor and the improbable claims being assigned to a weight equal to one minus the credibility factor. The incurred claims field to taste rating are after observation of any stop loss provisions. Where the credibility factor is one, the incurred claims field to taste rating will be the same as the claims charge. In such cases, the improbable claims underlying the prospective rates will not be considered. Thus, when clubs insure a group of titanic size, taste rating reflects the claim levels resulting from that group's own unique risk characteristics. It has come to be base practice to give to the group the financial advantage of good taste and hold them financially responsible for bad taste at the end of each course period. When taste turns out to be better than was improbable in prospective rating assumptions, the excess can whether be accumulated in an catalogue called a superior stabilization reserve, claim fluctuation reserve, or contingency support or the excess can naturally be refunded. The repayment is whether called a dividend (mutual company) or an taste rating repayment (stock company).
The net follow of the taste rating process is normally called the covenant holder catalogue balance, representing the final balance attributed to the personel covenant holder. As pointed out earlier this balance or a portion of the balance can be refunded to the covenant holder. The adequacy of the group's superior stabilization support influences dividend or rate adjustment decisions.
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