Lecture 16 Group Insurance Ratemaking
description
Transcript of Lecture 16 Group Insurance Ratemaking
Lecture 16Group Insurance Ratemaking
• Steps in Ratemaking
• Manual Rating
• Experience Rating– Prospective– Retrospective
Steps in Ratemaking
• Determination of the unit price
• Determination of the total premium
• Goal is to have rates that are:– Adequate– Equitable
Manual Rating• Rating basis
– Benefit unit• Term life - each $1000 of death benefit
• Short-term disability - each $10 (or higher) of weekly income
• Long-term disability - each $100 of monthly income
• Medical expense - each employee or category of dependents
– Factors affecting claims• Sex Age
• Geographical location Occupation
• Income Size
– Frequency of premium payment period
Calculation of Manual Rates
• Number of employees by category
• Amount of coverage
• Expense loadings
• Expense reductions
Calculation of Manual RatesGroup Term Life Example
Company has one 25 year old male employee eligible for $20,000 of coverage and one 55 year old female employee eligible for $100,000 of coverageAge Sex Coverage Rate (p. 376) Cost 25 M 20 .25 5 55 F 100 .99 99
Total Unadjusted Cost 104Expense Charge (p. 377) 8Total 112Expense reduction (p. 378) 0Adjusted monthly premium 112Final monthly rate: $112/120 0.93/1000
(premium/total coverage)
Experience Rating
• Rationale– Equity– Competition
• Prospective– Bases future rates on past experience
• Retrospective (or Dividend Calculation)– Bases rate on experience during policy period
Experience Rating Example(Page 389)
1 Premiums paid 100,0002 Incurred claims 79,8003 Stop-loss limit 120,0004 Incurred claims subject to limit 79,8005 Expected claims 84,0006 Credibility factor (Z) .87 Claims charge 80,640
(Z x incurred claims) + (1-Z)(Expected claims)
8 Retention charge 9,8009 Dividend earned [1-(7+8)] 9,560