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