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Lecture 16 Group Insurance Ratemaking

Lecture 16 Group 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

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Lecture 16 Group Insurance Ratemaking

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  1. Lecture 16Group Insurance Ratemaking • Steps in Ratemaking • Manual Rating • Experience Rating • Prospective • Retrospective

  2. Steps in Ratemaking • Determination of the unit price • Determination of the total premium • Goal is to have rates that are: • Adequate • Equitable

  3. 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

  4. Calculation of Manual Rates • Number of employees by category • Amount of coverage • Expense loadings • Expense reductions

  5. 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 coverage Age Sex Coverage Rate (p. 376) Cost 25 M 20 .25 5 55 F 100 .99 99 Total Unadjusted Cost 104 Expense Charge (p. 377) 8 Total 112 Expense reduction (p. 378) 0 Adjusted monthly premium 112 Final monthly rate: $112/120 0.93/1000 (premium/total coverage)

  6. Experience Rating • Rationale • Equity • Competition • Prospective • Bases future rates on past experience • Retrospective (or Dividend Calculation) • Bases rate on experience during policy period

  7. Experience Rating Example(Page 389) 1 Premiums paid 100,000 2 Incurred claims 79,800 3 Stop-loss limit 120,000 4 Incurred claims subject to limit 79,800 5 Expected claims 84,000 6 Credibility factor (Z) .8 7 Claims charge 80,640 (Z x incurred claims) + (1-Z)(Expected claims) 8 Retention charge 9,800 9 Dividend earned [1-(7+8)] 9,560

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