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

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Presentation on theme: "Lecture 16 Group Insurance Ratemaking Steps in Ratemaking Manual Rating Experience Rating –Prospective –Retrospective."— Presentation transcript:

1 Lecture 16 Group 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 SexAge Geographical locationOccupation IncomeSize –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 Rates Group 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 AgeSexCoverageRate (p. 376)Cost 25M F Total Unadjusted Cost104 Expense Charge (p. 377) 8 Total112 Expense reduction(p. 378) 0 Adjusted monthly premium112 Final monthly rate: $112/ /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) 1Premiums paid100,000 2Incurred claims 79,800 3Stop-loss limit120,000 4Incurred claims subject to limit 79,800 5Expected claims 84,000 6Credibility factor (Z).8 7Claims charge 80,640 (Z x incurred claims) + (1-Z)(Expected claims) 8Retention charge 9,800 9Dividend earned [1-(7+8)] 9,560


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