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Lecture 16 Group Insurance Ratemaking

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Presentation on theme: "Lecture 16 Group Insurance Ratemaking"— 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 Factors affecting claims
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 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 Age Sex Coverage Rate (p. 376) Cost 25 M 55 F Total Unadjusted Cost 104 Expense Charge (p. 377) Total Expense reduction (p. 378) 0 Adjusted monthly premium 112 Final monthly rate: $112/ /1000 (premium/total coverage)

6 Experience Rating Rationale Prospective
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 ,800 3 Stop-loss limit ,000 4 Incurred claims subject to limit 79,800 5 Expected claims ,000 6 Credibility factor (Z) .8 7 Claims charge ,640 (Z x incurred claims) + (1-Z)(Expected claims) 8 Retention charge ,800 9 Dividend earned [1-(7+8)] 9,560

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