Lecture 16 Group Insurance Ratemaking

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