Lecture 16 Group Insurance RatemakingSteps in RatemakingManual RatingCalculation of Manual RatesCalculation of Manual Rates Group Term Life ExampleExperience RatingExperience Rating Example (Page 389)Lecture 16Group Insurance Ratemaking•Steps in Ratemaking•Manual Rating•Experience Rating–Prospective–RetrospectiveSteps in Ratemaking•Determination of the unit price•Determination of the total premium•Goal is to have rates that are:–Adequate–EquitableManual 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 periodCalculation of Manual Rates•Number of employees by category•Amount of coverage•Expense loadings•Expense reductionsCalculation of Manual RatesGroup Term Life ExampleCompany 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 99Total Unadjusted Cost104Expense 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 periodExperience Rating Example(Page 389)1 Premiums paid 100,0002 Incurred claims 79,8003 Stop-loss limit120,0004 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)]
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