Page 140 - Group Insurance and Retirement Benefit IC 83 E- Book
P. 140
If you are a small business owner or operator and want to get an explanation of the way
premiums are priced for the company, then please read on. There are basically two ways
these premiums can be calculated.
Group Insurance Pricing
The pricing (rate making) process in group insurance is essentially the same as pricing in
other industries. The insurance company must generate enough revenue to cover the cost
of its claims and expenses and contribute to the surplus of the company. It differs in that
the price of a group insurance product is initially determined on the basis of expected
future events and may also be subject to experience rating so that the final price to the
contract holder can be determined only after the coverage period has ended. Group
insurance pricing consist of two steps.
(1) The determination of a unit price, referred to as a rate or premium rate for each
unit of benefit (e.g., $1,000.00 of life insurance, $1 of daily hospital benefit, or $1 of
monthly income disability benefit)
(2) The determination of the total price or premium that will be paid by the contract
holder for all of the coverage purchased.
The approach to group insurance rate making differs depending on whether manual rating
or experience rating is used. In the case of manual rating, the premium rate is determined
independently of a particular groups claim experience. When experience rating is used,
the past claims experience of a group is considered in determining future premiums for
the group and/or adjusting past premiums after a coverage period has ended. As in all rate
making, the primary objective for all types of group insurance is to develop premium
rates that are adequate, reasonable, and equitable.
