Page 141 - Group Insurance and Retirement Benefit IC 83 E- Book

Manual Rating

In the manual rating process, premium rates are established for broad classes of group

insurance business. Manual rating is used with small groups for which no credible
individual loss experience is available. This lack of credibility exist because the size of

the group is such that it is impossible to determine whether the experience is due to
random chance or is truly reflective of the risk exposure. Manual rating is also used to

establish the initial premiums for larger groups that are subject to experience rating,

particularly when a group is being written for the first time. In all but the largest groups,
experience rating is used to combine manual rates and the actual experience of a given

group to determine the final premium. The relative weights depend on the credibility of
the groups own experience. Manual premium rates (also called tabular rates) are quoted

in a company's rate manual. As pointed out earlier, these manual rates are applied to a
specific group insurance case in order to determine the average premium rate for the case

that will then be multiplied by the number of benefit units to obtain a premium for the

group. The rating process involves the determination of the net premium rate, which is
the amount necessary to meet the cost of expected claims. For any given classification,

this is calculated by multiplying the probability (frequency) of a claim occurring by the

expected amount (severity) of the claim.

The second step in the development of manual premium rates is the adjustment of the net
premium rates for expenses, a risk charge, and a contribution to profit or surplus. The

term retention, frequently used in connection with group insurance, usually is defined as
the excess of premiums over claim payments and dividends. It consists of charges for (1)

the stop-loss coverage, (2) expenses, (3) a risk charge, and (4) a contribution to the

insurer's surplus. The sum of these changes usually is reduced by the interest credited to
certain reserves (e.g., the claim reserve and any contingency reserves) the insurer holds to

pay future claims under the group contract. For large groups, a formula is usually applied
that is based on the insurers average claim experience. The formula varies by the size of a

group and the type of coverage involved. Insurance companies that write a large volume
of any given type of group insurance rely on their own experience in determining the

frequency and severity of future claims. Where the benefit is a fixed sum, as in life