Page 142 - Group Insurance and Retirement Benefit IC 83 E- Book

insurance, the expected claim is the amount of insurance. For most group health benefits,

the expected claim is a variable that depends on such factors as the expected length of
disability, the expected duration of a hospital confinement, or the expected amount of

reimbursable expenses. Companies that do not have enough past data for reliable future
projections can use industry wide sources. The major source for such U.S. industry wide

data is the Society of Actuaries. Insurers must also consider whether to establish a single
manual rate level or develop select or substandard rate classifications on objective

standards related to risk characteristics of the group such as occupation and type of

industry. These standards are largely independent of the groups past experience.

The adjustment of the net premium rate to provide reasonable equity is complex. Some

factors such as premium taxes and commissions vary with the premium charge. At the
same time, the premium tax rate is not affected by the size of the group, whereas

commission rates decrease as the size of a group increases. Claim expenses tend to vary
with the number, not the size of claims. Allocating indirect expenses is always a difficult

process as is the determination of the risk charge. Community-rating systems, developed
originally by Blue Cross Blue Shield, are often defined to limit the demographic and

other risk factors being recognized. They typically ignore most or all of the factors

necessary for rate equity and may be as simple as one rate applicable to those with
families. There is little actuarial rationale for charging all groups the same rate regardless

of the expected morbidity. Community rating has been mandated in some jurisdictions.
This makes it a matter of public policy rather than an actuarial pricing question.

Experience Rating

Experience rating is the process whereby a contract holder is given the financial benefit
or held financially accountable for its past claims experience in insurance-rating

calculations. Probably the major reason for using experience rating is competition.
Charging identical rates for all groups regardless of their experience would lead to

adverse selection with employers with good experience seeking out insurance companies
that offered lower rates, or they would turn to self funding as a way to reduce cost. The

insurance company that did not consider claims experience would, therefore, be left with