Page 143 - Group Insurance and Retirement Benefit IC 83 E- Book

only the poor risk. This is why Blue Cross Blue Shield had to abandon community rating

for group insurance cases above a certain size. The starting point for prospective
experience rating is the past claim experience for a group. The incurred claims for a given

period include those claims that have been paid and those in process of being paid. In
evaluating the amount of incurred claims, provision is usually made for catastrophic

claim pooling. Both individual and aggregate stop loss limits are established in which
exceptionally large claims (above these limits) are not charged to the group's experience.

The "excess" portions of claims are pooled for all groups and an average charge is

accounted for in the pricing process. The approach is to give weight to the individual
groups own experience to the extent that it is credible. In determining the claims charge,

a credibility factor, usually based on the size of the group (determined by the number of

insured lives insured) and the type of coverage involved, is used. This factor can vary
from zero to one depending on the actuarial estimates of experience credibility and other

considerations such as the adequacy of the contingency reserve developed by the group.

In effect, the claims charge is a weighted average of (1) the incurred claims subject to
experience rating and (2) the expected claims, with the incurred claims being assigned a

weight equal to the credibility factor and the expected claims being assigned to a weight

equal to one minus the credibility factor. The incurred claims subject to experience rating
are after consideration of any stop loss provisions. Where the credibility factor is one, the

incurred claims subject to experience rating will be the same as the claims charge. In such
cases, the expected claims underlying the prospective rates will not be considered. Thus,

when companies insure a group of substantial size, experience rating reflects the claim
levels resulting from that group's own unique risk characteristics. It has become common

practice to give to the group the financial benefit of good experience and hold them

financially responsible for bad experience at the end of each policy period. When
experience turns out to be better than was expected in prospective rating assumptions, the

excess can either be accumulated in an account called a premium stabilization reserve,

claim fluctuation reserve, or contingency reserve or the excess can simply be refunded.
The refund is either called a dividend (mutual company) or an experience rating refund

(stock company).