Page 331 - Ebook health insurance IC27

Sashi Publications

Rating methods
There are different methods for calculating basic premium rates ranging from stochastic
modeling of each benefit to simply taking the average of the aggregate claims cost.
However, a general approach is usually that of:

Basic Rate = Expected Claims Frequency x Expected Claims Cost

Calculating standard rates
In its simplest way, an expense ratio and the insurer's desired profit margin should be
added to the basic rate (usually known as the risk premium) in order arrive at a standard
premium rate (usually known as the office premium).

In reality calculating standard rates can be a complicated process and is usually handled
by actuaries. They consider several other parameters, such as medical inflation, social
attitude to illness and accidents, the use of deductible and coinsurance, etc.

Individual rating
Individual rates are calculated using manual-rating process, under which rates are
established only for broad classes of insurance business. The insurer does not
consider the past claims experience of a particular group when determining the
rates. However, the past experience is not entirely ignored since the aggregate claims
experience for a class of business is used to determine the rates for that class.

The rate for an individual is then determined by adjusting the rate for the class to
reflect the characteristic of the individual being insured, using such parameters (known

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