Group Ins.- Experience Rating & Special Funding

Front 1

Experience Rating and Special Funding Methods
Introduction

Back 1

This is the most important chapter in the syllabus. 10 out of the 120 points on the exam will come from this chapter. You will be asked to:
 Compute the renewal premium rate for a group, using both stop-loss and credibility pooling;
 Compute the retrospective experience refund for a group.
 Describe considerations in establishing a credibility factor for a group.

Front 2

Experience Rating vs. Pooling vs. Community Rating
Experience Rating

Back 2

Experience rating means that an employer group’s premium is based, at least in part, on its prior claims experience. Employer groups are charged low rates if their past claim costs have been low, and high rates if their past claim costs have been high.

Front 3

Pooling

Back 3

Pooled premium rates are rates based on the demographics and underwriting factors of the employer group, but not on its actual experience. A rate manual specifies rates to be charged to an employer group policyholder based on the age, sex, health, family status, industry, and location of the employees, and on the benefit plan type and the group size.
Any two groups with the same demographics will be charged the same premiums, even if one of them has never had a claim and the other has had many claims before. Pooling is also called manual rating.

Front 4

Community Rating

Back 4

Community Rating is a regulation, not a methodology in and of itself. Community Rating regulations limit the extent to which age, sex, health, industry, location, and the rest of the above can be used in differentiating rates to be charged to different policyholders. Community Rating also prevents or severely limits the use of experience rating.
In pure community rating, each policyholder with the same benefit plan must be charged the same premium rate, regardless of its age, sex, demographics, or prior experience.
In modified community rating, policyholders with the same benefit plan can be charged different rates based on age, sex, industry, and family status, but those are the only factors that can be considered.

Front 5

Blended Rates

Back 5

Only the largest employer groups have claims experience that is so statistically valid that it can be used alone to determine a premium rate. For medium-sized groups, a blend of experience rating and pooling (manual rating) is used.
Essentially, when setting a premium rate for a medium-sized group, two premium rates are computed: one based purely on the group’s past experience and one based on the manual rate. The group is then charged an average of those two premium rates.
For small groups, the claims experience is too volatile to be statistically credible at all; thus manual rating is used exclusively.

Pooling can also be applied to just a portion of expected claims; say, very high claims. For example, a group might be experience-rated, but include stop-loss pooling; that is, the group’s potential for a very high claim is combined with the potentials of other groups for very high claims when establishing its premium rate.

Front 6

Prospective vs. Retrospective rating
Prospective rating

Back 6

Prospective rating means that the premium rate is set in advance of the coverage period. Regardless of the claim costs that occur during the coverage period, there is no refund or additional charge.

Front 7

Retrospective rating

Back 7

Retrospective rating means that the premium rate is somehow adjusted after the year of experience is over. The policyholder receives a refund if claim cost has turned out to be lower than the premium. Conversely, the policyholder must pay an additional amount if claim costs have exceeded the premium that was charged.

Manual Rating is always prospective, since the premium is set in advance (based on the demographic factors of the policyholder) and no adjustment is ever made after the policy year is over.
Experience Rating can be prospective or retrospective. Usually it is prospective. Retrospective adjustments are administratively expensive, and thus are only offered to the largest employer groups.

Front 8

Self-Insuring vs. Partial Insuring vs. Full Insuring

Back 8

Self-insuring means that an employer pays for all of its employees’ medical costs itself. A self-insuring employer usually hires an insurance company just to handle the administrative work. The type of policy it buys is called an ASO policy (Administrative Services Only).

Partial Insuring means the employer pays for all of the insureds’ costs up to a specified dollar amount. A partially-insuring employer purchases stop-loss insurance from a commercial insurance company to cover larger claims.

Full insuring means an employer purchases a commercial insurance policy or HMO plan to cover all of the medical claims of its insureds.

Front 9

Reasons to Use Experience Rating

Back 9

 Competitivity: Groups that have very few claims prefer experience rating, because the rates are lower. Under Pooled Rating, they have to subsidize unhealthy groups.
 To prevent antiselective lapses: If the healthiest groups are unsatisfied with their premiums, they will lapse, leaving the unhealthiest (highest-claim groups) remaining.
 When a group’s experience is credible.
 Large employer groups have the strongest credibility.
 High-frequency, low-severity coverages, such as medical insurance, have the best credibility
 Claim types that are not independent from one year to the next (e.g. medical claims) also give a group’s experience high credibility.

Front 10

Reasons to use Pooling

Back 10

 When group’s experience is not credible:
 for small groups
 for low-frequency, high-severity coverages, such as LTD
 for claim types that are independent from one year to the next (e.g. accidental death)
 b/c Pooling is easier and cheaper than experience rating.
 When Community Rating regulations prohibit experience rating.