542 Chapter 13 Insurance and Risk Management
Applying the factors to the prior year’s rates gives a total of ($3,457,089)(1.05)(1.15)
$4,174,435. Dividing this among the 800 employees gives $4,174,435/800 $5,218.04
per year. Since rates are usually given per month, we divide this fi gure by 12 to get
$5,218.04/12 $434.84.In this example, costs were given per employee. Typically, different rates are charged for
single or family contracts, sometimes with further distinctions among the family contracts,
depending on whether or not the “family” includes a spouse or children. The details of
how these costs are split among single versus family contracts fall beyond the scope of
this book, other than mentioning that this split is almost never done by separating the
actual claims filed for single contracts from those of family contracts. However, unless the
method of splitting the costs changes from year to year, we can readily estimate rates on
the basis of the prior year’s.Example 13.2.8 Last year, the premiums for the Zarofi re plan were $258.10 for
a single contract and $787.50 for a family contract. Those premiums were based on
projected claims of $3,108,103. The loads did not change from last year to this year.
What will the rates be this year?The projected claims for last year were $3,108,103. This would include the assumed cost and
utilization trend, but not the administration. Building in the administrative load, we calculate
that the total assumed plan cost would have been $3,108,103(1.15) $3,574,318.Then $4,174,435/$3,574,318 1.1679, so next year’s projected costs are a 16.79%
increase over the projection on which this year’s costs were based. So we would expect
next year’s premiums to increase by 16.79%. Therefore, we expect the single rate to be
($258.10)(1.1679) $301.43, and the family rate to be ($787.50)(1.1679) $919.72.We do not take these rates to be the exact ones for the next year, since the method of split-
ting costs between single and family contracts may not produce rates in exactly the same
proportion next year. But we can reasonably expect these fi gures to be good estimates of
next year’s rates.As we have discussed previously, insurance is based on the law of large numbers, which requires
large numbers! While the group from the previous two examples might be large enough for us
to confidently use their past experience as a predictor of their future experience, this would not
be true for a smaller company. If a company had only 100 employees, we would not be able to
realistically base a rate on its experience, since the group is not large enough for us to be con-
fident that the experience seen is large enough to smooth out any “blips.” On the other hand,
100 employees is probably large enough to not ignore their claims experience entirely.
Insurers using experience rating make use of blended rates to account for this. The rate for
smaller experience-rated groups is determined entirely on the basis of the group’s experience,
and then blended with a community rate. The percent of the group’s own experience to be
included in the final rate is based on its size. A credibility table gives the percent to be used.
An example of a hypothetical credibility table is given below:GREATEST LAKES HEALTH INSURANCE COMPANY—CREDIBILITY TABLEFrom this table, we can see that groups with fewer than 100 covered employees would pay
the community rate; groups with more than 750 covered employees would not have their
rate blended with the community rate at all.Example 13.2.9 On the basis of experience, Greatest Lakes’ health insurance
rates for the health insurance plan offered to Burned Beans Coffee Roasters would be
$108 single/$242 single plus spouse or partner/$455 family. The community rates are
$175/$360/$700. The company has 125 covered employees. What rates will they be
charged?Number of covered employees
Credibility