Formulas for establishing health insurance renewal rates:
Standard Industry Formula
Required Rate = Incurred Loss Ratio / Target Loss Ratio x Inflation x Trend
Renewal Rate Analysis
- Model A: An analysis using the most recent year’s experience only
- Model B: An analysis using the last two periods of experience which places 66.7% credibility on the most recent year and 33.3% credibility on the previous year
- Model C: An analysis which applies 50% credibility on the most recent year’s experience, 30% on the previous year’s experience, and 20% on the experience two year’s previous
Averaging three models combined offers a weighted average to compare to each separate model results. Final underwriting includes other relevant factors (including the intuition factor).
Rating Model For Beginners
The following model targets a 70% loss ratio:
Required Premium = Current loss ratio / .70 = Renewal Premium
Example: Last year’s loss ratio was 80%. Rate adjustment on renewal = +14%
