Underwriting Health Insurance Plan Made Easy

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%