When designing a group insurance product..

[merrycherub]

Coinsurance, deductible or limitation is helpful to achieve profit target, that's the reason we use coinsurance?

or there are other reasons...

I am a fish in the field Thanks a lot.....

[FormLetter]

Coinsurance helps align the incentives of the insured with those of the insurer.

[DudeMan]

Originally Posted by merrycherub

but there is a strange thing, that is, when I do the profit test: If I increase the value of deductible and limitations, the profit as % of premium actually increases...

Is it abnormal?

this is normal.

Given that premium levels stay the same, increasing the deductible increases profit for 2 reasons. (1) It shifts liability from the insurer to the insured. (2) Since the insured has more Out-Of-Pocket (OOP) expense, claim utilization will most likely decrease. I believe this is what FormsLetter is referring to.

Increasing the deductible will certainly increase profit as a % of premium, but my question to you is....what effect does it have on the nominal level of premium? Groups will typically opt to increase their cost-sharing in exchange for lower rate increases....which means lower than expected premiums.

Take this example: Your company collected $1 million in premium this past year. The actuary determines they will need $1.1 million in premium next year in order to meet goals. They file for a 10% rate increase in order to meet their target. In turn, some groups will cancel and some other groups will increase cost-sharing. Let's say 10% of groups (on premium basis) get a better rate with another insurer and cancel, and another 25% increase cost-sharing in exchange for only 5% increase. Coincidentally, the 10% rate increase actually yields a total premium decrease of 2.25% ($100k * 0 + $250k * 1.05 + $650k * 1.1 = $977,500).