TSIL has developed an experience rated formula to be used in calculating a member’s premium for each year. It is primarily based on a member’s expected losses for the upcoming policy year, as projected by the actuary’s review of the member’s claims and exposure history. The following is a brief outline.
- The intent of the formula is that each member pays a premium to fund for its expected ultimate losses but it allows for risk sharing and risk shifting amongst the entire membership for “shock losses” i.e. infrequent large (over $125,000) claims.
- To develop a member premium, each member’s previous five-year loss and payroll history is collected and the data is then trended and developed by TSIL’s actuarial firm. They then produce what they believe a member’s predictable losses will be plus what should be reserved for “shock losses” which together become the member’s loss fund.
- Next, the operating costs of the program such as excess reinsurance, fronting costs, claims service, brokerage, etc. are calculated for each member. These costs are fixed percentages of total premium for all accounts.
- Finally, the contributions of that member to the loss fund and operating costs are added together, producing their premium for each year.
- In addition to premium charges, a member can be assessed up to a maximum predetermined amount if his expected losses exceed his loss fund contributions for the policy year.