Optimal Pricing Of Medical Insurance For Formal Employees Using Empirical Bayes Credibility Model

Abstract

Through the premium, insurance cover is made possible . The study purposed to estimate optimal price of premiums paid to an insurance company to cover for medical expenditure based on historical expenditure of an organization/company. Speci cally, this was to be achieved by rst, coming up with a credible risk premium values of institutional claim experience to be used as an average premium regulator, second, by projecting future nancial cost of providing medical cover due to rising costs brought about by in ation and technological advancement, third, modelling group expenditure claim cost using distribution based techniques to ascertain estimates of cost of expenditure. To derive credibility premium, Buhlmann credibility and Buhlmann Straub credibility models were adopted. Five contracts which represent the hospitals were simulated for a ve year period each with it claim size, weight and ratios. Projections for the credibility premiums is done by computation of between and within portfolio variances with the view of nding credibility premiums by linear estimation from the credibility formula. Unbiased estimators for the mean and variance functions for both the Buhlmann and Buhlmann-Straub procedures are obtained.Results reveals that Buhlmann Straub procedure yields higher premium amounts for all the contracts. Credibility factors with the Buhlmann procedure were constant while Straub credibility premium varied with associated weights. It was discovered from the two models su ered that outliers who had hamper correctness of mean and variances which should be addressed. A longer data period is strongly recommended clean of outliers in further studies.