Manual Rates Explained: The Actuarial Foundation of Stop-Loss Pricing

# Manual Rates Explained: The Actuarial Foundation of Stop-Loss Pricing

Manual rates form the foundation of stop-loss underwriting. Understanding how carriers develop these rates helps brokers interpret quotes and explain pricing to clients.

## What Are Manual Rates?

Manual rates are developed using actuarial tables and statistical modeling. They represent what a group *should* cost based on population-level expectations rather than its individual claims history.

Carriers construct these manuals using large, multi-year datasets—often purchased from third-party actuarial firms—and apply predictive models to estimate expected losses for different risk profiles.

## Key Factors in Manual Rate Development

Several variables influence manual rate calculations:

### Demographics
- Age distribution of the covered population
- Gender mix
- Geographic location (regional cost variations)

### Plan Design
- Deductibles, copays, and coinsurance levels
- Out-of-pocket maximums
- Network type (PPO, HMO, HDHP)

### Industry Type
- Certain industries carry higher or lower risk profiles
- Blue-collar vs. white-collar workforce considerations
- Hazardous occupation adjustments

### Trend Assumptions
- Expected increases in healthcare costs over time
- Both medical trend (7-9% annually) and leveraged trend
- Specialty pharmacy cost projections

### Contract Type
- Paid vs. incurred contracts
- Contract periods (12/12, 12/15, 24/12, etc.)

## Annual Manual Updates

Carriers typically update their manuals annually to reflect changes in:

- Medical inflation
- Leveraged trend factors
- Observed claim patterns from their book of business

For example, if medical trend is projected at 7% and leveraged trend at 20% for certain deductible levels, manual rates will incorporate these adjustments to maintain actuarial soundness.

## From Manual to Final Rate

Manual rates serve as the starting point for underwriting. Carriers then adjust for:

- Group-specific experience (claims history)
- Lasers on high-risk individuals
- Contract features and provisions
- Market loads (administrative fees, taxes, commissions, margin)

The goal is to achieve portfolio-level targets—carriers commonly aim for a loss ratio of **65–70%** ([Segal Health Plan Cost Trend Survey](https://www.segalco.com/consulting-insights/2024-health-plan-cost-trend-survey)).

## Practical Example

A carrier might determine that a group with:
- 200 employees
- Average age 42
- $100,000 individual specific deductible
- Standard $2,000 deductible PPO plan design

...should be priced at **$100 PEPM** based on its manual—before any experience adjustments.

*This article is part of our series on stop-loss underwriting. For a comprehensive overview, see our whitepaper: [Stop Loss Underwriting: A Deep Dive](/resources/whitepapers/stop-loss-underwriting-deep-dive).*