Before the natural gas companies came to Central Pennsylvania and changed the health status of the people living there, 100% of the households in one county had employer-paid health insurance. The fair premium per family was $8300 per year, and every policy required each family to pay 20% of their own expenses while the insurance company covered the other 80%. There were also loading factors that we will ignore although they are included in the premium charged to the employer. We are interested in knowing how the premium must change to account for the increased risk of AML and how the cost to the insured (as a deductible) is likely to change.
The $8300 premium that is currently being paid is “sunk cost.” It already includes the average risk of AML for the population throughout the nation and should not be included in our calculations. We are interested only in calculating the increased risk and increased cost for this particular population, and determining the rating that must be added to the existing premium to cover this new precondition.