Each year at renewal, many companies are faced with high premium pain in their employee benefits plan. The apparent answer is, all too often, to broker their plan to another provider in the hopes of reducing the premium and finding relief from rising costs. Unfortunately the brokerage exercise alone is akin to taking your car to a mechanic only to have them reset the “check engine” light without looking under the hood. High premium pain is a symptom, not the disease and we should be looking under the hood to address the underlying conditions.
Just how many diseases may present with the same symptom, many problems within a benefits plan may present with the same high premium pain as a symptom. In this blog post we’ll be examining three of the most prevalent underlying conditions.
Underlying Condition Number #1 – High Claims. Let’s deal with the obvious right away. In a previous post we’ve explored “Employee Benefits Prepared Three Ways” and how the experience rated benefits plan offers employees a high level of benefits coverage but at the risk of total claims raising next year’s premium. Employee reimbursement for claims is the largest percentage of costs related to the overall premium. Understanding whether high categorical claims or specific unique claims are the source of your high premium pain is the first step in a productive conversation with an advisor on strategies to impact that underlying condition. Without brokering the plan, changing your people or cutting benefits, there are other strategies to consider in the areas of benefit delivery, employee engagement, and wellness.
Underlying Condition Number #2 – Plan Expenses. Most who manage an annual benefits plan are familiar with the gap between their claims and their premium. This gap is represented in health and dental plans by the loss ratio. The loss ratio is the margin retained by the benefits provider to cover expenses such as: administration, claims adjudication, service, websites, materials, commissions and of course, profit. Each benefits provider has an established target loss ratio (TLR) for each group that defines the desired margin for plan expenses and serves as a goal line for the claims each year. Evaluating the TLR is an important financial aspect of evaluating plans and providers. Less is not always more though; smaller, leaner benefit providers may offer a more attractive TLR; however, you may be missing out on services and features that your company values from a larger, more established provider. The TLR is also directly influenced by the commissions paid to your advisor. Disclosure of commissions will allow companies to fairly evaluate the value their advisor offers in brokerage, advice, service and consulting. Beyond simply comparing fees and commissions there are also various financial arrangements with the provider that could prove more efficient in managing plan expenses.
Underlying Condition Number #3 – Renewal Factors. The third, and likely least discussed underlying condition, may also be the most frequent cause of increasing costs to employers each year. As mentioned earlier (and observed in the industry), many companies suffering the symptom of high premium pain will regularly broker their plan to competing benefit providers without thorough evaluation. Competition encourages providers to offer marketing discounts and attractive low premiums in the first year. While premiums are primarily a function of claims and expenses, the secondary renewal factors used by providers after year one could be the source of your high premium pain. There are many assumptions and variables used in renewal calculations however we’ll highlight two: Trend/Inflation factor and Incurred But Not Reported Reserve (IBNR). Trend/Inflation factor, not to be confused with monetary inflation, is the benefit provider’s estimate as to how much your claims should increase by next year. While this trend (9-14%) may be true for Canada’s population as a whole, it’s rarely reflected in the working population of one specific company. In reality, the trend/inflation factor is a conservative buffer by which a provider attempts to maintain their loss ratio (expense margin) each year. The IBNR, typically a percentage of the premium, is an amount held in a separate reserve, to pay for claims incurred but not yet submitted by employees after a plan is cancelled. The IBNR is retained by the provider (regardless of use) and must be funded again with any new provider should the benefit plan move. Renewal factors such as Trend/Inflation and IBNR can lead to high premium pain, however, once identified, can be accounted for, compared and challenged in the market or during renewal negotiations.
In summary, when faced with high premium pain, ensure you are working with a strategy to identify and address the underlying conditions, not just the symptoms. Taking the plan to market and evaluating quotes may only compare premium, whereas a more thorough evaluation of claims, plan expenses and renewal factors should help uncover the real issues. Armed with a better understanding, companies can then address their pain with targeted recommendations in each area.