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SmallBiz Employee Benefits – “That damn insurance company made money off of me, again!”

By December 13, 2019 No Comments

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WARNING: This is a really long, technical BLOG…I have to let the geek in me come out to play at least once a year. ūüėČ

“That damn Insurance company made money off of me again this year!”

Now, I did hear those exact words once from one of my Clients but more often I hear, “How did they come up with that increase?”

My Clients tend to have at least a passing interest in trying to understand how the rating is accomplished, so I am happy to explain where the Provider is coming from…it brings out the geek in me! And, once you¬†better understand where the Provider is coming from, it’s easier to develop a negotiation strategy so we can get what we want…a sustainable Benefits Program.

Yes, you can negotiate Traditional Group Insurance rates!

At the end of the Policy Year with Traditional Group Insurance programs, the Provider is afforded the opportunity to request adjustments to the rates to ensure that their risk is sufficiently funded to cover expected claims for the coming year. Sometimes those Rate Adjustments don’t quite line up with the way that you, the Client, feel they should have been calculated…that’s the bad news.

The good news is that after receiving the Renewal, you are then afforded the opportunity to accept, dispute, or refuse the terms of the renewal.

Sorry…I’m going to get real geeky today and do a deep dive into what the Provider likes to use when calculating Traditional Group Insurance rates:

DEMOGRAPHICS¬†– Demographics are used to calculate Basic Life, AD&D (Accidental Death & Dismemberment), Dependent Life, Critical Illness, Disability, and, to a certain extent, Health and Dental benefit rates. The Provider reviews the Demographics (Age, Sex, Marital Status, Salary (if the Life and/or the Disability benefit(s) is/are a function of Salary), Occupation, and Hire Dates) of your Employees from last year to this year’s group of employees. Did new ones get hired? Were there terminations? retirements? Did existing employees get married? divorced? Male/Female ratio change? Average Age change? Salary change?

Depending on how the Demographics changed, the Provider would ask for an increase or a decrease (yes, there are circumstances that a decrease is calculated…and requested). A Demographics calculation tends to be pretty straightforward as long as there is a fundamental understanding of,

  1. The older your employees get, the higher the price…and exponentially higher once they reach the age of 50.
  2. Females are a lower Life risk than Males.
  3. Blue Collar workers are a higher risk than White Collar workers.
  4. Some industries have higher Life and Health risks than others.

EXPERIENCE¬†– Experience (Paid Loss Ratio or PLR) is the term often used to describe, “How much premium did you give the Provider vs how much did they pay out in claims on your behalf?”…it’s a simple ratio of Paid Claims/Paid Premium. In the Small Business Benefits world, Experience is used most often in calculating Health, Dental and, to a certain extent, Short-Term Disability benefits.

The Provider compares your group’s Experience from the past year to their Target Loss Ratio (TLR). The TLR is expressed as a percentage…a 65% TLR says that for every $1.00 the Provider takes in, they expect to pay out $0.65 in claims. Another way to look at this is that 1 – TLR = Provider’s Expenses…so, the higher the TLR, the better it is for you, the Client.

You would think that an Experience (PLR) vs TLR calculation is a pretty straightforward way to calculate next year’s rates. For example, let’s say a group claimed $3,000 in health claims and paid the Provider $4,000 in health premium last year. Quick math says that is a 75% PLR. If the Provider’s TLR was 75%, then there should be no change to the rate, right? Wrong. Wrong? Why can’t it be this simple?

It can’t be this simple because the Provider is taking on 100% of the risk and they need to feel comfortable and make a profit. The factors that they take into consideration when calculating Health and Dental benefits are:

  • Credibility – This is a major factor…Credibility is the measure of how believable your Experience is. This tends to depend on how many employees you have. If you have 2 employees, then your Experience tends to not be believable and instead of using your Experience, they will actually use their Block of Business’ Experience to calculate your rates. That’s why when your 2 employee company’s Experience is running at 42% and the Provider’s TLR is 58%…42%/58% = -27.6% decrease!…they are still going to ask for an increase. If you have 50 employees, then that 42% is actually 100% CREDIBLE…and you will get that decrease. Oh, by the way, because you have 50 employees, the TLR will more than likely be around 75% to 80%. Bigger is better when it comes to calculating rates.
  • Weighting – This is a major factor if you are a smaller company…less so, like Credibility, if you are a larger company. This, again, has to do with how believable your Experience is. If the Provider doesn’t believe your Experience, then they will take a look at your previous years’ experience to try and establish a claiming trend…this can be good news, if your claims tend to be below the premium. It should be noted that when it comes to Weighting, the Providers feel they can start using “Cumulative” factors…that deserves a whole lot of explaining, which we won’t get into today. Let’s keep it as simple as possible. Suffice it to say that your 32% PLR a couple of years ago has a good chance of adversely affecting your current year’s 71% PLR.
  • Trend – In the grand scheme of things, this is a minor factor. Trend refers to what the Provider believes how much this year’s claim will cost next year. So, if your Provider says that their Trend is 10%, then that means they believe that a $100 claim this year, will cost $110 next year. Industry Standard Practice says that the Trend should be around 10% for Health and around 5% for Dental but it is never a nice round number like 10%. The Providers also factor in the fact that the Experience Period lags behind the actual date the suggested Renewal Rates go into effect. The Experience Period, which is usually 12 months, is being used to predict rates that won’t come into effect until 3 or 4 months after the end of the Experience Period. So, 10% becomes 12.5% with a 3-month lag or 13.3%, if it’s a 4-month lag.
  • Reserves – Like Trend, this tends to be a minor factor. Essentially it is another form of margin that the Providers build into their rate calculations by saying that if you were to terminate your benefits program, they will be paying for claims that have been incurred but have not been paid for, yet. They believe that there are enough employees out there that hold onto submitting their claims for about a month…if you were to terminate let’s say December 31, 2019, then they will still be paying for claims in January 2020 that were incurred before December 31, 2019. So, in the first year Renewal, the Providers add about 1 month’s premium to the Health and Dental rates and then account for fluctuations in the monthly premium in subsequent Renewals.
  • Fee Guide – This is something that is exclusive to the Dental Benefit. In Ontario, the ODA (Ontario Dental Association) sets the Reasonable & Customary Fees for their Services. These fees tend to increase by around 2% per year.

Since we now know where the Provider is coming from,¬†let’s build a Negotiation Strategy to ensure that the Cost of the Benefits Program meets your expectations.

Located in Cambridge, ON Sharkey Group Insurance  provides independent Employee Benefits advice & counsel for Small Businesses across Ontario.