• Group Insurance - What am I paying for?

  • With each renewal of your group insurance plan you likely enhance your understanding with respect to pricing and have a better sense for what is fair and not fair. With good education you can feel more confident that you are getting a reasonable deal from your supplier/carrier.

    Let’s spend a few minutes to address some of the hard and soft facts around price.

    To begin with insured benefits like Life and LTD, we need to realize that these are driven almost exclusively by industry risk and your company demographics. It’s really a function of rate bands all added together and divided into your total coverage volume – that’s how we get a blended rate. If we review demographic changes from year to year we need to discuss these with the carrier to make sure that their suggested rates are reasonable and in line with these changes.

    We are often told that the “rate is the rate” by carriers but it must be in line with the market. Shopping rates is really the only realistic way to know for sure but we cannot afford to market rates every year – so we use appropriate pressure and rationale when negotiating with carriers.

    Behind the scenes, we realize that Life and LTD rates are subject to the book of business at that specific carrier and internal factors might be pushing a rate up or making first year rates abnormally low. Having a sense of the market and demographic factors is the skill that keeps your rate in a fair range. Put it this way, very rarely is the rate that is provided at renewal the rate you should accept – at least not until it has been discussed in detail.

    On health and dental rates we have several factors to consider. We won’t go into all of them but: Target Loss Ratio, Claim Reserve, Trend, and Pooling are the main variables.

    The target for an appropriate loss ratio (claims:premium) is a function of size – claims and employee volume. Essentially, we’re talking about how much the carrier says they need for administration, profit, commission, and taxes. There is a good argument that many of these targets are too low and that since many insurance companies have gone public they have a new motivation for profit – the shareholder. In general, we feel that carriers are pushing the boundaries on target so we need to push back and question these numbers. If we understand what other carriers provide for a similar case we have an argument to make.

    As for claim reserves or what we call the “Incurred But Not Reported” claim factor, we need to make sure the allocation of this reserve is realistic. This reserve is the carrier’s way of funding claims that your employees have incurred already but have not reported or submitted. They assume that there is as much as 10% – 20% of your current premium needed to pay these claims after you leave that carrier for a new one. As your premium rises they continue to add funds to your reserve by padding your actual paid claims number. You will notice or should be prepared that, a first year renewal is when a carrier will start funding your claims reserve. In theory, this reserve will cover your claims if you ever left that carrier but in reality you’re not getting real dollars back. Reserve numbers should be questioned and understood as a negotiating tool.

    Trend or Inflation is the assumption for how claim cost is increasing from year to year. Think about inflation like you would with CPI. In the “basket of goods” within healthcare only, we have seen numbers around and over 15%. If we accept how carriers try to inflate previous years experience this can be a significant assumption on price. I say “assumption” because it’s a guess as to how much claims will rise. If we guess too high or too low we don’t see the result until the following renewal. If you have noticed that your claims have high credibility (predictability) then take a look at your average inflation over the past 3 years. For your calculations you should use a number no higher than 15% on health and 8% on dental. There is a reasonable argument that the health trend assumption should be down around 10%. We can debate for days about realistic trend but take the time to understand your claims, to build your argument.

    Last, one major piece to price is the cost of high claim pooling. These are the high drug claims or out of country claims taken out of your claims experience. Now, you pay an insurance premium for this and that premium is either a single/family cost within your health rate or a percentage of claims or premium. Fact is, with much higher usage of high priced drugs, this cost is rising fast. In some cases a carrier will charge over 10% of your claims for pooling protection. There are many types of pooling and costing so take the time to understand how you are protected and what you are paying for.

    Although the insurance company is not going to adjust the variables they use in their renewal report – you can still negotiate the final outcome using your own numbers that you think are fair. Your assumptions on what you think are the appropriate target, reserve, and trend factor, will support your argument for a better rate. Like any good negotiation, you need rational reasons for what you think is a fair price. Responding with – “the rate is too high” is not going to work and using other insurance company quotes to leverage off is not a good long term strategy. If you have been doing the “play one against the other” game you should understand the consequences of how this will affect your future relationship with that carrier.

    The key here – is that you have an understanding for how an insurance carrier gets to a price. If the factors for price are clear for you – now you just need to understand how your claims and plan design shape overall cost. It’s a tricky game and it requires attention to detail.


    About the Author

    Roger Thorpe is President of Thorpe Benefits. As a specialized employee benefits consulting firm, their clients expect regular communication and education in order to outsource what has become an expensive and challenging area for businesses. Check out the video segments on their website to learn more. www.thorpebenefits.com


    Financial Tip… from James Phillipson

    An understanding of your insurance company’s factors in the pricing of your group benefits will often go a long way to improving the fees that they will charge by enabling you to negotiate with them for better rates. This is often more effective than comparing to rates obtained from other carriers. There is a danger in “going to the market” (as obtaining quotes from a variety of insurance companies is called) too often, as many companies will “low ball” rates slightly without fully understanding your case. The result can be low rates for one year, followed by a steep increase in subsequent years and the need to constantly shop for rates. The time invested by you to have your broker fully explain the factors that are influencing your rates and developing a negotiating strategy is probably comparable to the time to compare rates from various insurance companies. Remember that your broker is your agent and should be representing your case to the insurance company. Besides, good underwriters (the people doing the quoting at the insurance company) will often be accommodating to good arguments based on sound logic, as they appreciate not being the target of the big whip threat to move to another company.

    So, take some time to review your experience statistics and to point out unusual circumstances that affect your case to the underwriter. He may have overlooked this in developing the pricing and be prepared to improve his quotation. So what are some examples of things that may influence the pricing?

      • Change in the demographics of your group e.g. is the average age getting younger (possibly because of new hires at less than the average age, or retirements);
      • In a smaller group, where a group member’s need for a particularly expensive medicine has ceased (if you are aware of this);
      • Changes in the proportion of single to family units; etc.

    Ask your broker what factors he can see that will affect your pricing favorably and ensure that they use them in the negotiation.

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