Every year, companies find out about upcoming rate adjustments during the group benefits renewal period. Being aware and prepared for changes from insurance carriers is important but knowing why group benefits rates are changing and the criteria used by the insurance company may help alleviate drastic year-over-year adjustments.
There are seven factors heavily influencing adjustments to these rates.
1. Credibility of claims experience
This is how insurance carriers measure the predictability of past claims experience and how they factor into determining future claims. This is also known as credibility. This means that in larger benefit groups, there is greater credibility because the claims for each employee don’t have as much of an impact on the overall claims experience.
With a higher number of employees, the claims are more stable, reliable, and predictable, resulting in more credibility.
While every insurance carrier has its own criteria for measuring credibility, they all consider the average number of employees per month and the number of years the plan has been with the carrier.
2. Manual rates
This is also known as book rates. These are the rates a new group that has just started offering benefits would be charged by the insurance company.
The insurance company establishes these rates based on the experience of the entire book of business and are used for the non-credible portion of renewal adjustments if 100% credibility is lacking.
In this case, manual rates are calculated based on the insurance carrier, but group rate adjustments come from blending the claims experience of the group (the portion that is credible) with manual rates.
3. Weighting
The third factor deals with weighting the claims experience. This is the process of using multiple years of claim experience to calculate a renewal adjustment.
- The greatest weight results from the most recent experience. Every insurance carrier weights its claims differently.
- Different weighting may also be a factor for different lines of benefits. For instance, health and dental benefits may be weighted over three years at 65% current period and 25% prior period.
- Short-term disability may be weighted over a two-year period at 60% current period, 30% prior period, and 10% prior-two period, and may be impacted by the size of the group.
4. Trend factors
The trends indicate the rising costs of products and services covered under the plan. Factors that contribute to the calculation of health and dental rates for an upcoming renewal period include:
- Increased use of health and dental services
- Inflation
- Increases in the cost of new drugs entering the market
- Cost-shifting from provincial medical plans to private plans
- Adjustments to the dental provincial fee guide.
It is important to note that trend factors are usually calculated at the block level instead of the group level. They are also consistently applied across all the groups in the carrier’s entire block of business. Insurance companies used a midpoint-to-midpoint trend instead of an annual trend in renewal calculations.
5. Claims incurred but not reported
The Insurance Act requires insurance companies to collect reserves for claims that are incurred but not yet reported.
High volume benefits have reserves established to provide a buffer of premium to pay those claims that were incurred prior to the termination of the policy in the event the group terminates coverage.
This means that with a new carrier, reserves are established at the first renewal and are usually expressed as a percentage of the paid premium or paid claims.
The IBNR is recalculated based on paid premium or claims from the previous renewal period at each subsequent renewal.
6. Pooling charges
As part of a health benefit, groups purchase pooling protection to cover those claims incurred above a specific threshold. This is usually a flat amount or percentage of the paid premium. This helps protect the plan sponsor from unexpected high-cost claims that could significantly impact the ability to provide coverage of group benefits. Claims incurred by a plan member that exceeds the pooling threshold are removed from the group’s claim experience to calculate the renewal rates.
7. Target loss ratio
The target loss ratio (TLR) displays the percentage of premium dollars allocated to pay claims.
For instance, if a TLR is 70%, this means the insurance company will pay 70 cents in claims for every dollar of premium paid. The additional 30 cents will cover the advisor commission, costs of claims payments, administrative costs of the insurer, profit charge, and premium tax.
When claims of the policyholder are more than the TLR, in most cases, the insurance company will have to increase its rates. This means if claims are lower than the TLR, the insurance company is charging too much and can lower rates. It all depends on the credibility of the claims experience.
It is always wise to use best practices for containing costs in company benefits when attempting to contain costs while monitoring these factors that may cause fluctuations in rates.
For more information on group benefits rates, contact People Corporation today.
