A company’s annual group benefits renewal is typically when the plan sponsor is made aware of fluctuations to their insurance rates. How the renewal is presented will differ between advisors but generally speaking, there is a desire to provide some education while being careful not to get too far ‘into the weeds’. It’s a delicate balance.
This year, perhaps more than any other year, rate adjustments that don’t positively impact the client are being highly scrutinized. For some of your more analytical clients, it may be necessary to take a deeper dive into how insurance companies arrive at their rates.
Below are the seven key factors that impact all renewals, regardless of insurance provider:
- Credibility of claims experience
- Manual (book) rates
- Weighting
- Trend factors
- Incurred but not reported claims (IBNR or reserves)
- Pooling charge
- Target loss ratio (TLR)
One additional factor, “COVID Normalization Factor”, is excluded. Not only is it a temporary adjustment to account for the months where dental offices and paramedical practitioners were closed, there is a lack of transparency among insurance providers around the factors being used and how they are applied to the renewal.
Credibility of claims experience
Credibility measures how predictable past claims experience is in determining future claims.
Larger groups have greater credibility since claims for each employee have less impact on the overall claims experience. For example, with a group of only five employees, each member represents 20% of the group, but with a group of 50 employees, each member represents 2% of the group. The greater the number of employees, the more stable, predictable, and reliable the claims experience will be; therefore, more “credible”.
Each carrier has their own formula for calculating credibility, which takes into account average number of employees by month and number of years with the carrier (to a maximum of two or three years for full credibility).
Manual rates
Manual rates, or book rates, are the rates an insurance company would charge a new group that has never had benefits before. These rates are established based on the experience of the insurance company’s entire book of business, and are used for the “non-credible” portion of the renewal adjustment, if the group is not 100% credible.
Insurance carriers have different ways of calculating manual rates for a client.
The group’s rate adjustment is determined by blending the group’s claims experience (to the degree that it is credible) with the manual rates.
Weighting
When multiple years of claims experience are used to calculate a renewal adjustment, the most recent claims experience is typically given the greatest weighting. Each carrier uses a different methodology for weighting the claims experience. For example, some carriers may weight two years of experience while others may weight three years.
Different lines of benefits may also use different weighting. For example, Short-term Disability may be weighted over a three year period at 70% current period, 20% prior period and 10% prior-two period. Health and Dental may be weighted over two years at 75% current period and 25% prior period.
The size of the group may also impact the weighting; larger groups, i.e., 50+ or 100+ employees may be weighted 100% on the current period.
Trend factors
Trend factors reflect the increasing cost of products and services covered under the plan. Some contributing factors used to calculate the Health and Dental rates for the upcoming renewal period include:
- Standard inflation
- Increased utilization of Health and Dental services
- Cost-shifting from provincial medical plans to private plans
- Increased cost of new drugs entering the market
- Adjustments to the Dental provincial fee guide
Trend factors are typically calculated at the block level, rather than at the group level, and applied consistently across all groups within the insurance carrier’s entire block of business.
Insurance companies use midpoint-to-midpoint trend rather than annual trend to calculate the renewal.
Incurred but not reported (IBNR) claims (Reserves)
Insurance companies are required by the Insurance Act to collect reserves for claims that have been incurred but not yet reported.
Reserves are established for high volume benefits such as Health and Dental so that in the event the group terminates coverage, there is a buffer of premium to pay claims that were incurred prior to the termination date of the policy, but submitted after the termination date of the policy.
Reserves are established at the first renewal with a new carrier, and are usually expressed as a percentage of paid premium, or as a percentage of paid claims. At each subsequent renewal, the IBNR is recalculated based on paid premium or paid claims from the previous renewal period.
Pooling charges
As part of the Health benefit, groups purchase pooling (known also as stop-loss) protection to cover claims that are incurred above a specific threshold, such as $10,000.
The pooling/stop-loss charge is usually a flat single/family dollar amount or a percentage of paid premium. The pooling threshold helps to protect the plan sponsor from unexpected high-cost claims that, without this cap, could significantly impact their ability to provide group benefits coverage. Claims incurred by a plan member that exceed the pooling threshold are removed from the group’s claims experience for purposes of calculating the renewal rates.
Pooling charges continue to increase at a rapid pace given the number of high-cost drugs entering the marketplace.
Target Loss Ratio
The Target Loss Ratio (TLR) indicates the percentage of premium dollars that are allocated to pay claims. If the TLR is 80%, this means that for every dollar of premium paid, the insurance company expects to pay out 80 cents in claims. The additional 20 cents covers insurer administration costs, advisor commission, claims payment costs, profit charge and premium tax.
When the policyholder’s claims are in excess of the TLR, theoretically, the insurance company will need to increase their rates. When the claims are lower than the TLR, they are charging too much and should be able to lower them. This, however, depends on how credible the claims experience is.
In these unprecedented times, group benefits rates may vary greatly depending on your current funding model, existing rates, or any of the seven factors outlined here. As employers try to manage costs, ensure predictability, and limit risk, it’s critical that Canadian HR and Finance stakeholders are aware of these factors, and feel empowered to ask questions.
Written by Jeff Bremner, Director of Partner Relations at People Corporation.
