Benefit plan advisors of a certain vintage may recall learning in childhood that 3 is the magic number. It turns out this wisdom also applies to firms evaluating whether to initiate a marketing of their group benefit plan. Firms, carriers, and advisors are all participants in a dance card during a plan marketing, with each partner evaluating the relative merits of a given carrier offering, relative to what is currently in place. However, this pas de trois requires some footwork if anticipated savings do not carry through to subsequent renewals. The challenge then for firms is to manage budgetary constraints against carrier pricing requirements, long after the glow of initial savings has faded.
The decision to undertake a marketing of a benefit plan typically involves a comparison of carrier quoted premiums against the incumbent renewal premium, with notations on any plan differences or deviations by carrier. While the comparison of premiums may be straightforward, the longer term implications are not, as firms will have to evaluate whether a decision to change carriers will deliver promised savings in future years.
Complicating the evaluation process is whether a discount to current premiums offered by a carrier change will manifest itself in recovery of marketing discounts or plan experience adjustments at subsequent renewals. While the impact can be deferred for a few years through carrier rate guarantees, by the second or third renewal, firms may be looking at a marketing again if premiums rise significantly.
How can firms manage this cycle, such that marketing expectations are in line with carrier pricing objectives? Part of the answer might be in three being the magic number.
At time of marketing, this starts a three-year timer that affects firms and carriers alike. Carriers typically require about 2 to 2 ½ years to recover initial expenses associated with a new client. In turn, firms will often have a two (and sometimes three) year guarantee on rates. Other carriers likely will show limited interest in offering terms to a firm if the group has only been with the current carrier for a year or two. In this dance, all partners are largely on the same card for this three-year period, as changing partners becomes expensive, or suitors less desirable.
So let’s look at the marketing on a three-year timeline, and offer strategies to assess whether client and carrier expectations are being met at marketing, first renewal, and second renewal.
At time of marketing, advisors can evaluate carrier health and dental proposed ratings in relation to whether those premiums are sustainable, based on projected claim experience and carrier target loss ratios. One tool to assist with this is to use predictive analytics to assess what claim level is needed to support projected carrier profit targets at quoted premiums. If the projected claim level is far higher than average claim values, this would suggest an exceedingly conservative rating, which would leave more premium available to absorb higher than expected claims without rate increases.
On the other hand, a quoted premium that is far below what would commonly be required to support projected claim activity would increase the potential for marketing discount recovery or adverse claim experience, and in turn, steep rate increases at first renewal. In either case, the scenario becomes one of “pay me now, or pay me later”.
At first renewal, in many cases, life and LTD rates will still be under a two-year rate guarantee, so there may not be any visible financial impact to firms for premium adjustments. However, by quantifying carrier marketing investment and emerging demographic change, advisors can foretell potential Life and LTD rate adjustments, and develop a strategy for minimizing the impact of marketing recovery and demographic change at the next renewal.
At second renewal, the impact of the marketing becomes much more pronounced, as carriers will have recovered initial onboarding expenses, rate guarantees will likewise have since expired, and health, dental, and short term disability experience will begin to demonstrate whether carrier profitability expectations have been met. The firm will also be able to assess whether there has been any appreciable financial gain in changing carriers, and if not, may be readying another marketing exercise to begin the cycle anew.
At this time, advisors can assist in managing firm and carrier expectations by negotiating amortizations of carrier investments on Life and LTD rates, applying predictive analytics techniques to determine whether carrier pricing is in line with evidence based simulation trials, and identifying budget based approaches to aligning quoted premiums with client financial constraints.
The marketing cycle need not renew itself in perpetuity, if alignment between carrier and client service, financial, and budget targets remains an ongoing and achievable objective. In applying the above strategies at different stages of the marketing and renewal process, greater degrees of partnership between carriers, advisors, and clients can minimize the prospect of ongoing marketing initiatives. Three is the magic number, indeed.
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