Too many times, when it comes to measuring what makes a good benefit plan, the only data used are the rates. This leads to false conclusions and the deterioration of coverage.
How easy would the job of the consultant be if the conversation began and ended with rates…and what a disservice to the client if the conversation on benefit strategy only looked at the “cost of benefit” verses the actual coverage.
When insurance premiums increase at renewal
While it is easy to assume that premiums never decrease, this too would be a false assumption. The same as thinking when a plan is placed at a certain monthly premium, that it will always remain that way. Like gears in a finely made clock, there are many moving parts to an employee group benefit plan and all work toward building the rates at renewal:
· Number of participants and their demographics
· Employee turnover
· Market and economic triggers
· The costs of goods and services year over year
· New treatments and pharmaceutical improvements
· The usage on the benefit plan—the claims
There is a marked correlation of benefit usage and economic downturn as well as instability of the job market. Instability causes people to use what they anticipate may be taken away. When employers are known for coverage removal—the yoyo effect—add benefits when rates reduce, remove benefits when rates increase due to use—this erodes employee trust. If staff anticipate that at the renewal the employer remove coverage, they will rush use everything they can prior to the loss.
Abandoning coverage to save money is like saving a dime to spend a dollar later
Sure, saving money is important, but chasing the dollar is a race to the bottom. Every carrier/benefit provider will come out with their BEST rates to secure the business at the onset. This is because they will discount manual rates, not include the necessary reserve funding, which only comes into play after the first year, and ignore experience trends, knowing they will recoup this money at renewal.
When you move carriers, you walk away from build-up reserve funds, coverage options, and rate stability over the long term. This is the real “win” for the insurance providers as they retain that money.
Now you’re with a new provider and once the rate guarantee is over, rates go up usually by at least 15% to compensate for having to build reserves, replace plan design requirements that hadn’t been quoted properly, and experience history that continues.
How premiums are established
Life Insurance and Long Term Disability are based on active demographics of the covered population, plus demographic and claim exposure from within the carrier’s pool of business. There are reserve funds established on the block (fixed-term investments) to ensure when these high costing, long term claims occur that there will be money available. Remember a long-term disability claim is payable to age 65 and that could mean a total claim in the millions of dollars.
Collectively as people age, and the volume of claims ever increase, the rates for this benefit will increase year over year by 5-8%.
When it comes to the pharmacy, health, vision, and dental care rates, the formula can get quite complicated at the underwriter end as they factor in trend, inflation, and other risk elements. But by the simplest measure, rate adjustments are based on claims plus administrative expenses (what it takes to operate a business) and inflation adjustments.
The role of the benefit consultant
The Group Benefit Advisor will first ascertain that the renewal being provided is fair and accurate. That the price points are in-line with market expectations, based NOT on what would it look like if another competitor BID on new business, but what would costs look like at the first renewal.
By the same measure, an actively engaged advisor will outline and highlight these details, plus the benefits of the plan as it applies to your policy coverage. How claims are paid. When considering whether to retain current coverage, increase coverage in certain areas, or reduce benefits, this advisor will highlight what this will mean to staff in terms of reduced total compensation, the tax consequences, after-tax exposure, reduced claims in the event of a risk element, other benefit arrangements (like a health spending account) and the overall impact to culture.
It is so important to consider all of the data points before jumping ship and perhaps abandoning what was working very well and priced the same. Take the time to understand discounting, inflation adjustments, manual rates, funding arrangements, and usage experience. Then you can decide how to best budget your costs if you are not comfortable.
It’s probably time to have a conversation.
Reach out if you would like to explore your corporate benefit options, like:
· Challenging the notion of the Lifestyle Drug
· The value of a thorough analysis
· Why place a benefit plan in first place
Note: From a human’s mind … this was written without the aid of Artificial Intelligence (AI)
Disclaimer: Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. The site is read by a world-wide audience and employment, taxation, legal vary accordingly. Please seek legal, accounting and human resources counsel from qualified professionals to make certain your legal/accounting/compliance interpretation and decisions are correct for your location. This information is for guidance, ideas, and assistance.
