Definition of insanity: doing the same thing over and over again and expecting a different result.
When companies ‘switch’ their insurance provider due to a rate hike at their renewal with a previous carrier, in many cases, without understanding why the premiums increased, to begin with, the business owner has simply ‘bought’ themselves a one-year reprieve before the new carrier increases their rates for the same reasons as the previous and these increases can often be more substantial than what would have been incurred over the two years with the incumbent carrier.
In these scenarios, the question amounts to “why did you move in the first place?”
No matter what, there is no way to get around the simple equation: usage, plus administration, plus inflation, equals the premium. All insurance providers are a business first and operate in this environment.
Though we all want something for nothing, that is not the case—ever. An insurance carrier is no different than any other business. When it comes to claims, they need to have the funds available to cover the usage, most especially on the day-to-day “choice” benefits like dental, vision care, paramedical services, such as massage therapy. This prior usage is a significant factor for creating new rates.
But if you have moved without understanding the essence of the benefit package, you could be setting yourself up to pay more over the long term. The following is some industry information, which may impact your decision to move or continue to work with the existing provider.
- Most group underwriter expenses are within percentage points of one another. When a marketing has been conducted on your behalf, beware of those carriers who promise substantial savings based on the same information as the other carriers. This may be an indicator that they are ‘buying’ the business in anticipation that you will not move again so quickly at the first renewal.
- True rates from the providers are what the industry refers to as the “Manual” rates and these are typically within 10% of each other based on a company’s demographics and industry code. In order to be competitive, insurers may discount these manual rates, but again, once the business is secured, they re-coup this discount at the first renewal.
- Each time business moves to a new insurance benefit provider, they have to re-establish reserves. These reserves are referred to as “Incurred But Not Reported” IBNR. This reserve can account for 8-10% of the rate. With every move, this reserve fund is left behind with the old carriers and has to be re-established within the first year with the new provider. This does not form part of the initial quotation on which you based your decision to move in the first place.
- Inflation charges for health and dental range from 11-15% depending on the benefit line and are factored at the first renewal. When quoting, the insurance carrier does not typically factor these numbers into the rates. They are applied at the first renewal.
The unforeseen consequence of a move typically includes the timing of the move. For instance, many maximums are set at a calendar year, but if you changed carriers in August, by all accounts, employees could use a full year of maximum eligibility within those first four months, then the maximum is reset January 1st and they can re-use again. So, the first renewal may be impacted by two year’s worth of maximum usage and the new carrier will want their money.
- Let’s not forget the hidden costs of a move—the time spent organizing the paperwork, coordinating employees to complete new forms, establishing the online presence, banking information, new booklets, education meetings, and employee anxiety relative to the change, which may impact their ‘trust’ in the value of the benefits being offered.
The bottom line is, no matter what, employers need to be aware of their plan design and usage patterns. Unless these items are addressed, they have simply placed themselves on the hamster wheel to repeat the same pattern over and over again without changing the result.
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