Due to the impacts of COVID-19 in 2020, many insurers provided benefits premium subsidies, or even deferred the program renewal date. In 2021, at least in insured benefit programs, renewals could look slightly different given the unique claims patterns we had in 2020. This is due to the temporary closure of health providers, the subsequent surge in services due to pent-up demand, derived extra cost due to PPE and business logistics, as well as increasing mental health issues and different working landscapes.
Whether you are a cost controller, work in human resources or a small business owner, there are some basic concepts of the renewal process that you should understand, to best deal with rate adjustments while keeping costs under control.
Why are renewal reports so complicated?
Renewal reports can be mind-bogglingly complicated. They don’t have to be. Yes, you have a great deal of data to consider in understanding your group’s claim usage. But there’s a key factor that defines your renewal adjustment.
This factor has to do with:
- target loss ratio, or TLR, and
- two formulas that will help you understand where your renewal should stand.
TLR, sometimes called a break-even ratio, is a percentage that represents the expense level of the insurance carrier. This expense level directly affects how much your group can claim before the insurance carrier loses money.
For example, let’s assume your plans TLR is 80%. First we need to calculate the loss ratio, which is claims paid/premiums paid. In this case, let’s assume claims paid were $90 and premiums paid were $100:
- loss ratio = total claims paid/total premium paid. Using the numbers above, this would yield a 90% loss ratio ($90/$100).
- estimated adjustment = loss ratio/target loss ratio. This would yield +12.5% (90%/80%).
There is a lot more that goes into calculating a renewal adjustment. For illustration purposes, we didn’t take into account a few other factors, such as credibility (how much of your group’s own claims are taken into account), trend (inflation factor) and reserves (claims lag).
But the above, in a nutshell, is a very basic description of how renewal rates are calculated. It’s a quick and easy way for a plan administrator to do the math to get a ballpark idea as to where the group should stand.
How is the TLR determined?
You might ask: How is the TLR determined? Usually, it’s determined at the time of inception and illustrated on the initial quote. Included in the TLR calculation are the insurance company’s costs in handling servicing and claims adjudication, as well as any commission paid to the broker. As the group size grows, typically the TLR will increase and the administration cost will be lower relative to the amount of premium the insurance carrier is receiving.
So, the lower the TLR, the greater the portion of your premium going into expenses and administration and commissions. On the other hand, the higher the TLR, the smaller the portion of the premium going to expenses and admin costs.
You want to ensure that your TLR is updated accordingly and is negotiated to be as high as possible. And you can do this by working with specialized employee benefits brokers that have preferred pooling arrangements.
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