Pondering the question: “Why do my benefit plan costs keep going up?” We’ve got answers.
If you’ve walked away from your renewal meeting scratching your head at the rate adjustment, you’re unfortunately not alone. Many advisors don’t do a great job explaining a rate change, and the math used by insurers can be quite (unnecessarily!) complicated. Our goal with this article is to give you insight into what causes rates to increase or decrease, and hopefully help you to better understand your program and what you can do to achieve cost sustainability.
Renewal rate reductions DO happen! We promise.
Before we get into why rates increase, we’d like to point out that for many of our clients, they see their rates reduce from time to time! Approximately 30-40% of our clients in a given year experience an overall rate decrease, rather than an increase.
We conducted a quick review of our block of business, and for their 2022 renewal rates:
- 43% of our clients saw a reduction to their Extended Health Care rates
- 30% of our clients saw a reduction to the Dental Care rates
- 75% of our clients saw their pooled rates held without change
It’s a fact! Employee benefit program rates do not always increase, even in times of high inflation.
We want our clients to understand how benefit plan pricing works
During a renewal meeting, one of our primary goals is to ensure that our client understands WHY rates adjust. One of our key values at Immix is transparency; showing the details of the claims experience and how the rates are calculated is important to us.
First, as your advisor, we are responsible for determining fair pricing is presented to you for the year ahead. On a typical non-refund insured program, this means assessing the claims experience and projecting the required premiums for the upcoming renewal year, using some basic mathematical formulas. We look closely at the composition of the claims, the inflationary trends applied, the IBNR (Incurred But Not Reported) factors etc., but once we are satisfied we have arrived at fair pricing, our goal is to ensure you also understand.
However, if you’ve walked away from a meeting with your benefits advisor and you’re googling to attempt to understand why your pricing has increased, here are some insights:
1. Your claims experience is high.
This is the obvious one! In short, what was paid out in claims was too high relative to the premiums you paid for the benefit. This applies to health, dental, and to an extent, short term disability.
In very simple terms, if you paid $100 in premiums, and the claims paid back to members were $125, you have a Paid Loss Ratio of 125%. If you paid $100 in premiums, and the claims paid back were $50, you have a Paid Loss Ratio of 50%. While other factors come into play some of which are described below, in short, the premiums need to be sufficient to cover the claims, at a certain break-even mark.
2. Your group is not fully credible/ has low credibility.
What is credibility? The simple explanation is that it’s the portion of your own claims experience used in the renewal rate calculation, versus the percentage that is based on the insurer’s block of business or manual rates. This is expressed as a percentage.
With Credibility of 25%, this means that 75% of the experience used to calculate your rate adjustment is based on the insurers block of business or manual rates, not your own claims experience. This can have the effect of helping or hurting your renewal rate calculation, depending on whether your claims experience is better than or worse than the insurer’s.
Credibility is based on the size of the group and the number of years with the insurer. The larger and longer you are with a carrier, the higher the credibility. It’s worth noting that within Immix Group’s broker-managed pools, we have full credibility for all groups, from day one.
3,Inflationary trends come into play.
Benefit programs are not immune to basic inflation, and an inflationary factor is incorporated into rate calculations.
Firstly, inflation affects claim costs, including fees charged by benefit providers such as paramedical practitioners, medical supply offices and dental clinics. In particular, we saw a huge increase to the 2022 Dental Fee Guide in BC, at 7.35%. With inflation hitting everything right now from groceries to gas to wages, you can also expect to see claims dollars increasing, across the board.
When calculating the renewal rates, the anticipated higher cost of future claims is taken into account.
An inflationary trend* is typically applied to the paid claims (along with the change in IBNR reserve) to arrive at the Incurred Claims, the number that is used in the calculation to project the required premium for the year ahead. Although the term “Incurred Claims” is a bit confusing, it’s basically your claims, trended for inflation and reserve adjustments.
4.You have a low Target Loss Ratio.
This might be based on the size of your group, how long you’ve been with the carrier, or perhaps you are inside of a pool. Nevertheless, this directly affects your renewal rate calculation under a typical insured plan.
If you’re not familiar with this term (read more here), Target Loss Ratio refers to the ‘break-even’ mark for the experience-rated benefits (typically health and dental, and partially, short-term disability). The Target Loss Ratio is the goal as far as where the Incurred Loss Ratio will fall, for the plan to not lose money. Assume the following:
- 75% Incurred Loss Ratio, and 72% Target Loss Ratio
- 75/72= 1.0417 (a 4.17% rate increase applied)
- 75% Incurred Loss Ratio, and 84% Target Loss Ratio
- 75/84= 0.8929 (a -10.71% rate decrease applied).
As illustrated, Target Loss Ratio is a key factor in your renewal pricing calculation. It’s a reflection of the costs to run the plan and includes the payment to the advisor.
5.You’re inside a pool where the experience of the pool drives your pricing.
Perhaps you had very low EHC claims, but the rates are still going up 15%, because under the pool model you are in, everyone in the pool gets the same adjustment based on the overall experience of the pool. Fair? Not at all. However, that’s how many pools are managed.
Even worse (in our opinion!) if you’re inside a pool where you are not allowed to see a breakdown of the types of claims or even the claims dollars compared to the premiums, you have no way of knowing if your pricing is fair. While it’s a lot easier for the advisor and insurer to give everyone the same rate adjustment, in addition to unfairly punishing groups with low claims experience, it doesn’t provide the transparency needed to properly manage the program.
6.You have aging demographics or a generally ‘older’ group.
We have discussed mostly the factors that affect health and dental pricing, but the pooled benefits (Life, AD&D, Dependent Life, Disability, Critical Illness) are also subject to rate changes. These are primarily driven by shifts in the overall group of people with regards to the headcount, male vs female split and the distribution over age brackets. As a group becomes “older” or there are higher concentrations of people in the older age brackets, rates tend to increase for pooled benefits.
A higher percentage of males vs females will drive life insurance rates up, whereas the opposite is true for disability pricing; proportionately more females drives the disability pricing up. This is simply a reflection of mortality and morbidity tables (likelihood of death or disability, respectively).
For the health and dental, an “older” group also will impact claims. Older groups are more likely to claim for prescription drugs, and often the more costly and ongoing drugs associated with chronic conditions. When it comes to Dental, older people are also more likely to be claiming for more expensive procedures such as crowns, bridges and dentures as opposed to just regular cleanings.
7.Your plan was set up with manual pricing.
Perhaps you are setting up group benefits for the first time meaning there is no claims history for your group of employees. The pricing that is implemented when a group is first established is based primarily on the demographics of the group, in combination with the selected plan design (known as book rates, or manual rates). As there is no information as to the medical or dental needs of the group, the pricing is really just an estimate based on data held by the insurance carrier. After the expiration of the initial rate guarantee period (15-24 months, or even longer for some benefits), the rates will be adjusted based on the factors described above for a typical non-refund insured plan. What may happen is that claims are far higher than estimated, meaning a rate increase is required. Alternatively, you could see your rates drop.
8.Your plan was set up with discounted pricing when you moved carriers.
Perhaps you decided to switch insurance carriers due to the reduced pricing presented to you. If it was not carefully analyzed and explained, you may be surprised to see a large increase at the first renewal with the new carrier. One reason for this is to recoup the sales discounts that were applied to entice you to make a move. As we have written about, sometimes a discount is warranted (i.e. in assessing the claims ratios, the rates were too high) and sometimes they are illogical (the premiums proposed are far less than the historical claims). It is when the proposed rates seem far too low, where one needs to be cautious.
These discounts can be significant; insurers can offer 15%, 20% even beyond 30% discounts to obtain business, along with lengthy rate guarantees. As moving a group can be onerous, they anticipate they will likely retain the business for at least a few years, so will have the opportunity to increase the rates and recoup any sales discounts.
The answer? There are a lot of reasons for pricing to go up, but also reasons it can reduce.
As you can see, there are a variety of reasons why benefit plan pricing changes, whether it relates to your people, your pricing model, the broker and/or insurer you’ve engaged, or quite simply factors going on in the world. Working with an experienced and qualified employee benefits consultant is essential in ensuring your program remains sustainable for your organization.
*Inflation: This is often expressed with a time lag factored in, so the number you see is higher than the annual expected inflation. For example, if the inflationary trend is displayed as 14%, this is divided by 12 and spread over the full year plus the additional months to the point the rates will change. Therefore, 14% over 16 months is actually 14/16×12= 10.5% inflation.
FAQ’s
Not always. For fully-insured non-refund plans, rates can increase or decrease depending on the claims experience of the group or shifts in the demographics.
The credibility of a group refers to the portion of the groups own experience that is included in the renewal rate calculation.
This refers to the ‘break-even’ mark for the program, or the projected point of profit vs loss for the experience-rated benefits, for the insurance carrier.
The ratio of paid claims, trended and with reserve adjustments factored into the premiums, expressed as a percentage.
The ratio of the paid claims to the premiums, expressed as a percentage.
These are the ‘book rates’, or the rates used by an insurance company based on the demographic composition of the insured group, in combination with the plan design.
Read More:
Sunlife: Increase to Dental Fee Guide: https://www.sunlife.ca/workplace/en/group-benefits/focus-updates/over-50-employees/provincial-dental-fee-increases-for-2022/
Reuters: Inflation Canada may need a recession to cool down inflation | Reuters
HR Reporter: New salary survey: ‘Significant’ increases predicted for 2023 | Canadian HR Reporter
Target Loss Ratio: https://immixgroup.ca/blog/index.php/2021/04/20/renewing-employee-benefits-in-2021-here-are-things-to-know-going-forward-to-keep-costs-down/
What you need to know about discounted group benefits pricing: https://immixgroup.ca/blog/index.php/2020/12/04/employee-benefits-what-you-need-to-know-about-discounted-group-benefits-pricing/
Setting up Benefits for the First Time?: Top 8 FAQs for Business Owners when Implementing an Employee Benefits Plan – Latest News from Immix Group
Lindsay Byrka BA, BEd, CFP
Vice President, Immix Group: An Employee Benefits Company
A Suite 450 – 888 Dunsmuir St. Vancouver V6C 3K4
O 604-688-5262 E lindsay@immixgroup.ca
W www.immixgroup.ca
