What is the absolute cheapest way to run a benefits plan?

1) You need to be big. Rates improve dramatically when you get to above 50+ lives. Size also opens up additional funding methods such as Refund or Self Insurance.

2) Break out lines of benefits. The carrier that provides the best Life Insurance rate, may not have the best rate for Health Care. Some carriers have sharper pencils or specialize in certain areas. RBC provides really good LTD rates and coverage, but has no health or dental. Green Shield has good rates with health and dental but no pooled benefits such as life insurance. If you want the best rates the market has to offer you need to place the benefits with the carrier that can offer the best rate. This usually results in 2 carriers at least, one for pooled lines and one for health and dental.

3) Manage it yourself as much as possible: With more than one carrier this can get complex. Sure there are Third Party Administrators (TPA) which will help organize and manage the complexity but they will want a slice of the pie. Also, If you advisor doesn’t have to renegotiate renewals or fight over getting claims paid, why pay full price? Negotiate a flat annual fee, or a dollar per hour rate.

4) Embrace volatility. Pooled rates might be slightly lower if you take a shorter guaranteed of 12 months over 24 or 36 months.

5) Self Insure. Health and Dental benefits have big margins in premiums for risk premiums. By self insuring you take the risk and save the charges. You will want a stop loss policy for big health care claims however

6) Fee for service or percent of paid claims. Self insured plans are usually priced as a percentage of claims paid. IE: if a health care claim of $100 was paid, the administrator charges 10% or $10 to process the claim. Most plans use a percent of paid claims. Bare bones paper pushing can get as low as 6-8% before advisor compensation. Health care is usually more expensive than dental care. A less popular but equally valid approach is a flat fee per claim. With this method it doesn’t matter if the claim is $5 or $500 the administrator charges a flat cost to process each claim. Dental claims are usually a buck or two, pay direct drug claims are a few cents. Something more time consuming like a paper paramedical claim might be $5-$10 each.

TL;DR

• Be big
• Shop each line of benefit individually (Pooled lines: RBC Insurance, SSQ, IAP. Health and Dental: Green Shield, Blue Cross, Claim Secure)
• Take some risk.

--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.

Gamble with a guarantee

 

Segregated Funds have maturity guarantees. This means that after 10 years (usually) if you have lost money, the insurance company has to pay you back either 75%, or 100% depending on the contract, of your money. Here is the first such occasion where our office has seen this happen. The image above is an actual RRSP statement we received recently. Personal information has been redacted for privacy reasons. As you can see the original deposit (Net Transaction) was $58,218.41 this was deposited nearly 10 years ago on Feb 25, 2000. The client had invested heavily in the NASDAQ index and we all know how that went. 

  

NASDAQ index from 1999 to 2009 - OH GOD IT BURNS.

So in about three weeks, this client will be receiving a cheque from Industrial Alliance Pacific for 100% of his original investment, $58,218.41 A pretty terrible rate of return for 10 years of time, but far far better than the loss he would have otherwise be stuck with. 

Segregated Funds, it's whats for breakfast.

Risk, sometimes it’s worth it.

Insurance is all about risk, more importantly, paying someone to take a risk for you. In group insurance, the risk is that your employee’s might incur a large and costly medical claim. You would then have to pay it, even if you didn’t have the funds available. The insurance company takes the risk of paying for catastrophic claims, but charges a premium on everyday claims. 9 times out of 10 you pay more with insurance than without it. However, it is that 1 out of 10 that saves your butt.

I had a group which had excellent claims history, very stable and very low, especially when compared to their premiums. While I did everything I could to keep premiums down, I eventually reached a minimum premium which the insurance company refused decrease further. The claims of the group still warranted a rate decrease so I began looking for alternatives.

Self insurance came to mind, simply pay the claims, and be done with it. You will never overpay and as long as claims are low you have nothing to worry about. Except risk. Without an insurance company, any large claims are now the responcibility of the business. Risk reward, big rewards usually require big risks.

We needed some kind of insurance, but there must be something out there less expensive than what this client currently had. Their premium was more than twice what their claims were, they were not getting good value.

I found a product called Benaccount from a company I work with regularly, Benefits By Design. Benaccount lets you self insure what you are comfortable with and insure the rest. This way you get the best of both worlds, low insurance costs, but protection in case of catastrophic claims.

Benaccount relies on a health spending account for each employee; each account is funded to $1000 for a single employee and $2000 for an employee with family. This money is the first payor, every claim will reduce this account until the money is gone. The account is used for both health and dental claims. Once the account is empty, the employee switches to an inexpensive stop-loss insurance plan ($8/month single, $22/ month family) the stop loss doesn’t provide dental, paramedical or other small coverages however, it does provide coverage for prescription drugs, hospital, and large ticket medical items like electric wheelchairs etc.

A good way to think of the plan is as a stripped down health plan, with a high deductible of either $1000 or $2000. You take the risk that you might have to pay the deductible yourself, but after that you are protected. Speaking of risk, there is certainly a potential downside here, if every employee maxed out their claims, the total cost for this little 5 life group would have been $7700. When the insurance company guaranteed a rate of a only $6000. Giving up the rate guarantee was a risk the business owner had to agree to take, this plan could cost him more, while not likely to happen, it is still possible.

When agreeing to take on any risk, there needs to be a return involved. The return is if claims are lower than $6000, the company saved money.

At the end of the day, this group claimed, about what they always do, $2205.59 over the year on health and dental expenses. They paid $671.14 in insurance about 10% of their old premium, for the security that if a catastrophic claim occurs they will be safe.

Their total annual cost was $2876.73
Vs. Their insurance quote of $6203.26
The reward for taking a little risk?

$3,326.53 saved.

To pool or not to pool - Small group insurance economics

Pooling is essential for insurance, a large group of people pitch in a little bit of money each, and the result is a large reservoir of cash. Any claims are paid out of this pool, the water level drops a little but soon rises back to the high water mark with the many added contributions.

Group insurance typically pools Life, Accidental Death, Disability and Critical Illness Insurance. Because these claims are so unpredictable, and so large in value there is no way a small group can absorb their cost on their own. Sometimes for small groups, usually 10 or less, Health and Dental Insurance are pooled as well. A more common way of pricing health and dental insurance though, is called prospectively rated, or experience rated. Just like if you are constantly in car accidents or regularly set your house on fire, your insurance rates increase. The same can also be true for health insurance, if you are constantly in the hospital or have higher than normal claims your rates go up. The opposite can also be true, if you claim less you pay less.

Health and Dental expenses are different because they are more predictable than a death or disability claim. You can fairly accurately predict that the average person will go to the dentist twice a year approximately 6 months apart. You can predict that a prescription for the birth control pill will be filled once a month. Because we have a pretty good idea of what is going to happen we start budgeting rather than insuring. The wonderful thing about a budget is that you can come under budget and bank the difference.

I normally like experience rated health and dental benefits because it lets me and the client set out a budget for their claims, if they are over or under budget we have that information and can react accordingly. The client knows that they are paying for only as much as they are claiming. Under a fully pooled plan the client might be paying far more than they are actually claiming, they have no idea if they are getting a good deal or not, the insurance company doesn’t tell them.

A pool is big, stable, and predictable, a small group is just the opposite, volatile, unpredictable. The pool is safe and calm, what little ripples there are you can see coming from across the water. Small groups can seem like river rapids; rates and claims wildly gyrating, swirling constantly changing and never knowing what is coming around the next bend.

I instinctively gravitate towards the river rapids, as I think it is the best value. However, the wild rate changes a group can experience can easily backfire against me. When I have to tell a group their rates are going up 30% next year it is never a good day for anyone. On the other hand, a large pooled plan might only go up 6% that same year, with the same claims from that same member group. It doesn’t mean that group doesn’t deserve a 30% increase it just means other member groups in the pool paid too much and offset my groups high claims.

Fully pooled plans are, by nature, unfair. Some groups pay more than their share, while others profit from it. But in the end everyone gets the same rates. I think as a first step a pooled plan can be good for a client, if they don’t want to worry about the plan, and just want it in place and they can think about it as a true insurance sunk cost. Then a pooled plan will probably be alright, but I will still feel like I’m not getting them the best value, and I lie awake at night worrying that they might be spending too much (seriously, I lose sleep over this stuff, it's a good thing I have those psychologist benefits). On the other hand they could go experience rated and see their rates fly through the roof, that doesn’t help them either as it means their benefits now cost more than the pooled plan would have. That client also can’t get the better pooled rate anymore since they have to disclose their experience to the pool before they join, so even if they did try and go into the pooled plan they will get a higher rate which reflects their past experience.

It is a tough choice, be ignorant of your actual cost but maintain stability in rates, or have transparency and volatility. I am an open information kinda guy, so I choose transparency and freedom of information over closed systems and being in the dark. I know of some clients who would have been better in a pool. But I have just as many that are far better off being experience rated. The choice ultimately comes down to what the client wants and their risk tolerance, If they are willing to accept some volatility in the name of potential savings. Or if they are willing to possibly pay too much to reduce their risk.