Demystifying Renewal Pricing

Group insurance renewals can seem strange and clouded in mystery. While each group, carrier and renewal is different here is a simple example of how renewal rates are set.

1) Past Experience
The insurance company looks at your claims experience and demographics, over the past 12 months, sometimes going back as far as 36 months.

Paid Premium = $20,000
Paid Claims =  $18,000


Paid Claims = 90% of Paid Premium


2) Pricing for the Future
Health care in Canada is getting more expensive every year. Expensive new drugs, an aging population and government cutbacks are causing healthcare costs to increase at approximately 13-15% annually . This increase is called a Trend Factor.

Trend Factor = 14%

3) Administrative Costs
Administrative costs include: processing claims, printing booklets, maintaining phone and internet support, plan enrolment, preparing billings and invoices etc. If a plan has a Target Loss Ratio of 72%, the remaining 28% is used for administration.

Administration Costs of 28% = Target Loss Ratio of 72%


4) Putting it all Together
From past claims experience, known administration costs and predicted increases in healthcare costs we can predict next years’ claims and budget accordingly.

Example #1 High Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
       90%     +       14%       –         72%             =      +32%

Example #2 Low Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
     55%       +        14%      –          72%            =       -3%

Often clients feel like they are getting taken advantage of when their claims are at or below their Target Loss Ratio and they still receive an increase. They instinctively feel that if they hit their "Target" they shouldn't have any change to rates. If health care costs were stable this would be the case but, sadly the fact is that health care is getting more expensive each year, so insurance premiums need to increase to keep up. If you wanted to calculate this break-even point, where next year you would see no rate change it would be found by subtracting the current trend factors from your Target Loss Ratio. In the example above with a 14% trend and 72% Target Loss Ratio the "break-even" point for claims would be 58% of premium.

Clients need to understand that administration is going to account for between 15-30% of their premium, depending on group size. Trend factors will, on average increase the cost of  health and dental plans by 15% and 8% each year, respectively.