Target Loss Ratio?

In a nutshell a TLR is the ratio of administrative expenses to claims payments. Every plan has expenses, paying claims, paying commissions, printing booklets, etc. These expenses are part of the overall premium you pay. At renewal time the insurance company seperates these expenses from your claims to determine your new premiums. Aside from plan design changes, the biggest impact you can have on premiums is reducing your administrative expenses, this translates into a better or higher TLR.

As a group grows they start to benefit from economies of scale and the TLR improves. A group of 10 members might have a TLR of 70%, which when flipped around means that expenses were 30% of premiums paid. A larger group of 100 might have a TLR of 85%, so expenses were only 15% of premiums. The higher the TLR the better.

Each insurance company has a differnt level of expenses, some of the more "value added" carriers like Great West Life, and Manulife tend to have a lower TLR becuase they provide more services and benefits all of which cost money. Some of the more basic providers such as Wawanesa, who dont have as many bells and whistles, can do things for less and have a better TLR.

For example I often find the big 3 (GWL, Sun, Manulife) will have the same TLR for health care and dental care.But if you actually look at claims settling expense dental care is FAR cheaper to administrate than health care. Furthermore, dental care doesnt require a stop loss charge in the event of a catastrophic claim.

One thing I really like about Wawanesa is they are one of the only carriers I am aware of, that charges a different TLR for Health Care vs. Dental Care. The Target Loss Ratio for Health might be 80%, while the Dental Care TLR is 85%. Most carriers would charge 80% for both, and pocket the difference.

So aside from the cost of expenses, what does a Target Loss Ratio mean to you the client? It can mean lower premiums.

Lets assume that we had a group with $50,000 of health care claims. Their current carrier has a Target Loss Ratio of 75%, in other words they require 25% to administrate the plan.

We can work backwards from the claims, and the Target Loss Ratio to find the premium the group would pay. The Total Premium for the group would actually be (50,000 / 0.75) = $66,666

75% of the premium is $50,000 in claims, and 25% of the premium is $16,666 in admin.

Given the same claims of $50,000 how much could the client save if they had a better TLR of 82%?

($50,000 / 0.82) = $60,975.60
By switching to a carrier with a better Target Loss Ratio the client would save $5,691

A trick I sometimes see inolves this same princple but working backwards. I will get a quote from a competing insurance company, which is cheaper than the existing coverage, however, the TLR is far poorer than the current carrier. Even though the premium looks cheaper, there are be fewer dollars directed to paying claims. This often results in a higher renewal next year.

Example:
Current premium $10,000
Current TLR = 72%
Dollars directed to claims = $7,200

Competing premium $9,500
Competing TLR = 65%
Dollars directed to claims = $6,175

So while the competing quote looks to save 5% over the current plan, the drop in TLR actually results in fewer dollars being used to pay claims, assuming the claims were actually the $7,200 budgeted in the current plan, the competing plan would need to raise rates by $1025 (ignoring trend etc) which makes the new carrier actually MORE EXPENSIVE than the current plan.

Take a look at your Target Loss Ratio and what you are getting for your premium dollars. If you don't need all the bells and whistles you might want to look into a more budget carrier who charges less.