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--
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.

Why Price sometimes doesn't matter

When thinking about how Health and Dental insurance is priced it is easy to get confused.

Because these benefits are usually "Expereince Rated", that is to say high claims beget high premiums, and low claims beget low premiums, price is really determined by the claims, not the insurance company.

If I compared two identical groups, but one claimed $10,000 a year, and the other claims $20,000 per year, there would be a direct correlation in the premium they pay. Moving the high claiming group to a different carrier isnt going to reduce their premium to $10,000. Maybe you can save a bit on Admin expenses (refer to last weeks post comparing Manulife and Wawanesa) or maybe the carrier is willing to take a loss in the first year to earn the business, but in the long run your premiums are going to be based on your claims.

Sure there is some pooling going on, and one carriers pool might be better than the next, but over time this pooling drops away, and we are never given info regarding the pool. Is the group in the fancy French springwater pool with great claims? or in stinky sewage pool?

When it comes down to it, if you are happy with your carrier and they are doing a good job you should consider staying with them. That is of course assuming "good job" encompasses things like fair renewals and efficient TLRs.

At the end of the day, if you take away the marketing dollars, the new business discounts, and the other fluff that clouds the way, two identical groups with identical claims but different carriers should see the exact same rates.

Group Insurance Quotes

I've been busy running quotes for a few new group clients, as well as marketing a few existing groups to ensure prices are competitive. This hasn't left a lot of time for blogging. So I thought I would just post the stuff I have been working on. Below you will find a quote comparison for a group of mine, name removed for privacy. The group is currently with Benefits By Design, they are getting a 13% increase in their renewal rates, which I think is somewhat unjustified. So I have marketed the group to a number of carriers, I have included 5 in the comparison (Manulife, Equitable Life, Sun Life, Wawanesa and Great West Life). I have worked with all of these carriers and have confidence in the service and support they provide. As you can see the rates do vary from carrier to carrier, with Great West Life being the most expensive, though still providing a savings over BBD's original renewal. Manulife looks artificially cheap because they declined to quote on Long Term Disability for this group, we would need to add about $600 or so, to their premium, involve another carrier, possibly double up on some Life Insurance etc. so they have been eliminated from the running.

Sun Life is next in line, they are actually providing a savings of $278 per month over what the group is currently paying. This concerns me slightly as I think this is too cheap, I believe there is some heavy discounting going on here and that at next renewal there will be a corresponding increase. If the client is ok with the fact that next renewal will be high, than I have no problem taking the discount, but the client has to be aware of what they are getting into.

Equitable Life looks pretty good, both rates and efficiency wise. You will notice under health and dental the Target Loss Ratio (TLR) field. These number show how much of the premium is directed to claims and how much goes to admin. Ideally you want higher TLR's as this provide more money to pay claims, and less to overhead. Equitable is running 77.8% for health and 78.8% for Dental, this is far better than the current 73.4% and 75% BBD is providing. Wawanesa is the most efficient at 79.7% for both Health and Dental.

A Good example for looking at TLR efficiency is to compare the Health Care rates of Wawanesa with Manulife. Manulife has the less expensive premium of $2069 for health care, but also a lower TLR of 76%. Wawanesa looks more expensive at $2344 but has a higher TLR of 79.7%. When you compare dollars to dollars,

Manulife comes up with $1572 directed to claims and $497 in admin.
Meanwhile
Wawanesa comes up with $1868 directed to claims and $476 in admin.

So while Manulife "looks" cheaper on the surface, Wawanesa will pay more claims, and also charges a little less in admin. At the end of the day having more money funneled to claims means better renewals and more stable premiums.

Assuming the client is comfortable with a sizable renewal next year I would be recommending Sun Life for a combination of best premium, meeting the plan design requirements, as well as having good service and support. If the client isn't comfortable with the idea of a large renewal then my fallback position would be Equitable Life.

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.

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.