Many employers are surprised to learn that their benefits renewal is based largely on their own plan’s usage. Every prescription and dental cleaning your people claim feeds into the number the carrier sends you each year, usually about two months before your renewal date.
The good news is that a renewal built on usage can be explained. Once you see how it’s put together, you can have a real conversation about whether the increase makes sense for your organization and your budget.
Your usage shapes the renewal
For most small and mid-sized groups, extended health and dental are priced on experience. The carrier looks at what your plan paid out in claims, adjusts for expected cost increases and sets rates to cover it.
Life and disability coverage usually work differently. They’re generally priced from the carrier’s rates for groups like yours, so a quiet year or a busy one doesn’t move them in the same way. Smaller groups also have less claims history to go on, so carriers often blend a group’s own experience with their broader pricing.
Paid claims and premium: the two numbers behind it
Paid claims are the dollars the carrier paid out for your plan during the experience period, usually the most recent twelve months. Premium is what your organization paid the carrier over the same period.
Neither you nor we can see which employees made claims. Carriers protect that privacy, as they should. What we see are totals: claims paid and premium paid, often broken down by benefit. That’s enough to understand what’s driving a renewal.
What’s a target loss ratio?
A loss ratio is paid claims divided by premium. If your plan paid $80,000 in claims on $100,000 of premium, its loss ratio is 80%.
The target loss ratio, or TLR, is the share of premium the carrier expects to pay back out in claims. The rest covers the cost of running the plan: administration, the pooling charge that protects you from very large claims, reserves, premium taxes and the carrier’s margin.
When your loss ratio runs above the target, rates usually rise. When it runs below, there’s a case for a smaller increase, or even a decrease.
How last year’s claims become next year’s rates
Paid claims are the starting point. From there, the carrier adjusts for a few things:
- Trend. The expected rise in what care costs and how often people use it, from new medications to higher dental fees.
- Pooling. Very large claims, such as an expensive specialty drug or an emergency outside the country, are often pooled so they don’t land fully on your plan. You pay a pooling charge for that protection.
- Reserves. Some care happens before the period ends but isn’t claimed until later. Carriers hold a reserve to cover it.
- Changes to the plan or the group. New coverage, or a change in the people covered, shows up here.
The result is a projection of next year’s claims, priced back up to the target loss ratio. That’s the rate change you see on your renewal.
What does a normal renewal look like?
In our experience, an increase of about 4% to 6% a year is a reasonable adjustment for a stable plan. It roughly keeps pace with rising health and dental costs.
When an increase is larger, there’s usually a specific reason, such as a jump in claims, a run of expensive prescriptions or a change in the group. Today, specialty and newer drugs are a big part of the story. A plan member with diabetes who cost a plan roughly $1,000 a year a decade ago can now cost close to $10,000 a year with today’s glucose monitors and medications. Whatever the cause, it should be explained to you clearly before you accept.
What we check before you accept
Every dollar of premium is counted. We reconcile the premium the carrier used against what you actually paid. Missing premium makes the loss ratio look worse than it is, and the renewal comes in higher than it should.
Claims are recorded correctly. We check the paid claims, confirm that large claims were pooled the way they should be and flag one-time claims that are unlikely to repeat.
The assumptions hold up. We review the trend, reserves, pooling charge and target loss ratio, and ask the carrier to support anything that looks higher than your plan’s history justifies. Much of a renewal negotiation happens here.
Your plan still fits. We talk with you about your budget, your people and what’s changed in your organization. If the plan needs adjusting, we bring options and explain the trade-offs, and the choice stays yours.
Carriers have real work to do: paying claims, running the systems and earning a fair margin. Our job is to make sure your renewal is accurate and that the margin is fair for your group. Most of the time, that means a constructive conversation with your current carrier.
How often should you shop the market?
There’s no fixed schedule. Moving carriers has its own costs, including new administration for your team and changes your employees have to learn. A full market review makes sense when renewals keep running above the normal range, when the plan no longer fits your organization or when service isn’t where it should be.
Because we’re independent and work with all the major Canadian carriers, we can tell you honestly when staying put is the better choice, and when it’s time to look around.
Understanding your plan all year
Renewal shouldn’t be the only time you hear about your plan. We keep an eye on claims through the year, explain what we’re seeing and help your people understand their benefits, so the next renewal arrives without surprises.
If you’d like a second set of eyes on your renewal, or simply want to understand the one you have, we’re happy to walk you through it. You can read more about our group benefits service, or meet the people behind Bridgepoint.