Every year, your group benefit program is reviewed by your insurer based on premiums and claims paid. The various insurer fees are then added to that ratio. Every insurer does this and has the same cost-base so they all have the same fee structure. Some insurers are less efficient than others and some seem to build extra profit into some of their fees so their fees are higher. Your goal should be to have reasonable fees as that is the way to have the best priced benefits for the longest duration.
The math used by all insurers at time of renewal is:
- Claims Divided by Premium = Claim Ratio
- Claim Ratio +
- Administration cost
- Administration includes the service fee paid to your Broker or Advisor
- Cost of Living
- Large Amount Pooling
- Establishment of Reserves (Mostly done in the first year of an insurance contract)
- Administration cost
When we provide quotes to our clients, we illustrate the first-year premiums and we clearly show the above fees. We also show our clients the insurer math so they know where prices are going in future years based on their own use. This is how we help our clients and this is how we ensure the client is fairly treated each year. An insurer with a 10% discount this year looks good, until you learn that next year they will be 10% higher because their fees are…higher. Every year after that, they again charge an exponential 10% more than if they had just charged a fair amount in year one.
Going forward, we are now getting our insurers to state their discount at time of quote and we are including that information on our proposals.
Here are some of the messages we are getting from our insurers about their discounts on recent quotes:
Insurer 1
We have applied 15% discounting on Life and LTD.
We will recuperate 5% after 28 months, 5% after 40 months and 5% after 52 months.
Insurer 2
10% off on basic life, 12% off LTD, 10% off Health and 10% off dental.
We usually take 2 to 3 renewals to recoup the investment.
Insurer 3
We take back the investment over 2 renewals.
Renewals 1 and 2 for health and dental ; renewals 2 and 3 for life, dep life and LTD.
As you can see, there are no real discounts. In addition to higher fees, you can also add the discount recuperation and re-establishment of the reserves. This is like getting a great deal on leasing a car, then having my car lease reviewed each year with increasing costs based on my driving style, cost of living and recovering the discount.
By now, you should be asking yourself how you can save money on your benefit plan. Here are some thoughts:
- Work with a Group Benefit Specialist. You can tell you have a specialist as that person will disclose the full fee schedule in addition to the premiums and be able to clearly explain it. They will also know which insurers have the best fee factors. We do sometimes see up to a 20% difference between insurance companies in their fee factors. (I have seen a fee schedule that equated to $0.72 of each dollar going to pay fees! We did not go forward with that insurer.)
- If you are already with an insurer, without knowing your premiums, a true advisor will know if you are in a well-priced place or if you can truly save money. The advisor will also be able to prove that at time of quote.
- If you are already with an insurer, without knowing your premiums, a true advisor will know if you are in a well-priced place or if you can truly save money. The advisor will also be able to prove that at time of quote.
- When shopping for benefits, if your “Specialist” did not show you the fee factors, the discounts and the math along with the offered premiums, they are likely not a specialist. Stop the process and look for a different advisor.
- Some insurers are very clear with what they will pay and what they will not. I personally like an insurer who only pays for what they said they would cover. If the insurer pays for things that are not listed in the book, then you and your employees pay more every year for those claims that should not have been paid.
However, if your goal is to make your employees as happy as possible, then this practice may fit your needs.
Just recognize, you will pay more premium since more claims were paid. Fair enough. - Design your plan so you don’t accidentally end up being the first payor even if a spouse has benefits through their employer. Remember, your next year’s premiums are based on this year’s paid claims + the insurer fees.
- Work with a provider who has solid anti-fraud systems.
- Design your plan to cover the things that are important to you and your team. Good plan designs are more price stable over time and may help reduce other business costs.
- If you are large enough, explore different methods of coverage. ASO and Refund Accounting are two great alternatives that lower your cost of insurance.
- A Specialist will help you organize your benefit related HR processes to reduce any liability you may pick up if you do not administer the plan properly or if your HR documents do not clearly talk about the plan.
- If you are a smaller business, explore a pooled plan. Pooled plans do not disclose the fee factors. Since they are a pool, their factors are always lower. You lose some flexibility and reporting. You gain long-term price stability. Do ask about how the renewals work in the pool you are evaluating. There should be a clear explanation.
As always, if you have more questions, always feel free to reach out.
Jay Nadler, Employee Benefit Specialist.
