GROUP INSURANCE RENEWALS: INTRO TO THE TARGET LOSS RATIO
Posted at 10 months ago in blog by M Lederman
Your group insurance plan is much like your car insurance plan. If you get in a car accident, your risk rating increases and your insurance is more expensive the next year. Likewise, if your company’s benefits claims are higher than the premium the insurance company takes in, they will raise your premium the next year to recoup the cost.
The package the insurance company presents is complicated, but renewals are really that simple.
What’s not easy is managing your team to ensure everyone is using the plan appropriately. It is very common to see a group, particularly in their first year, overuse benefits. The costs can begin to add up as the premium will be increased every year, until the growth in plan cost becomes unsustainable.
How do you avoid this? The first step is to communicate with your team that the benefits plan is a pooled way for everyone to minimize their costs and risk. You want to convey that it should be used for routine care and emergencies, but not for indulgences. There are methods to naturally reduce the tendency to over spend, like placing maximums, out of pocket payments or deductibles on the plan. There are also cost effective methods to give employees a set allowance for indulgences, like a Health Spending Account, which does not cause an increase in premium.
The next step is to get in touch with your broker or account manager and ask what your Target Loss Ratio is. Every company is assessed a TLR based mainly on the size of the group. The TLR is expressed as a percentage and represents how much the insurance company is willing to pay out in claims for every dollar taken in.
A simplified cost breakdown of your group insurance premium looks like this:
10% – Reserve for large claims + Insurance company profit
10%- Administration costs
10% – Broker commissions
70% – Claims payouts for the year
In this case the Target Loss Ratio for the group is 70%. As long as the claims for the year remain a bit below 70% of premium taken in (offsetting inflation) you should not expect to see an increase in premium the next year.
Your group insurance renewal package includes detailed math on how you’ve claimed in the past and how they expect you to claim going forward. This can be a bit confusing and full of industry jargon, but you can cut through the noise and understand most of the price action by focusing on the claims and the TLR. With your own simple calculations, you'll be in the ballpark to determine whether your renewal price is fair.
Make sure to:
- Check in with your broker regularly to see how the claims are progressing and get a working TLR throughout the year. We check in every 3, 6 and 9 months to give an update and offer a course correction measure if necessary.
- Communicate with your team. The plan is there to use when you need it and it will protect you should an a large claim occur (a reserve fund is built for this reason). Every individual can do very simple math to see if they are claiming out of line with their premiums. The increase in costs affects everyone, so you have to work together.
Keep seeing price increases on group insurance and not sure why? Reach out to us if you want a consultation on your own renewal.