August 12, 2021
Dusan Baic

How To Budget For Benefit Renewals

August 12, 2021
Dusan Baic

Renewal time for your group benefit plan is a moment for leaders to review expenses and start to put together budgets for the following year. It can feel daunting to estimate the benefits line item since it's known to be an area of volatility.

To help give you the tools to better forecast your expenses, we broke down the key cost factors for two type of benefit plans: experience rated and pooled benefit plans.

"Experience Rated" Benefit Plans

Experience rated benefit plans include coverage like health, drug, dental & vision care and short term disability. Typically ,70% of your benefit costs are composed of experience rated plans.

The cost of these benefits are highly driven by usage, hence the term "experience rated". Because these benefits are used on the regular basis, they are fairly predictable. In order to determine what your premiums need to be, insurers take a historical average of your employee claims and factor in their fees on top. It's more or less a budgeting and projection exercise.

To put more accurately, the cost of premiums = claims + fees. This guiding principal is the cornerstone in forecasting your experience rated benefits cost for any year.

Health & Dental

Claims and usage are the biggest drivers in the health and dental categories, which combined account for an average of 70% of total benefits premiums (remember: premiums = claims + fees). Private sector spending on health & dental expenses grew by 4% in 2019 (Source: CIHI), and insurers still target a higher inflationary metric in order to stay conservative. Dental inflation added by insurers is anywhere from 5% to 9%, whereas health inflation added ranges between 9% to 15%. Each insurer is different, and assess your plan based on your population size, stability of claims over time, and your plan design.

  • Budget 0% to 5% if your claims are relatively the same, the employer pays close to 100% of the premiums, you've had very little population changes year-over-year, and no change in plan design.
  • Budget +5% to 10% if you've had slight population changes, or a slight change to plan design.
  • Budget +10% to 20% if you've either had population changes, plan design modifications, if employees pay a portion of the health/dental premium, or if you've switched carriers in the last 12-24 months.
  • Budget 20%+ if you've either had significant population changes/turnover, significant plan design changes, if employees pay close to 50% of health/dental premiums, or you've accepted a discounted rate from an insurer in the last 12-24 months.

Talk to your advisor 6 months before your renewal and read your quarterly reports with your advisor's help. If you have just received a renewal proposal for your experience rated plans and are wondering if it is good deal, we recommend you read this.

Pooled Benefit Plans

Pooled Benefit plans includes coverage like Group Life Insurance, Critical Illness (CI) & Long Term Disability (LTD). The pricing model for these benefits is a bit more complicated because they are a lot harder to predict and happen infrequently. Hence the need to incorporate actuarial models and more complex variables to determine what the pricing of these benefits need to be. The "pooled benefits" component of your plan makes up an average of 30% of your total benefits premiums.  

The biggest drivers of cost increases in this category are as follows:

Interest Rates

Insurers deposit premiums into safe, interest-bearing accounts in preparation to pay future liabilities. It's no secret that interest rates have been historically low for several years, so insurers need to hold more in deposits today to satisfy their future liabilities. This is a regulated area for insurers and is therefore difficult to negotiate away.

Claims History

The odd life insurance or critical illness claim is nothing to worry about. Rather, you may need to brace yourself for a large increase in LTD premiums if you've had several LTD claims over the last 5 years. 'Several' may mean an incidence of more than 1% to 4% disability rate depending upon your workplace.For example, if you're looking at a 10% incidence of disability (ex: 6 people on claim out of a total workforce of 60), you have a problem. This will almost certainly come to haunt you at your next renewal due to the incidence being over the average. Ask your advisor or read our helpful article to work on a strategy to lower your disability claims in an ethical, safe and legal manner.

Demographics

Group Life & LTD tables are a weighted average of the mortality & morbidity tables which govern the pure cost of individual life insurance. Therefore, the more younger people on your books, the less your premiums will cost. Males tend to be better risk for LTD and females tend to be better risk for Life.This is certainly is not a reason to look at deliberately skewing your workforce towards a certain age, as that's clearly discriminatory and against the Charter. However, workforces who tend to have young talent may want to realize that they may be under-paying for a benefit that could escalate in cost as their team grows up.

Profitability

There's no free lunch. Insurers -- mutual or not -- need to ensure each line item is in surplus. However, different insurers may have different growth and profitability targets depending upon their leadership or industry trends. A change in leadership at the insurer may signal that rates may accelerate or decelerate... that said, talk to your advisor about your insurer's circumstances and how that may affect your premiums.

  • Budget +0% to 5% if your demographics have not changed significantly, and you've had no change claims in the last 3 years.
  • Budget +5% to 15% if your demographics have changed slightly in the last 1-3 years.
  • Budget +15% to 30% if either your demographics have significantly changed, and/or you've had an increase in claims in the last 3 years.
  • Budget 30%+ if you've both had a significant change in demographics and 3 or more claims in the last 3 years.

Health spending account ('defined contribution')

A small but growing group of employers are opting for 'defined contribution' benefit plans similar to health spending accounts. These plans provide employees with a fixed number of dollars to spend, rather than a cafeteria of items with individual maximums.These plans are more inflation-proof for the employer, since the ceiling is set early on. Employers rarely change these ceilings and may want to consider applying a cost of living increase every year to the annual allowance.If this is your plan, the only area to budget an increase is for the pooled benefits attached to your plan (Group Life / CI / LTD). Please see above and talk to your advisor about whether an increase to HCSA amounts are warranted.

Closing Remarks

COVID-19 has forced many changes in the health benefits space. Due to lockdown restrictions, 2020 has seen lower claims when it comes to health and dental (which compose the biggest portion of premiums). While premiums = claims + fees, one make the assumption that if claims are lower this year, then next year premiums should decrease. Although this is fair assumption and some companies can see a slight decrease in their renewals, insurance companies will remain cautious of the "pendulum effect" that may happen in 2021 or 2022.

The pendulum effect, as seen with the SARS epidemic in 2003, showed a large volume of claims come in after the epidemic passed and authorities gave the "all-clear" sign (see figure 1 below). With the roll-out of the COVID vaccine and an eventual lift in lockdown restrictions, plan members may spend significantly more on dental, paramedical, and prescription drugs after having warehoused their health issues for so long. So while claims are generally lower this year, insurance companies are likely to take a conservative approach and account for this "pendulum effect" in health benefit renewals for 2021 and beyond.

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