Gaining a better understanding of how Employee Benefits quotes, renewals and pricing are formulated.

Presented by: Vince Principato B.A., President Beneplan Inc

Renewals, Shopping the market and Lowball Quotes….How does it all really work?

To simplify how Extended health care (EHC) and dental premiums pricing are established.

Breaking down how renewals are calculated for EHC and Dental

Identifying “renewal factors”for EHC and dental

Shopping the market

The truth on how Brokers and Insurers prepare quotes:

“Marketing Discounts” = “Lowball Quotes”

“The IBNR Marketing Discount Game”

Goals and Objectives

Experience Rated Benefits vs Pooled BenefitsExperience rated benefits are benefits that are priced based on the usage patterns (claims) of your group. This type of claim has a certain amount of reoccurrence or predictability, and is usually a small amount of money, but occur frequently.

Examples of experience rated benefits are Prescription Drugs, Dental, Vision care, Paramedical, Orthotics, Orthopedic shoes and compression hose.

Pooled Benefits are benefits that are not easily predicted, are usually large dollar amounts, and don’t occur very often.

Examples of pooled benefits would be Life Insurance, Accidental Death and Dismemberment, Long Term Disability, and Critical Illness.

This presentation will focus primarily on the Experience Rated Benefits and the pricing associated with them.

Everyone in this room has an Employee benefits plan, and at some point has experienced an increase or decrease in premiums.

Some of you may completely understand why an increase is warranted, while others may not be sure.

Others still may be afraid to ask how it all works.

Employee benefit renewals are not rocket science, even though many carriers and brokers make it seem so.

Benefit “Renewals” are nothing more than an exercise in budgeting and projections to arrive at a new price/rate.

How many of you participate in the budgeting process at your respective companies or households?

Today’s Situation

Pretend for a moment that you are accountant/controller for your respective company. You have been asked by the CFO to prepare the budget for Hydro costs in 2017.

What is the first thing you would do?

First, you would view the historical data to establish what was spent on hydro over the last few years.

Let’s assume that you find out that :3 years ago (2014) your company spent $50,000 annually in hydro 2 years ago (2015) your company spent $55,000 annually in hydroThis past year (2016) your company spent $57,500 annually in hydro

Using “Hydro” as an Analogy for The Employee Benefits Renewal Process?

What would you Budget for Hydro for 2017 based on the previous Hydro figures?

$45,000?

$50,000?

$56,250?

What would you Budget for Hydro for 2017 based on the hydro figures of the past?

This is referred to as a “Weighted Average”

$56,250 is a good answer Why?

Here’s why….

(2014) $50,000 * 10% = $ 5,000(2015) $55,000 * 20% = $11,000(2016) $57,500 * 70% = $40,250

=$56,250

The first part of this exercise is designed to determine what hydro usage patterns were established in the past, and to calculate the weighted average.

We must predict future hydro usage for the 2017 year based on our historical data/usage patterns. How?

More data is required. Events that could effect our usage patterns in the future should be considered:

• Possible Hydro rate increases• Upgrading less efficient machinery/technology• Adding more machinery and/or more personnel• Expansion or reduction in production • Any additional factors pertinent to daily operations

Understanding how to project Historical Data

Lets assume the following:

You will be removing an old piece of equipment from the plant operations and replacing with a newer more efficient unit, it is estimated this will reduce the hydro usage by 5%

Ontario Hydro announces a rate hike of 3% for 2017

Assume that there is another 10% administration fee on top

Based on these factors what would you “Project” your Hydro costs to be for 2017?

$50,000?$55,000?

$60,544.69?

Hydro Usage - Projection factors for upcoming year

$60,544.69 would be the Hydro cost projection, but how did we arrive at this amount?

Let’s do the math:3 year Weighted Average (2014, 2015, 2016 based on 10% 20% 70%)$56,250.00

Removing old equipment (-5% savings) ($56,250 * .95 = $53,437.50)$53,437.50

*$53,437.50 represents the new adjusted weighted average amount

Hydro rate increase of 3% ($53,437.50 * 3% = $55,040.63)$55,040.63

Administration fee of 10% ($55,040.63 * 10% = $60,544.69)$60,544.69

Therefore Projected Hydro Cost for 2017 would be $60,544.69

$60,544.69 Hydro Cost Projection for 2017

Historical Data aka Dental Claims Usage

3 years ago (2014) the Dental claims usage was $50,000

2 years ago (2015) the Dental claims usage was $55,000

This past year (2016) the Dental claims usage was $57,500

10% of $50,000 = $ 5,000

20% of $55,000 = $11,000

70% of $57,500 = $40,250

$56,250 is the 3 year weighted average

Now take “Hydro” out and replace with “Dental”

Renewal Factors

Company implements a deductible on plan which represents a 5% reduction

The Dental Fee guide goes up by 3% for 2017

The Administration fee is 10%

Dental Renewal Factors

$60,544.69 is the Dental cost projection. How did we arrive at this amount?

Let’s do the math:3 year Weighted Average Claims (2014, 2015, 2016) $56,250.00

Add a deductible to existing plan (-5% savings) ($56,250 * .95 = $53,437.50) $53,437.50

*$53,437.50 represents the new adjusted weighted average amount

Dental Fee Guide increase of 3% ($53,437.50 * 3% = $55,040.63) $55,040.63

Administration fee of 10% ($55,040.63 * 10% = $60,544.69) $60,544.69

Therefore the Projected Dental Cost (Premiums) for 2017 would be $60,544.69

$60,544.69 Dental Cost Projection for 2017

Deep Discounting by Romancing BrokersHow many of you have received a phone call from a broker claiming “I can save you 20% on your current benefit costs if you switch your plan to me”?

Has anyone ever asked “How can you do that”?

What responses have you received?• Special arrangement with the Insurance company• Charge lower fees• I shop the entire market • Part of a larger group

How many of you believe the reasons above?

All of those reasons can be true, but……..These are possible ways that a Broker may be able to lower benefit costs, but the vast majority of the time there is one main reason Brokers can obtain lower rates:

“Marketing Discounts” aka “Lowball Pricing”

Marketing discounts are discounts that are applied by the insurance companies to their Employee Benefit quotes in order to entice businesses to buy their Benefit plans and leave their existing carrier. What the broker doesn’t mention is that this rate will be increased to a much higher rate upon renewal, in order to recoup the insurance company’s “lost” revenue.

How do you know if a quote you have received from a Broker is “real” or simply “discounted” enticing you to move?

You need to ask the right questions!

Renewal Factors: Questions to ask a Broker once they have given you a quote

Whenever you receive a quote from a Broker you should be prepared to ask the following questions:

1. What is the “Target Loss Ratio” for the EHC and Dental? 2. What are the “Incurred But Not Reported Reserves” (IBNR) for

this quote and how are they calculated? 3. What are the “Trends” that will be applied to the EHC and Dental?

What do all of the terms above really mean?Target Loss Ratio (TLR):Means overhead expense, margin, fees or expenses. It is expressed as a percentage and is arbitrarily set up by the insurance carrier based on the size of the group. Typically, the larger the group, the more attractive the TLR. Target Loss Ratios can range anywhere from 70%-85%.

Assuming a TLR of 75% means that for every dollar you pay the insurance company in EHC or Dental premiums, the carrier anticipates paying $0.75 towards claims and keep $0.25 for themselves for fees. This is a 25% overhead expense but it actually represents a “margin” of 33%.

25:75 is the ratio which works out to 1:3. This equals 33%

What does it all mean?

Questions to ask your Broker once they have given you a quote…….Incurred But Not Reported Reserves:

This refers to a fund of money the insurance carrier will need to set up that you pay through your premiums, to pay for claims that will happen after you have terminated coverage with that carrier.

Assume you were to terminate your plan with ABC Insurance on December 31st 2016 and Jan 1st 2017 start with a new carrier, XYZ. In the month of January and February 2017 your old carrier (ABC) receives some outstanding claims from your employees that were “incurred” in December 2016 but “not reported” until January and February. These claims must be paid by the old carrier.

But where does the old carrier get the money to pay for these claims?

The IBNR Reserve!

The “Incurred But Not Reported” reserves fund is built with a percentage of the premiums that the carrier has been charging you.

Questions to ask your Broker once you have received the quote……..continued

What is ``Trend`` or trending, and how is it applied to EHC and Dental benefits?

Trend refers to the difference in the amount that a claim is anticipated to cost tomorrow vs what is cost today, in simple terms “inflation”

Example: if a dental cleaning today (2016) cost $100 and the “trend” is projected to be 5%, then this same dental cleaning in 2017 will be estimated to cost $105

Most insurers typically estimate dental trend between 7%-10% annually and between 11%-15% annually for EHC

Now lets put it all together and crunch the numbersThe objective of this next exercise is to apply all of the information we learned today and use it to determine which quotes you receive are quoted properly and which have been discounted in order to win the business.

Example: ABC Company goes out to market to solicit quotes. Assume the following:Dental Claims Target Loss Ratio = 80% Trend =5%

$70,000 in 2014 * 10% = $ 7,000

$81,000 in 2015 * 20% = $16,200

$87,000 in 2016 * 70% = $60,900

3 year weighted average =$84,100

Based on the $84,100 in dental claims what would a Bona Fide Dental quote look like?

$85,000 in Dental Premiums annually?

$90,000 in Dental Premiums annually?

$110,381 in Dental Premiums annually?

Lets do the math$84,100 * 5% trend = $88,305 / 80% Target Loss Ratio = $110,381

Therefore if the Dental Premiums quoted by the insurance carrier are lower than the $110,381 this usually means that a “marketing discount” has been applied. The bigger the difference the bigger the discount, and more importantly the bigger the increase that will be required on renewal to recoup that discount.*same calculations for EHC except the trend figure is higher anywhere between 11%-15%

**Please note under The Beneplan Employee Benefits Cooperative the Dental Premiums quoted would be approximately $100,000, with a savings of over $10,000.

$110,381 would be the correct answer, but why?

The “IBNR Marketing Discount Game” is really just a hidden time delay claims payment program, insurance companies use to create “Marketing Discounts”.

In any given claims year, there are claims incurred late in the year and reported early in the next claim year. For example, a dental claim that was made in December 2015 would actually be reported in January or February 2016.

This “time delay” is one of the ways insurance companies create the “marketing discounts”.

Insurance companies will discount the claims experience by estimating what the “time delay” claims are going to be, and then base their premiums on that lower amount. This results in the discounted premiums, and is the enticement for you to get on board with the new carrier.

Once you get to the first renewal that time delay no longer applies and now the discounts that were applied need to be recouped! This means big increases.

The IBNR Marketing Discount Game

You go to the dentist’s office for your 6 month cleaning and scaling. After paying for the service, your

Dental Clinic Administrator fills in a claim form and sends it in to the insurance company.

The Journey of a Claim

The insurance company processes the claim.

The payment arrives in your bank account.

The claim travels through accounting systems until it is logged.

Finally, the claim is filed and closed.

The Journey of a Claim

When Beneplan goes to the market we ask insurance companies to provide the“Renewal Factors” for their respective quote (ie Target Loss Ratio, Trend, IBNR)Beneplan performs all of the calculations to estimate (based on group’s claims experience and the declared “Renewal Factors”) what the potential renewal will be.When Beneplan generates a quote for a client based on the Beneplan Employee Benefits Cooperative model, we are not allowed to use “marketing discounts”. Beneplan does not play the IBNR Marketing Discount Game.Beneplan is completely transparent and accountable!When Beneplan prepares a quote, we use your company’s actual historical data and prove savings through comparative pricing for those years. We also project future costs realistically.

How Beneplan is different…

What happens when the “Discount” is so enticing?Imagine receiving a quote that has been “discounted by 20%-30% representing $10,000 or even $20,000 in annual savings, what do we do?If Insurance Carriers are willing to offer ridiculously low rates, then…TAKE IT AND RUN…..but do it all through a broker you trust!Brokers have the ability to solicit quotes from the market for you and place the business with whichever carrier is willing to give you those rates.Beneplan will also “do the math” for you, illustrating what the potential increase on the first renewal could be. This way you are well aware of what the discounts are and what could happen on renewal….No Surprises!!!The Good News: If large increases occur and Beneplan is still your Broker, we can simply bring you back to the Beneplan Employee Benefits Cooperative.Truly a “win win” situation.

Thank you

Vince Principatovprincipato@beneplan.ca1-800-387-1670 x235