Why do my benefit premiums keep going up?
If you’ve ever wondered this, you’re unfortunately not alone.
The math used by our insurers can be quite complicated, however we hope to provide some insight into what causes rates to change, and help you to better understand how our benefits plan is affected by increasing utilization.
At plan renewal each year, our consultant and benefits providers meet to assess our claims experience and project the premiums required to cover anticipated claims for the upcoming renewal year, using some basic mathematical formulas. This is done by looking closely at the composition of our claims, inflationary trends, the IBNR (Incurred But Not Reported) factors etc., and once satisfied that the costs proposed are fair, present the proposed renewal to the AOMBT and Trustees.
When increases are imminent, the following are some of the reasons:
This is the obvious one! In short, what was paid out in claims was too high in relation to the premiums collected from our members. This applies most specifically to health, dental, and disability.
In very simple terms, if the Trust remitted $100 in premiums, and the claims incurred were $125, our Paid Loss Ratio would be 125%.
If we paid $100 in premiums, and the claims incurred were $50, we would have a Paid Loss Ratio of 50%.
While other factors come into play, in short, the premiums paid to carriers need to be sufficient enough to cover the claims paid out, at a percentage determined by the provider.
Similar to automobile insurance, if you continued to have claims on your car for accidents etc., this would negatively impact your experience, and furthermore have a negative impact on your insurance rates.
Target Loss Ratio
Target Loss Ratio (TLR) refers to the proportion of premiums intended to cover claims set by the insurer. The TLR splits each dollar of premium spent on health and dental into claims costs and administrative costs.
For example, on a 75% TLR, 75 cents of every premium dollar goes to claims and 25 cents goes towards administrative costs. Therefore, the higher TLR, the more money there is to pay claims before seeing an increase in premiums.
Credibility is the portion of our own claims experience used in the renewal rate calculation, versus the percentage based on the insurer’s block of business.
For example, credibility of 25% means that 75% of the experience used to calculate our rate adjustment is based on the insurers block of business, and not our own claims experience. This can help or hurt our renewal rate calculation, depending on whether our claims experience is better or worse than the insurer’s book of business.
Credibility is based on the size of the group and the number of years with the insurer. The larger and longer we are with a carrier, the higher our claims credibility.
Benefit programs are not immune to basic inflation, and an inflationary factor is incorporated into rate calculations.
Firstly, inflation affects claim costs, including fees charged by benefit providers such as paramedical practitioners, medical supply offices and dental clinics. With inflation hitting everything right now from groceries to gas, you can also expect to see claims dollars increasing, across the board.
In exchange for a pre-determined pool charge, the insurer agrees to pool specific claims instead of charging the claims to the plan’s experience. The pooling may apply to certain types of “catastrophic” Healthcare claims (e.g. Out-of-Country) and/or to claims in excess of a specific threshold, such as $10,000 per person per policy year. This way, the risk of higher than anticipated claims is transferred from one to many, and that risk is shared by all plan sponsors in the pool. This spreads the cost of the losses across the member pool.
Pooled benefits (Life, AD&D, Dependent Life, Disability, Critical Illness) are also subject to significant changes. These are primarily driven by the number of insureds, gender/sex, and age factors.
As our group becomes “older” or there are there are higher concentrations of people in the older age brackets, rates will tend to increase for these benefits.
For the health and dental, an “older” group will also impact claims. Older groups are more likely to claim for prescription drugs, and often the more costly and ongoing drugs associated with chronic conditions. When it comes to Dental, older people are also more likely to be claiming for more expensive procedures such as crowns, bridges and dentures as opposed to just regular cleanings.
Additionally, our gender demographic drives the disability pricing up. This is simply a reflection of mortality and morbidity tables (likelihood of death or disability, respectively) which increases the disabled life reserves required.
Disabled Life Reserve (DLR)
This applies to our Long-Term Disability plan. The DLR reflects the present value of all future payments to an open Long-Term Disability claimant and is re-valued on a regular basis.
The reserve for each claimant will depend on such factors as the monthly benefit amount, the age of the claimant at disability, the maximum benefit duration, and the length of time since the date of disability. Reserves are discounted based on interest assumptions, as well as the possibility the claim will close prior to the maximum benefit duration date.
As you can see, there are a variety of reasons why benefit plan pricing changes, whether it relates to membership changes, our plan experience, or quite simply factors going on in the world.
The Trust does its utmost to ensure that renewals are performed with your best interests foremost in our negotiations.