Have you ever started a group benefits plan or changed insurers for a lower price, only to be told a year later that due to your high claims your rates have increased?
The reality is that the initial rates you were quoted were most likely artificially low. Creating an unrealistic expectation of what the level of benefits should cost.
Effect of acquisition pricing on experience-based plans
When you sign up for cellular or cable services, they let you know your rates are initially discounted as an incentive. You know up-front your monthly payments will increase at some point in the future. You knowingly agree to this and sign up. Acquisition pricing hurts clients since it creates unrealistic exceptions, unlike incentive programs.
In group benefits, this is the problem: the “acquisition pricing” discount is undisclosed. Creating an unrealistic expectation of what your experience-based plan should actually cost. This is something you would not put up with for any other service. Most businesses will budget to the maximum they are comfortable with. Although this undisclosed discount can create problems for years to come.
Example (simplified, but accurate)
Let’s say your annual premium should be $20,000. However, the quote you are presented shows a first-year annual premium of $16,000 (undisclosed acquisition pricing). Let’s assume the insurer has budgeted that 75% of the non-discounted premiums of $20,000 will be paid out in claims. This equals $16,000 in expected claims. Just because you are paying less premium does not mean your staff will claim less. If manual (full price) rates should have been $20,000, there was a reason. At renewal, the undisclosed acquisition pricing discount will be removed, inflation trend added, IBNR (incurred but not reported) reserves deducted from the premiums available to pay claims, plus your claims are factored in. Based on standard industry calculations for experience-based plans, if your group claimed the $16,000 as expected, your rates will likely increase. This can be between 35-56% depending on the size of your business.
How do you deal with a large increase?
Simply put, you need better advice from an advisor. What we normally get is a spreadsheeter.
A spreadsheeter will usually say that our claims are too high. You need to shop around the market. They may even suggest changing your plan design. This is so your staff can “abuse the plan”. What they don’t usually tell you, is the underlying cause of the large renewal is not that the claims were too high but that the rates were too low. This results in under-funding, creating an unrealistic expectation of what the level of benefits should cost.
So what is a better approach?
An advisor will take the time to ask questions. Finding out what your objective in having a plan. Providing suggestions on how to stabilize rates, making sure your plan is competitive in your industry and much more. They will explain there are no magic fixes! If you want a plan with quality coverage and rate stability going forward, you may need to hit the reset. Start fresh with a properly priced plan within a budget you are comfortable with.
Changing insurers may or may not be part of the solution. Our advisors will help ensure that you have enough information to make an informed decision.
Clear Benefits is a group benefits provider, specializing in pooled benefits programs. We develop, distribute, manage, and service pooled group benefits programs. We work with and support selected advisors.
Each of our pooled group benefit programs features 5 options meeting the needs of almost any small to medium-sized businesses with 3-50+ staff looking for affordable, traditional-style or contemporary coverage.
Contact us today for more information.