First-year renewals can be complicated. Sometimes rates change or the plans change. How can you make sure you are getting fair first-year renewals? What do you need to know about first-year renewals? Let’s discuss both of those questions.
Understanding the Basics of Experience-Rate Renewals
Many Advisors and their Clients come to us when they receive their first-year renewals they are uncomfortable with. The conversation often starts with why they experienced unexpected rate volatility.
Teaser Rates are almost always the main reason for rate volatility, especially at the first few renewals. Teaser Rates generally have no correlation with actual expected usage. This creates an unrealistic expectation of what that level of benefits should have cost in the first place.
A properly priced and structured plan can allow for steady and reliable premiums each year. That’s how we show we have client priorities first in our minds.
An artificially low initial premium inevitably leads to abnormal premium increases in the following years. Why? Well, the insurer needs to bring the premiums into line with the actual cost.
Extended Health and Dental
Depending on the size of the group and length of time with the current carrier, premiums for these benefits may be partially based on the experience of the individual group and partly pooled.
For larger groups, premiums for these benefits are semi-pooled initially. But, gradually become based on the experience of the individual group. The larger the group, the sooner rates are based entirely on your own claims experience.
You can expect changes in premiums as a result of the following:
- Discount recapture (as applicable)
- Establishing IBNR Reserve – can have a significant effect on rates at first-year for Experience-Rate plans
- Claims experience
- Inflation trend – Dental approximately 6% per year
- Inflation trend – Extended Health & Prescription Drugs – approximately 11% per year
- Changes in the average age, gender, occupation, insurance volume, and family status, of the staff
There is usually very little difference in rates for Experience-Rate plans between carriers by the time you have had your plan 2—3 years. A properly priced and efficient plan design is the most effective method of containing and managing the premiums of your Experience-Rated benefits program.
Life, AD&D, Dependent Life, Disability Insurance and, Critical Illness
These are usually fully pooled benefits. Rates are based on the demographics of the group such as age, volumes, gender, and occupation. The insurer’s claims experience of its pool impacts these rates.
A lower average age can help decrease pooled and health rates. Occupations help determine the risk class for pooled benefits. A higher volume of insurance will reduce some of the pooled rates while increasing others.
It is important to structure the plan in a way that encourages normal usage. How? Here are some examples:
- Start with a plan you can grow with
- Expand coverage at a future date in place of a raise
- Use of co-insurance to help encourage stable claiming patterns
- Waiting period for new employees
Renewal Cost Containment
A properly priced and structured plan allows for steady and reliable premiums each year. An artificially low initial premium can lead to initially abnormal premium increases the following year. The insurer needs to bring the premiums into line with the actual cost.
We hope that this blog will shed some light on first-year renewals and how to keep costs low.
If you have any questions, click here to contact us!
Take a look at one of our other blogs which is closely related to this one. Acquisition Pricing Hurts Clients – Why and How? Click here to read.