Welcome to Part 8 of our Employee Benefits Marketing series – Checklist Items for doing it properly and the myths associated with each step.
The 10 Point Employee Benefits Marketing Checklist was created to equip advisors and employers with effective tools and information that go beyond marketing simply based on price. Our checklist is now available in the CloudAdvisors Solution Library, just search for “CloudAdvisors” or contact an employee benefit specialist who is #poweredbyCloudAdvisors to share with you.
Checklist #8: Comparison of Renewal Factors
Renewal factors are the underlying fees that impact the future renewal of a benefits quote and subsequently impact future costs for employers. Alongside any basic premium comparison should be a comparison of all factors such as target loss ratio, trend, reserves, guarantees, pooling charges and commissions. These fees are already built into the premium cost quotes, however each variable will have a different impact on next year’s renewal.
Some Renewal Factors to Highlight:
- Target Loss Ratio (TLR) is the percentage targeted between premiums and claims. The “loss” refers to the amount paid to claims and lost against the margin. A higher TLR means a smaller margin and a more competitive fee structure. This margin is used to pay for claim adjudication, administration, commission, risk, and profit. The TLR sets the relative claim volume against premiums that may project an increase or decrease at next renewal. TLR numbers range between 70%-90%.
- Trend, also known as the Trend / Inflation Factor, is used to inflate and project current claims to higher future claim volume for the purpose of setting future premiums. The trend is not specific to one group and not monetary inflation, but rather a budget used for expected future claims across an insurance company’s entire block of business. Trend numbers range between 6%-12%.
- Incurred But Not Reported (IBNR) Reserves is a fluctuating reserve (often a percentage of premium or claims) taken from premiums and held by the insurer to pay outstanding claims in the event the policy terminates. Any benefit plan will incur eligible claims each month, but they may not be submitted for reimbursement until weeks or even months later. The reserve is funded in the first year and owned by the insurer, as they are at risk for a future deficit or surplus. This puts extra pressure on reduced premium in the first year and takes premium dollars away from paying current claims.
- Rate Guarantees by Benefit Line are guarantees made by the insurer to maintain unit rates for two or more years. The rate guarantees can significantly change projections and provide employers with more certainty. The rate guarantees however can also defer high current claims to a future year when the costs would be priced into the next renewal period.
- Pooling Charges refers to additional insured premiums for pooled risks such as emergency travel medical or large claim ‘stop loss’ pooling (eg. claims above $10,000). Charges can be priced per person or as a percentage of premium. This will vary considerably between insurers and groups and being tied to the percentage of premium can escalate costs in the background of renewals.
- Commissions are the fees paid to the licensed advisor or broker for the sale and ongoing service for the group policy. Commissions are typically a percentage of premium and will be addressed in detail in an upcoming checklist item.
A comparison of renewal factors does not necessarily mean challenging every category or disputing every fee, but rather creating awareness of the differences in pricing strategy. Insurers will have different pricing strategies and may vary these based on arrangements with specific advisor partners. Pricing strategies will also reveal different opportunities and risks that may or may not be the right fit for an employer.
For example, during a review of two insurers, Insurer A may offer lower premiums and look like a clear winner, however Insurer B may offer a higher TLR and lower IBNR, making for potentially greater savings over the next two years.
Another challenge is that insurers and advisors may omit reporting one or more fees in the complete price to appear more attractive while shifting risk into another area. There are far too many combinations of these scenarios and strategies to list, however a comparison of these factors will guide an expert advisor to make more informed recommendations to an employer.
Marketing Myth #8: There are Hidden Fees in Insurance
False. All material fees (renewal factors), even if not initially reported, are available from the insurer and should be requested, disclosed, compared, and evaluated for their impact on current costs and subsequent renewal action.
As noted throughout the checklist items, premiums which are only compared at face value can seem to be full of hidden fees, when in reality, fees are hidden by a lack of disclosure work on the part of the advisor. Hidden fees are not often the fault of the insurance company who produced the quote, but rather the advisor who is presenting the quotes in a modified proposal. Employers should request a full review of the checklist from their advisor so they do not receive any “surprises” at renewal.