Why Do My Rates Go Up After The First Renewal With A New Carrier?
Have you moved your benefit plan to a new carrier for better pricing, maybe even for enhanced benefits
with a cheaper “intitial” premium? If so, chances are you may have had to go through the ensuing
“tough” first renewal (increase of 20-50%) with the new carrier. In these scenarios we are finding that companies are not clear on why the pricing looks so attractive when quoted, but are seeing a much different story at first renewal. Here are a few industry “tid bits” that may impact your next decision to market your benefit plan:
1. Most carrier’s expenses are within percentage points of each other. This usually means 1-3% and not
the mythical 5-10%. You can actually see this represented in the TLR (or target loss ratio) provided by
2. The true rate or “right” rate is what the industry calls the Manual rate. Typically insurer’s Manual
rates are within 10% of each other based on a company’s demographics, and industry code (SIC code).
3. When providing a quote, insurers will discount their rates below their Manual rate in order to look
attractive to prospective companies. In doing so however, they then have to re-coup this discount. On
the Life and LTD benefits it is recovered, on average within three years. When dealing with the Health,
Dental and Vision benefits however, they recapture it in year one if the claims incurred during the first year plus expenses are more than the discounted premium paid.
4. Insurers establish an IBNR (incurred but not reported) reserve to pay for claims after a company
leaves them. This reserve is typically 8-10%, and, if fiscally possible, established in year one. Therefore, when you move insurers you leave this reserve with the incumbent. This reserve is not returned to you and is pure profit for the insurer. Your new insurer then has to establish it at first renewal, as it is not priced into the quote.
5. Inflation charges for Health and Dental also have to be taken into consideration on every renewal.
These adjustments range from 11%-15% on Health and 6%-14% on Dental. The quoting insurer
typically does not factor these adjustments into their quote, but then have to begin defining them at
6. When a new benefit plan is put in place often new maximums are provided for each line of benefit. For example the dental plan maximums would reset October 1 (the would be effective date of the new plan) This means an employee could use all of their dental from January (calendar year benefits) to September 30, and then proceed to use the new plans’ dental offering from October to December 31. Also, when a new plan is rolled out application forms are required to be filled out, and new booklets are distributed. There are also typically education sessions that accompany the move. As a result, this breeds a higher level of awareness for the plan, and this in turn produces more claims.
At the end of the day usage + administration fees (includes commission) + inflation = premium. All insurers work in this environment. Thus if you want to reduce your costs you need to address your usage (plan design), your admin fees, and the inflation factor added to your claims. Going to the market does not address these items in an apple to apples scenario but rather shows you how much an insurer is willing to spend to buy your business. Then after it is bought reality will set in in the form of the dreaded first renewal.
About the Author
Matt Fraser has spent the last 14 years as a Group Benefits Consultant at Silverberg Group. Having continuously challenged the status quo Matt has pushed past the normally accepted results many employers and insurers have considered the standard. This has allowed Matt to become a leader in the area of claims and expense management. When you work with Matt employers will receive transparent information about the industry, they will be informed as to the innovative products and solutions in the market place, and they will have an advisor who focuses on guiding them away from risks and towards the opportunities that align to their employee benefit plan philosophies.