Choosing Renewal Calculations
In group benefits, the decision between selecting a Claims Rated or Pooled structure is more than just a choice; it’s a crucial decision rooted in mathematics. This determination significantly influences the financial dynamics of your benefit plan, as it dictates how premiums are calculated and distributed. The selection process involves consideration of mathematical models that tie premiums to individual claims history or spread the financial risk across a wider participant base.
Premiums are used to pay claims, cover the administration costs of managing the benefit program, and compensate your advisor. If the premium is too low, the insurer wouldn’t have the funding to pay claims or cover the costs of providing insurance. Also, premiums need to keep pace with increasing healthcare costs. To ensure the group benefit program remains stable, premiums are routinely reviewed, in a process called a renewal.
The selection between these two approaches determines how insurance premiums are calculated and distributed, directly impacting the financial dynamics of your plan. This fundamental decision shapes the renewal process, as it sets the stage for evaluating information, predicting future costs, and ultimately determining the financial sustainability of the benefit plan.
Claims Rated vs. Claims Pooled
Claims Rated
Characteristics
Claims Rated Benefits are tied to the premiums and claims experience of your group’s participants only.
- In a claim-rated benefit program, each participant’s insurance premiums are calculated based on their own historical claims experience. This means that benefit plans with a higher number of claims or higher claim costs can expect to pay higher premiums.
- Participants’ premiums are directly influenced by their own claims history. Those with a higher frequency of claims can face substantially higher premiums, while those with lower claims may enjoy lower premium rates.
- This approach aims to tailor the cost of coverage to each participant’s unique circumstances and usage of healthcare services, which are more affected by individual utilization.
- Claim-rated benefit programs are often used in situations where a more individualized assessment of risk and cost is desired.
Claims Pooled
Characteristics
Pooled benefits spread the financial risk across a broader participant base, minimizing the impact of high claims or periods of high usage
- A pooled benefit program operates on the principle of distributing the financial burden more evenly among a larger group of participants. This means that benefit plans receive more stable and predictable premium rates.
- Premiums for all members within the group are based on the collective claims experience of the entire group, rather than individual experiences.
- This pooling of risk spreads the financial burden more evenly among participants, resulting in more stable and predictable premium rates for everyone.
- Pooled benefit programs are commonly utilized in group insurance plans, where the goal is to mitigate the impact of high claims by a few individuals on the overall cost for the group.
- Pooled benefit plans can be more difficult to participate in if a plan has already become unstable due to existing high-impact claims.
Factors that Influence Rate Adjustments
1
Employee Demographics
Factors such as age, gender, and family status of employees influence the risk profile of the group. For example, an older workforce may have higher medical expenses, leading to increased premiums. By analyzing these demographic factors, insurers assess the risk and set appropriate premiums for the upcoming renewal period.
2
Target Loss Ratio (TLR):
The target loss ratio is the ideal ratio of claims expenses to premiums that insurers aim to achieve for a particular group. It is determined by the insurer’s underwriting assumptions and desired profit margin. If the actual claims loss ratio exceeds the target loss ratio, premiums may need to be adjusted upward to bring the ratio back in line with expectations.
3
Claims Loss Ratio:
This ratio compares the total claims paid by the insurer to the total premiums collected from the group. A high claims loss ratio indicates that a significant portion of premiums is being used to pay claims, which may necessitate an increase in premiums during renewal to ensure the insurer’s profitability and financial stability.
4
Incurred But Not Reported (IBNR):
IBNR refers to claims that have occurred but have not yet been reported to the insurer. These claims may arise from events such as accidents or illnesses that have occurred but have not yet resulted in a claim submission. Insurers estimate the amount of IBNR based on historical data and actuarial projections to ensure that adequate reserves are set aside to cover future claims.
5
Trend Factor:
The trend factor accounts for the expected increase in healthcare costs over time due to factors such as medical inflation, advancements in medical technology, changes in healthcare utilization patterns, and demographic shifts. Insurers apply a trend factor to adjust premiums upward to account for projected increases in the cost of providing benefits in the future.
Each Benefit’s Sustainability Is Maintained Individually
The Product-Specific Approach for Sustainable Coverage
Benefit renewals operare on a product-specific basis, maintaining sustainability for each offering. Costs aren’t spread across products, ensuring the financial sustainability of each. Adjustments are based on the utilization and market dynamics of each product, rather than the total premiums.
Understanding Renewals
When is the Group Benefit Renewal Period?
The renewal period typically occurs annually, around the anniversary date of the group benefits plan or on a common renewal date for all programs. Employers receive renewal notices in advance, which indicate the specific dates and deadlines for the renewal process.
The Purpose of Renewals
Renewals ensure that premiums remain adequate to cover anticipated claims while maintaining the insurer’s financial stability. Insurers review the claims experience of the group over the past year, analyzing factors such as changes in employee demographics, frequency and severity of claims, utilization patterns, and overall risk. Based on this assessment, insurers may adjust premiums to reflect the group’s claims history and projected future costs, thus maintaining their financial stability.
Understanding Claims Analysis Claims Rating vs. Claims Polling
Claims rating involves analyzing the specific claims history of the insured group, taking into account factors such as the frequency, severity, and types of claims incurred. Insurers use this data to adjust premiums based on the group’s individual claims experience, with groups that have higher claims history potentially facing higher renewal premiums to cover the expected costs of providing benefits.
Claims pooling involves combining the claims experience of multiple similar groups to calculate renewal premiums. This method spreads the risk across a larger pool, allowing for more stable and predictable premiums for individual groups. Ultimately, whether claims rating or claims pooling is used, insurers aim to set renewal premiums that accurately reflect the expected costs of providing benefits while ensuring the financial stability of the insurance plan.
Navigate Cost Changes and Premium Contributions Strategically
Changes to premium contribution amounts may occur during renewal, depending on factors such as cost-sharing arrangements. Analyzing how the renewal affects each employee’s cost-sharing portion can be calculated by an advisor based on your unique arrangement
How will the renewal process impact overall budgeting and financial planning for the organization?
Changes to premium contribution amounts may occur during renewal, depending on factors such as cost-sharing arrangements. An advisor can analyze how the renewal affects each employer’s cost-sharing portion based on your unique arrangement.