Do You Trust Insurance Carriers?
The Canadian employee benefits marketplace underwent significant consolidation in the early 2000s with about half of the insurance carriers being bought by others. As such, we have since been looking at a true “seller’s market” with three of the largest carriers (Sun Life, Manulife and Great-West Life) holding about two-thirds of the national market and then realistically only about 10 other carriers in the market. As well, we recognize that all of Canada’s employee benefits carriers are under ongoing pressure to maintain their profitability and accountability to their shareholders. So it is more important than ever to assess how these carriers carry on their business.
As employee benefits advisors, we continually review the underwriting methodologies and assumptions used by all of the insurance carriers in Canada. While the fundamentals underlying basic underwriting assumptions haven’t changed all that much over the years, the carriers continue to insert new ideas and concepts that we must assess. As well, we need to assess the carrier’s philosophies towards new and emerging issues to help ensure the sustainability of our clients’ benefits plans. Too often, these carriers simply ask us to “just trust us” but we have run into several issues that cause us concern.
- “Easy up and sticky down” – Carriers are often quick to assess risks to benefits plans and mitigate those risks relating to underwriting issues negatively impacting them. For example, for many years, the trend assumptions used to project insured premium rates have been higher than actual inflation thereby favouring the carriers. However, they are not as quick to reduce premium rates when the reverse is true. One recent example is the projected positive impact related to the latest negotiated reductions in generic drug prices. Another is the Ontario government’s OHIP Plus coverage for those under age 25. Neither of these issues are being factored into rate calculations until next year’s claims experience is reviewed thereby delaying any positive impact to plan sponsors.
- Insured pooling rates – The rates charged for pooling coverage have more than doubled over the last five years (from approximately 6% of Extended Health premiums to 14% for $10,000 annual pooling) without any transparency on the underlying costs. We fully recognize that the costs related to new cures for Hepatitis C (average cost of up to $100,000) pushed pooled claims quite high in 2015 and 2016 but the carriers have yet to disclose the underlying premium versus claims experience of the pooling coverage. Now that Hepatitis C treatment has largely been provided to those most at risk and Provincial governments now pay for much of the treatment costs there should be significant relief in pooling claims without any new drugs of comparable magnitude hitting the market. Sadly though we have seen very little relief in pooling premiums and ironically still some further increases.
- Self-insured pooling rates – The comments above are applicable to both insured and self-insured (Administrative Services Only) plans but there are additional risks for self-insured plans. For these plans, the carriers are not provided reinsurance coverage by way of the national EP3 initiative, where all insured plan risks are shared by all carriers in Canada. As such, carriers can charge what they like for pooling coverage under self-insured plans. What is most worrisome is that, based on our experience, carriers have not secured third-party reinsurance coverage specific to these risks nor do carriers proactively disclose their pooling methodologies until after a major claim, which is too late. We understand there have been cases where pooling charges may exceed the actual Extended Health claims after a major pooled claim and unfortunately then no other carrier is interested in providing a quote by way of a marketing given the poor claims experience.
- Coordination of claims – As much as ten years ago, when a major Cancer drug, Avastin, entered the Canadian market, carriers have reassured us that they would coordinate these claims with government plans where the costs are to be paid under Provincial health plans. However, it has been very difficult for any plan sponsor to actually assess the claims experience to test whether this has been done correctly. What has been most surprising over the past couple of years is that these very same carriers have been announcing their coordination programs as being something new to the industry! If this is “new” what was really happening over the last ten years.
- New underwriting concepts – Another way to overstate insurance premiums and make them more advantageous to the carriers is to introduce new underwriting concepts which are difficult for plan sponsors to assess without experience in underwriting. For example, a couple of years ago, one carrier introduced inflation trend factors for long term disability premiums citing there would be increased utilization of these plans during difficult economic times but they refused to apply an offsetting trend when positive economic times would return. In another case, some carriers introduced fluctuation margins into fully insured, experience-rated health and dental plans when they already use high trend factors and include profit and risk charges for carrying the insurance risk. And lastly, there used to be a time when one or two carriers were bold enough to use inflation trend assumptions below the rest of the industry but sadly now all carriers use similar or close to identical trend factors, like what you would expect to see under any true oligopoly.
We rely on carriers in Canada to provide us with the employee benefits plans that our employees value and rely on them to help ensure sustainability of those plans. However, we are repeatedly asked by those carriers to simply “trust them” but, as we have seen, we find some of their methodologies hard to accept. It is not surprising that one can become skeptical about whether concepts like these are really about plan sustainability to both plan sponsors and carriers or whether they are about plan profitability to benefit the carrier and their shareholders. Without greater transparency from the carriers and the industry more broadly, we must continue to be skeptical and do our due diligence.
Now more than ever, it is important to work with an advisor that has the necessary skills, experience and market leverage. An advisor that can help plan sponsors better understand the true risks facing benefits plans and to assess the validity of the underwriting assumptions and methodologies used by Canadian carriers. At ZLC Financial we are one of the fastest growing employee benefits advisors in Western Canada and we are fortunate to have the best people, resources and clients. We provide value to you by leveraging one of the most skilled benefits teams – collectively over 300 years of experience within our team of 14 employee benefits specialists. We have been working with businesses ranging from 3 to over 65,000 plan members for over 30 years.
We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits program. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.
By Dan Eisner
This information is designed to educate and inform you of strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a qualified advisor.