Inflation Update for 2018.
Regardless of the area of the business, inflation has always been a significant issue (i.e. will the increases in business costs exceed the ability of the company to grow its revenue?). However, the issue of inflation has become even more significant for employee benefits. This risk coincides with increasing pressure on businesses to maintain their employee benefits plans given that the labour market is tightening and employees continue to place a high value on benefits plans when choosing an employer.
Last year we had projected that the cost of employee benefits for 2017 was to increase approximately 9%. Our projection at that time was consistent with others that came out after us and to date in 2017 the actual results have been consistent with our initial projection. Unfortunately these costs will continue to increase for the foreseeable future.
- Life – For the majority of Canadian companies, annual renewal adjustments are driven by changes in the insurers’ broader block of business (i.e., manual rates). In general, the Canadian working population continues to age and that is not expected to ease for another decade until most of the boomers exit the workforce. As we reported last year, all insurers were also increasing their manual rates because of pressure from historically low interest rates. While this should have been largely a one-time event, there may still be residual effects in 2018 if those changes were not fully implemented in 2017. As such, we are expecting annual Life benefit increases to be about 5% to 8%.
- Long Term Disability – In much the same way as for the Life benefit, the ageing population will be driving rates but we have seen additional pressure due to the emergence of mental health issues. Thankfully there is greater awareness around mental illness and the stigma around it has eased, but, as a result, we are now seeing more claims relative to prior years. Also, just like for the Life benefit, we saw the impact of manual rate increases which may have a residual impact in 2018. As such, we are expecting annual Long Term Disability benefit increases to be about 7% to 10%.
- Extended Health – We continue to see the “perfect storm” for Extended Health benefits – more employees are accessing their plan, they are accessing it more often, and the average cost for each use is rising. Going forward, we will continue to see the introduction of costly specialty drugs ($15,000 to $50,000 per year, on average) and as the Canadian population continues to become less healthy they will be using higher cost drugs. As such, we are again expecting annual Extended Health benefit increases to be about 8% to 12%.
- Dental – For the past decade, dental inflation has ranged from 6% to 8% annually even though the fee guides on which dental services are based have only increased by about 2.5%. Dentists continue to be great marketers, introducing and promoting new services which add to benefit plan inflation, well above the cost increases of the underlying services. As well, fee guides in BC in 2017 increased well above the historical norms so we will likely see the full cost impact in 2018. As such, we are expecting Dental benefit increases to continue to be about 6% to 8%.
From there it is really some simple math – Life accounts for about 10-15% of the total benefits cost, Long Term Disability accounts for about 15-20%, Extended Health accounts for about 40-45% and Dental accounts for about 25-30%. When you put it all together, you are looking at a weighted average of approximately 8% annual inflation for 2018, and that would be in a relatively normal plan. If your plan has other additional cost drivers (i.e., older population, higher utilization, high turnover, etc.), you could be looking at even higher increases. We recommend using an inflation assumption of 6% to 11% if you are doing any multi-year business planning.
Each organization’s needs are unique and warrant a customized solution. 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.
ZLC Financial is one of the fastest growing employee benefits advisors in Western Canada and we are fortunate to have the best people, resources and clients. Our goal is to work with you to find a better way for your employee benefits plan. We provide this value to you by leveraging one of the most skilled benefits teams in the city – over 300 years of experience within our team of 14 employee benefits specialists. We have been working with businesses ranging from 4 to over 65,000 plan members for over 30 years.
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.