Smoke and Mirrors – Beware When Marketing Employee Benefits

Arguably the most commonly used strategy over time to manage employee benefits plan costs is to regularly “market” the benefits plan.  The idea is simple – have the various insurers compete for your group benefits business, as you may do with other areas of your business.  At the end of the day, you look for the insurer that offers the lowest apparent costs.  However, you need to be careful as things are not always as they appear.

  • Discounts – It is not surprising that insurers will try to “buy” your business by offering you discounts from their normal pricing.  What is surprising is the lack of transparency around these discounts as insurers do not proactively disclose these discounts and they usually come to light at future renewals when rates go up significantly.
  • Reserves – Insured benefits plans require certain underwriting reserves, the most common of which is the “Incurred But Not Reported” reserve, referred to as the IBNR.  This reserve is needed to pay for claims submitted by employees after the policy termination that were incurred prior to that termination date.  However, insurers rarely factor these reserves into their initial quote but rather build the reserve at the first renewal, often causing an additional and unexpected 8% to 12% increase to the Extended Health and Dental benefits.
  • Manual Rates – The rates quoted for Life and Long Term Disability are often not the true rates based on the employee population demographics (i.e., age, gender, occupation and industry risks).  Insurers may simply quote and discount relative to the current rates but it is important to know how they really rate your group as there is going to be pressure to move to those manual rates once any rate guarantees expire.
  • Expense Charges – Insurers will provide quotes for Extended Health and Dental that may be significantly lower than the current charges.  However, when you consider that the actual employees of the company are not changing and that the plan design is likely not changing, the underlying paid claims of the plan will not change.  Therefore, the only real reason for quotes to be realistically different is if their expense charges are lower.  How can quoted rates be lower in the long term if the expense charges are not lower?
  • Plan Design Deviations – Quotes should be requested based on the current plan design so that the plan sponsor can do an “apples to apples” comparison.  However, if the prospective insurer is unwilling or unable to replicate your current plan design and proposes an alternative, you need to assess any cost impact of these differences as they effectively result in making a plan design change which is not factored into your current plan costs.

Given all these concerns, should plan sponsors be relying on plan marketings as a cost control strategy?  While you may like the initial savings, nobody is happy when the rates “whiplash” at the first and subsequent renewals for the reasons noted above.  We would suggest that the better reasons to market a plan are:  (1) consistently poor service; (2) an insurer that does not like or does not understand your industry; (3) poor insurer technology; and (4) high expense charges.  That said, periodically taking your plan to market can also be part of good governance, but the real question is how often should that be done.

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 250 years of experience within our team of 13 employee benefits specialists.  We have been working with businesses ranging from 4 to over 10,000 employees for the past 30 years.

By Dan Eisner

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