We are often asked by our group health & dental clients if completing an RFP on their plan will result in savings?
Invariably the answer is yes! However that yes comes attached to the fact that at the first renewal much of those savings will disappear. It is important to understand what drives the initial savings and why some of these factors do not continue beyond the first renewal.
The reality is that the insurance marketplace is hungry for new business, therefore carriers are willing to offer discounts for plans to move. And while these discounts are often appealing, it helps to understand what is causing them.
Ultimately the cost of most benefit plans is a result of the utilization of the plan by your employees – this is a fundamental factor in what drives your rates. Therefore when you market your plan you need to understand that any significant savings is likely being directed from the following areas:
1. Insurer Investment: basically how much have the insurance companies invested in the marketing exercise and to what degree have they discounted their normal book rates? It is important to try and ensure an apples to apples comparison for what future costs might look like and therefore understanding to what degree the rates have been discounted is an important step. Ultimately at the first renewal these investments start to disappear and you will be faced with their book rates.
2. The Target Loss Ratio (TLR): this is basically the insurer’s break-even point. This ratio measures what percentage of every dollar of premiums that the insurer expects to pay in claims. The higher your TLR, the less in administrative costs you are paying for each claim. When you market your plan, always make sure you understand what TLR’s the insurance companies are offering you, and for long term costs the higher the ratio – the better it will be for your organization.
3. Incurred But Not Reported Reserve (IBNR): this is a reserve fund the insurer builds in order to account for claims that are incurred but not yet received and paid after a policy terminates. When you market a plan, you need to understand whether you have already fully funded your IBNR with the incumbent, and then you need to understand what reserve requirements each of the insurance companies are looking for – as ultimately they will start to build that into their prices at your first renewal.
4. Rate Guarantees: when you market your benefits plan, competing insurance companies will usually try to sweeten their offer by guaranteeing the costs for a number of months. Therefore it is important to compare those guarantees, but just as important to realize that once the rate guarantee is over the insurance company will price the renewal without the guarantee, without the investment, with the requirement to fund the IBNR reserve and all based on your employees benefit utilization.
If you are unhappy with your existing service and carrier, it is always the right time to market your benefits plan. If however you are happy with overall service you receive – we ultimately believe that marketing your plan every 3-5 years is a healthy exercise to ensure your pricing remains competitive.
There is nothing fundamentally wrong with the savings that can be earned through the marketing of your plan, particularly if a one year savings is important to your overall budget. But it is important to understand that those savings will likely disappear at the renewal
