A group insurance plan is a key component of competitive compensation packages and plays a vital role in both attracting and retaining valuable staff. As an employer, you offer a benefits plan to staff as a way to reward them for the amazing work they do each day in the community on behalf of your organization. Or perhaps you would love to offer staff a program but currently do not because you’re unsure if the organization can afford one. Group insurance coverage helps to protect staff in the event they incur health and dental expenses required to maintain good health, or in the unfortunate circumstance when they become ill and are unable to perform the duties of their job.

Insurance companies charge monthly premiums to the employer in exchange for providing benefit coverage to employees. There are many factors which come into play when insurers calculate billed premium rates, including:

• Census demographics (age, gender, salary, occupation etc.)
• Plan design (coverage levels provided to staff)
• Historical claims utilization (relationship between paid premium and paid claims)
• Inflation/trend factors (adjusting historical paid claims to account for the unavoidable rise in future claim costs)
• Plan expenses (broker commission & carrier expenses)

Why your plan expenses matter

When comparing providers, if everyone is looking at your same census demographics, plan design and historical claims utilization results, then how are real savings generated? There is a reason why the word ‘real’ is highlighted – so keep reading to better understand why!

You probably wouldn’t hire a contractor to renovate your home without knowing what they charge, yet when polled, most nonprofit benefit plan decision-makers do not have a good understanding of what their broker and carrier are getting paid to administer their plan. This can be a costly error of judgement as not all providers were created equally. It’s not uncommon to see a 10 to 15% variance in expense factors between providers – all to offer the exact same plan design to your staff.

Understanding the Target Loss Ratio (TLR)

Have you ever heard the term Target Loss Ratio (commonly referred to as the ‘TLR’) referenced in any of your insurance discussions? It’s a term that is often glossed over but it’s actually extremely important, as it’s the foundation on which your insurance house is built.  The Target Loss Ratio represents how much of each paid premium dollar is used to offset employee’s claims vs. how much is retained by the insurance company and broker as plan expenses – essentially it’s their breakeven position.

Think of it this way – when the insurance company receives a premium dollar, they first want to retain their expense component to offset operating expenses, pay claims, print booklets/drug cards and earn a profit. They then also have to carve out the broker’s commission and send them a cheque. Once carrier expenses and broker commission are taken, they are left with a pot of funds from which they pay eligible claims. In many cases however, at renewal time the insurer will advise that they didn’t receive enough premium to pay employee’s claims and therefore need an increase. Clearly if the providers took less for themselves and applied more to the employee’s claims, then by default the renewal rate action would have looked more favourable to the employer.

Economies of scale dictate that smaller groups will pay a higher expense factor as a percentage of premium because there are less dollars at play. For example, it wouldn’t be unrealistic for a small nonprofit, purchasing coverage on a standalone basis through a for-profit broker, to have a 70% TLR – meaning carrier and broker expenses are a whopping 30%! By comparison, a mid-sized organization might see an 80% TLR (or carrier and broker expenses of 20%). Large organizations can often secure a TLR in the 85% range and in some cases, providers which pool organizations together can offer an even greater TLR.

Don’t be fooled by the bait and switch!

It may come as no surprise that an unfortunate reality of the group insurance industry is that some providers will invest in artificially low rates to win new business, and then hike the rates at future renewals – the ol’ bait and switch! Thankfully not all providers do this, which is why it’s so important not to just focus on the quoted rates and offered savings being presented, but also on what expense factors are being used to calculate the rates themselves.

The truth is that any provider can offer savings which will evaporate down the road (that’s the easy part). The harder part is creating real savings through reduced plan expenses, as these reductions would therefore apply every single year. Every dollar less that your providers take for themselves, is one more dollar being reinvested back into making your benefits plan sustainable over the long term.

Robert Miller is the Sales and Marketing Manager for OJTBF Not for Profit Group Benefits.  OJTBF partners exclusively with non-profits of all sizes from all across Canada. By banding participating employers together at one insurance company (currently SSQ Insurance, Canada’s largest mutual insurance company), collectively we form one very large buying group capable of offering industry-leading carrier expenses. Our commission is designed only to offset the cost of operating our business and we price breakeven by removing all profit, padding and margin in our rates. Visit www.notforprofitgroupbenefits.com to learn more about OJTBF and obtain a no cost or obligation benefits quotation. We even have plans for organizations with only one employee. Let us show you how our Target Loss Ratio can typically save your organization between 10-20%.