Trend factors

Trend factors reflect the increasing cost of products and services covered under the plan. Some contributing factors used to calculate the Health and Dental rates for the upcoming renewal period include:

• Standard inflation
• Increased utilization of Health and Dental services
• Cost-shifting from provincial medical plans to private plans
• Increased cost of new drugs entering the market
• Adjustments to the Dental provincial fee guide

Trend factors are typically calculated at the block level, rather than at the group level, and applied consistently across all groups within the insurance carrier’s entire block of business.

Insurance companies use midpoint-to-midpoint trend rather than an annual trend to calculate the renewal.

Trend factors is 1 of 7 factors that influence group benefit rate adjustments.

Incurred but not reported claims (IBNR) or Reserves

Reserves are established for high volume benefits such as Health and Dental so that in the event the group terminates coverage, there is a buffer of premium to pay claims that were incurred prior to the termination date of the policy, but submitted after the termination date of the policy.

Insurance companies are required by the Insurance Act to collect reserves for claims that have been incurred but not yet reported.

Reserves are established at the first renewal with a new carrier and are usually expressed as a percentage of paid premium, or as a percentage of paid claims. At each subsequent renewal, the IBNR is recalculated based on paid premium or paid claims from the previous renewal period.

IBNR is 1 of 7 factors that influence group benefit rate adjustments.

Weighting

Weighting is a method of combining multiple years of claims experience are to calculate a renewal adjustment for employee benefits. The most recent claims experience is typically given the greatest weighting. Each carrier uses a different methodology for weighting the claims experience. For example, some carriers may weight two years of experience while others may weight three years.

Different lines of benefits may also use different weighting. For example, Short-term Disability may be weighted over a three year period at 70% current period, 20% prior period and 10% prior-two period. Health and Dental may be weighted over two years at 75% current period and 25% prior period.

The size of the group may also impact the weighting; larger groups, i.e., 50+ or 100+ employees may be weighted 100% on the current period.

Weighing is 1 of 7 factors that influence group benefit rate adjustments.

There are 7 key factors that influence rate adjustment for employee benefit plans.

1. Credibility of claims experience
2. Manual (book) rates
3. Weighting
4. Trend factors
5. Incurred but not reported claims (IBNR or reserves)
6. Pooling charge
7. Target loss ratio (TLR)

Credibility of claims experience

Credibility measures how predictable past claims experience is in determining future claims.

Larger groups have greater credibility since claims for each employee have less impact on the overall claims experience. For example, with a group of only five employees, each member represents 20% of the group, but with a group of 50 employees, each member represents 2% of the group. The greater the number of employees, the more stable, predictable, and reliable the claims experience will be; therefore, more “credible”.

Each carrier has their own formula for calculating credibility, which takes into account average number of employees by month and number of years with the carrier (to a maximum of...

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Challenge 1: Effectively Tracking Employee Leave

The first challenge in leave management is effectively tracking leave requests.

The Solution: Businesses must know and understand the rules around leave, including:

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• Many companies have different policies about sick days, short-term disability leave, and long-term disability leave.

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Target loss ratio

Target loss ratio (TLR) indicates the percentage of premium dollars that are allocated to pay claims. If the TLR is 80%, this means that for every dollar of premium paid, the insurance company expects to pay out 80 cents in claims. The additional 20 cents covers: insurer administration costs, advisor commission, claims payment costs, profit charge and premium tax.

When the policyholder’s claims are in excess of the TLR, theoretically, the insurance company will need to increase their rates. When the claims are lower than the TLR, they are charging too much and should be able to lower them. This, however, depends on how credible the claims experience is.

TLR is 1 of 7 factors that influence group benefit rate adjustments.