Renewal Accounting - Group Life & Health Insurance
An incurred but not reported claims reserve (IBNR) reflects the potential claims that the plan is liable for but has not yet paid. It is calculated on prospectively experience rated plans to compensate for the claim lag and gain an accurate number to use when estimating future claims. The IBNR is established at the end of the first year and should accurately reflect the claim lag. At the end of the second year the IBNR is recalculated and the previous year's IBNR is subtracted to determine the charge to experience for prospectively experience rated plan and the change in reserve required for plans with retention accounting.
A claims fluctuation reserve serves to smooth out the effect of unusual claims experience. There are statutory maximums for these reserves to avoid excessive tax sheltering.
The expense factors can be bundled as a percentage of claims or premiums. A more precise method of pricing is to charge for each component of the service provided. Fixed and variable costs are separated and priced as accurately as possible. The plan sponsor can control the expenses that relate to management information and benefit communication.
The risk that claims plus expenses may exceed premiums needs to be assessed and charged for. The default risk of a plan sponsor needs to considered and charged for.
Interest is often calculated on the cash-flow (deposits & claims) and claim reserves. It is common to use an external benchmark to determine the interest rate.
The federal government charges Tax (H/GST) on administrative charges. Some provinces charge Provincial Sales Tax (PST) and Insurance Premium Tax on health plans that qualify as a Private Health Services Plan as defined in the Income Tax Act.