Renewal Pricing - Group Life & Health Insurance
A complete market survey every 3 years with interim analysis of changes to demographics keeps the pooled rates competitive. Differences in plan design must be considered when analyzing competing rates.
Experience Rated Benefits
The object of the experience rating process it to determine a premium rate that will be sufficient to cover the cost of claims plus expenses for the next policy year.
The quantity of members and number of years of available experience impacts the reliability or credibility of the historical claims experience.
Price increases by benefit providers increase the average cost of each claim. For the past one and a half decades, the inflation rate for health benefits has averaged twice as high as the general Consumer Price Index (CPI).
There are factors that contribute to increasing the frequency of claims or plan utilization.
- aging workforce
- cost shifting by provincial plans
- technological advances
- creative billing
- public awareness of health issues
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 used to gain an accurate number to use when estimating future claims by compensating for the claim lag time.
The IBNR is established at the end of the first year and should accurately reflect the claim lag. At the end of the second and subsequent years, the IBNR is recalculated and the previous year's IBNR is subtracted so that only changes are charged to the claims experience.
Review the components of the expense factor to determine if they can be reduced or eliminated.
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.