It’s a buyer’s market in group health insurance today. But are the savings too good to be true? Do the short-term gains put plan sponsors at increased risk of long-term pain?
These are the questions that plan sponsors need to ask if they’re thinking about going to market more frequently than the recommended best practice of every three to five years.
On the surface, it makes sense to take advantage of today’s highly competitive market.
“Insurance companies are providing renewal caps and rate guarantees that are much longer and more aggressive than we have seen in the past, before COVID,” explains Gianluca Spirito, Senior Benefits Consultant, Penmore Benefits in Concord, Ontario, a member firm of Benefits Alliance. “We are currently in a soft market, and it may make sense to go to the market more frequently to lock in the lower rates with rate guarantees and renewal caps, prior to the market turning.”
For the past year and a half, about 18 to 20 per cent of existing clients are marketing their program at any given time, estimate Spirito and Allan Sabat, Partner, The Consulting House in Toronto, Ontario, also a member of Benefits Alliance. That compares to a longstanding average of five to 10 per cent before the pandemic.
The marketing rate hit a high of 25 per cent during the first year of the pandemic, note Spirito and Sabat, when plan sponsors turned to insurers for immediate savings to offset lost revenue. The ripple effect was a soft insurance market that continues to this day, which in turn perpetuates unusually high marketing activity.
However, both Sabat and Spirito caution against “stacking” marketings to extend renewal caps.
“These are artificial savings that create chaos in our industry because no client, in theory, will pay the fair rate based on their claims,” says Spirito.
“When we look at the claims projections, we can see the plan sponsor is going to be in a very difficult position in a couple years from now,” adds Sabat.
Long story short, the pendulum will eventually swing the other way. Both Sabat and Spirito are now working with clients who, after opting for immediate savings made possible by two or three years of rate caps, are seeing increases of 30 per cent or more. “We bring that down through negotiation, of course, but the artificially low caps are no longer possible unless the client again goes to market, which can be very disruptive to plan members and plan administrators,” says Sabat.
The irony is that, in many cases, plan sponsors would have achieved similar savings with a regular marketing cycle of every three to five years, with far less disruption. “We’ve found it’s best practice is to market every three to five years, depending on your needs,” says Sabat.
It all comes down to education, emphasize Sabat and Spirito. That may start with dispelling a persistent misconception that the insurer actually ‘pays’ plan members’ claims, when in fact the plan sponsor is always ultimately responsible for their full cost. “Reduced premiums do not reduce the claims that are coming in, nor their cost to plan sponsors,” summarizes Sabat.
A good advisor will help plan sponsors understand their claims experience throughout the year to be better prepared come renewal time. And advisors should help sponsors understand the process behind renewals and why marketing a plan too frequently can create challenges when it comes time to renew.
Finally, marketing should involve much more than asking for lower rates. “Your advisor should do an intensive audit of your program to answer the questions, ‘Where can we improve the plan? Are there areas of concern to be addressed? How else can we achieve cost savings other than by reducing rates?’” explains Sabat.
Having said all that, Sabat and Spirito don’t recommend waiting more than five years to go to market, for two main reasons:
- To rein in life and disability rates, which tend to increase year over year due to the natural aging of the employee population. As well, claims for these benefits are less frequent compared to health and dental plans. “Going to market every three to five years helps keep these rates in check,” says Sabat.
- To check out carriers’ latest offerings. “Carriers update their systems and value-adds every three to five years. It could be a new app, a new EAP, a new virtual care program,” says Spirito. “Sometimes the only way to get those things included without the additional fee in your program is by marketing.”