Welcome to the final installment, Part 4, of the CloudAdvisors Annual Advisory Model, the Renewal Meeting. If you’re new to the series, check out the outline here, followed by Part 1 Governance, Part 2 Plan Audit and Part 3 Claims Review.
Throughout the series, we’ve discussed many new touchpoints for advisors and employers as well as a core objective of separating the value of advisors from the benefits, specifically the renewal. While we’ve demonstrated how the renewal meeting and report should not be the only meeting each year it is still a very important and time-sensitive financial event. Ideally, the renewal meeting or at least the delivery of the report would occur a month before the effective date, proactively providing employers enough time make fully informed decisions and to communicate changes to employees. Fundamentally, the purpose of any insurance renewal is to set next year’s guaranteed rates, however, an important and often overlooked distinction is that the renewal reflects the provider’s commitment to an employer, not necessarily the employer’s commitment to the provider. While a balanced renewal process may result in both, this starting point should liberate the employer and advisor’s thinking, the renewal is not the last and only opportunity to review costs and make changes for the upcoming year. As we’ve already explored, there are multiple points which will repeat annually, where benefits, risks, and costs are explored and, with reasonable notice, employers are generally able to make changes at any point during the year, not just at renewal. In this article, we’re going to review how the full annual advisory model simplifies the renewal review and provides the opportunity to focus on the right questions to ask in evaluating a renewal decision.
The Wrong Questions to Ask at Renewal
Is there a different or better benefits plan we should consider?
This would have been explored comprehensively during the Governance and Plan Audit Reviews, uncovering risks and opportunities as well as making recommendations for any changes or alternate solutions in the marketplace. If decisions were not already made they can be included alongside the renewal proposal, remembering, however, these discussions can also be deferred until after renewal and into next year’s process.
Why are we getting an increase in rates OR should we be getting a decrease?
This is all about managing expectations that should have been set with the Claims Review meeting. The employer should know, at least on experience-rated health and dental benefits what a projected renewal could look and will have had the time to consider alternates proposed from the plan audit that may generate savings or re-allocate benefit dollars back into the plan.
Will another insurance provider offer us a better rate?
We can save you the request to quote process, a lot more than 15 minutes of your time to find out the answer is always yes, and likely more than 15% savings as well! Benefit providers aggressively compete for policies and regularly offer marketing discounts to new groups to move. These savings, as significant as they may be to an employer in the first year, often represent artificial savings that can’t be sustained in future renewals. An employer simply cannot have the lowest rates every year. As we’ve reviewed, rates are based on measurable factors like demographics and claims that insurance companies will need to price in the following years. Insurance companies will also block employers who try and market their plan too often, making this strategy a limited one. Marketing is a tool, and certainly not the only one in the toolkit. Requesting quotes should have a goal and specific intention to move providers, not to justify or challenge proposed renewal rates.
Simplifying the Renewal Review
While advisors will work in benefits and renewals every day of their career, employers generally only have their own experience and finite comfort in evaluation and decision making. As the renewal meeting has an important deadline and impact on the organization, the entire annual advisory model is in some sense designed to narrow the focus on this final important review. During this series, we’ve already outlined how the annual advisory model will shift questions, conversation, analysis and, advice as well as pages of reporting to other points throughout the year. This shift will not only lay the groundwork for this meeting but also free both sides to focus on making renewal decisions. With proposed rates for next year in hand, the advisor's role, acting on behalf of the employer, should be to challenge, negotiate and validate fair market rates that the employer can confidently accept. Employers have doubts and will want to know what to expect, leaning on advisors' expertise, supporting marketplace data, and evaluation questions that add safety and security to the renewal decision.
The Right Questions to Ask at Renewal
How will the proposed renewal impact the budget for benefits?
Similar to other costs of operating a business, employers should establish a budget for benefits, ideally in the prior claims review. A budget will provide the first layer of context to evaluate a renewal. Given the nature of employee costs and turnover as well as the calculation of premiums based on shifting volumes, an absolute cost can be misleading. We propose benefits are budgeted and measured as a percentage of payroll. This benchmark will help employers appreciate the dynamic aspect of benefit costs, not just at renewal, but as a part of total compensation. In absolute terms, a renewal increase can be seen as bad and a decrease as good but within context, relative to the budget, the significance of rate action will be revealed. Rate action within the budget is then not a significant increase or decrease, representing tolerable costs not worth changing benefits over or small savings not enough to re-invest in added benefits. Rate action outside of the budget, however, will signal strategies to bring costs back in line or the opportunity to re-allocate savings back into the plan.
What is the impact of the proposed renewal on employers versus employees?
Not all benefits are paid by the employer, in fact, a CloudAdvisors analysis of employers across Canada shows a high degree of variation by benefit line, employee-paid, employer-paid or shared cost, known as premium splitting. The general tendency would be to look at total costs only however renewals should next be evaluated by benefit line and on the basis of employer versus employee impact. This will not apply to all groups as some employers pay 100% of all benefits. If the employees pay any portion of the premium that will influence not only the impact of the renewal but also the negotiations. An employer over budget and trying to reduce costs won’t be as interested in negotiated discounts to employee paid benefits as an example. An employer will also have a greater tolerance to absorb volatility year over year but employees cannot always afford a ticket to ride that rollercoaster. Employees are more sensitive to rate action as it affects their take-home pay. Even minor increases can be reacted to with bitter disappointment, questioning the value and management of benefits. In this scenario, a greater focus is placed on negotiating employee paid benefits as well as finalizing any rate changes with reasonable notice to communicate to employees. Advisors should also be careful in negotiating or accepting large decreases to employee paid benefits that may result in an unwelcome rebound the following year. Employees rely on employers and advisors to manage the plan however the objective should be the same with employer dollars, to seek fair market rates, priced sustainably for future years, in order to maintain or improve the benefits offering.
Is the proposed renewal fair and reasonable?
Evaluating renewal rates is both a science and art with a mathematical component based on actuarial science as well as an emotional component that involves discounting, negotiating and market forces. The goal should be to strike a balance, hovering close to a calculated rate, accepting minimal overpricing while taking advantage of discounts and savings sustainably. While calculations vary from simple math to complex functions, either one will provide a basis of what the rate increase or decrease should be, technically. We will add to this by proposing a fair market rate context to be used in the art of evaluation.
Given their once a year experience, employers lack context for evaluating benefit rates against what other similar employers, with a similar level of benefits are paying, in other words, fair market rates. Fair market rates will have an average rate but more importantly, will have a range that employers are paying in certain industries, sizes, regions, demographics and most importantly plan design. If the comparison and ranking identify details or patterns where a plan is outside of fair market rates it may reveal issues with the pricing of that plan, the renewal or even the fit with that current benefit provider.
As we discussed in Claims Review, certain benefits are pooled so rates are driven by demographics, not claims, so direct benchmarking rates of comparable groups across providers will provide valuable insight. Premiums for experience rated benefits like health and dental, on the other hand, are driven by roughly 80% claims and 20% expenses. The volume of claims is largely driven by plan design and demographics meaning benchmarks should pull from comparable groups with comparable benefits. For expenses, advisors can directly share with employers comparison and ranking of fees by benefit for factors such as target loss ratio, IBNR, trend/inflation, and commissions.
All of these insights together help an employer to establish a clearer picture of their benefit financial positioning, including the correlation of factors to the overall budget for benefits. Advisors armed with market data can easily evaluate premiums without pricing and discounting, assisting employers with key context to the numbers they are seeing as well as comfort in a process that will flag any detail outside of the expected range each year.
Conclusion of the Advisory Model
The annual process concludes with a satisfied client, likely negotiating and renewing fair market rates for another year. As advisor and client enter the next year both sides have the confidence that the same process will repeat itself, positioning the advisor to earn their place as the trusted expert supporting their client with data and the most effective advice.
If you’d like to learn more details about how CloudAdvisors can organize financial data, automate renewal reporting, support advising from insight as well as digitally deliver please contact us for a demo. CloudAdvisors offers the platform to automatically follow these best practices, tracking everything digitally for both advisor and client including an annual review of the advisor's performance with this model.
Visit www.cloudadvisors.ca to contact us and see how you could become #poweredbyCloudAdvisors.
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