Reading this before renewing your group health insurance could save you 15-30% on your premium
Insurance, in the simplest terms, is a gamble. And any good gambler will tell you that success is a balancing act of risk and reward, certainty and uncertainty.
With health insurance, you’re uncertain the employees you pay to cover will stay healthy through the term of your policy. Your insurance provider covers that uncertainty by paying claims as they come up. In return for you commitment to paying regular premiums at a set amount. You get the certainty that your employees will be covered for their medical bills. And your insurance company gambles that the cost of your claims will not exceed the funds paid in premiums.
The importance of your loss ratio
When your policy is up for renewal, the key measure of success or failure is the “Loss Ratio”. This is the percentage of the total claims versus the total premium paid. In layman’s terms, this is the equivalent of your insurance provider laying their cards on the table.
If you’re not in the health insurance business, claims reports and data can be complicated and hard to understand. Some insurance companies and brokers deliver your plan’s claims data in a deliberately misleading format that protects them from risk while maximizing their rewards. In other words they don’t let you see the cards they hold. You might as well be playing blindfolded – far from a fair game.
How loss ratio reporting can differ
What constitutes an acceptable Loss Ratio varies from insurance provider to insurance provider, and depends on a variety of factors. These include the insurer’s standard fee (which can range from 10-20%) and whether or not you have a broker. As a general rule of thumb, anything below 70-75% would be considered a “healthy” loss ratio. Anything above this amount and the insurance provider is losing money. If you pay a million dollars in premiums and your total claims are less than $700,000, the policy renewal discussion should include no increases. Depending on the rate of medical inflation in your country, you may even get premium reductions.
Scenario 1: Net Premium as the basis for calculating your loss ratio
A common scenario is when insurer present the claims data and loss ratio using the Net Premium Loss Ratio. The Net Premium Loss Ratio is the premium leftover to pay claims after removing all insurer and broker fees and expenses, also known as the “Claims Fund”. By removing these costs from the total premium paid before calculating the loss ratio, the insurance provider guarantees their profits first and skews the loss ratio as a higher percentage of the remaining smaller number.
From the policyholder’s perspective, a fair target loss ratio when using Net Premium Loss Ratio is 100%. Anything less than 100% and the insurer is making good money on your policy. The Net Premium Loss Ratio will always be higher than the Actual Loss Ratio. Some insurers and brokers use the higher calculated percentage to misrepresent your plan’s performance. This can be used as justification for increasing your premiums. And using the Net Premium Loss Ratio gives the false impression that you are getting a great deal on your renewal, when in fact the opposite is true.
Scenario 2: Claims Cost as the basis for calculating your loss ratio
Another scenario is when the insurer or broker presents the claims data and loss ratio using the “Claims Cost”. The Claims Cost is the total claims paid plus insurer and broker costs, and sometimes also including Incurred But Not Reported (IBNR) claims.
This is another method to protect the insurer’s fees and expenses and skew the loss ratio to look higher than it actually is. Claims Cost is an artificial number that you won’t find on any of the insurer’s claims reports, and it will never match the actual claims dollar amount paid out. It only guarantees profits and sets the stage for further premium increases by exaggerating the loss ratio. Using the Claims Cost Loss Ratio similarly gives the false impression that you are getting a great deal on your renewal, when you most likely are not.
Why not just keep it simple? Actual loss ratio
The foundation of every health insurance policy renewal should only ever be the “Actual Loss Ratio”. Insurance companies have a right to make a profit, but we are not comfortable with an approach that guarantees them a profit and/or ensures their full fee is protected even when their clients might experience a bad claims year. The best insurance providers will view their clients as long-term partners and provide clear and simple claims reporting.
Trust, transparency and honesty are the pillars of a long-term relationship. Insurers and brokers have a responsibility not to withhold, delay or obfuscate client’s claims data. Both of the above scenarios present a loss ratio percentage of between 15% to 30% higher than the reality. If your insurance provider or broker is not providing your claims data in a timely manner in an easy-to-understand format, how can they be said to be truly representing your needs? For any large organization the employee health insurance is a big part of their operating expenses – often top 5. How long can you afford to overpay on your insurance and leave money on the table?
Need help with your company health insurance or concerned you are overpaying?
Need help with your company health insurance or concerned you are over paying? One World Cover is an Asia-based insurance consulting company and broker. We consistently help our clients reduce their group health insurance premiums by between 15-30%, without having to make any plan design changes or change insurance provider. Our many international school clients have done this using our proprietary digital Claims Data Analysis Platform (or “Control Room”) which gives our client’s finance team and senior management complete transparency to expose and significantly reduce any excess costs charged by your insurer or current broker.