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Renewal Rate Analysis

Pooled Benefits

Group Life, Dependent Life, Accidental Death & Dismemberment, and Long Term Disability are generally pooled benefits. The insurance company amalgamates the claims experience of similar size groups into one pool to determine a common rate. These rates are influenced by the demographics of the group and the insurer's experience with a particular pool rather than the claims experience of the group. Factors that could bring about a change in the rates include:

  1. the weighted average age distribution of the employees
  2. the female/male ratio
  3. occupational/industry characteristics
  4. the size of the group

A complete market survey approximately every three years with an interim analysis of changes to the group's demographics is an effective manner of keeping the pooled rates competitive.

Experience Rated Benefits

Premiums for experience rated benefits are based on the actual claims experience of the group. The Short Term Disability, Extended Health Care and Dental benefits are typically experience rated. For medium and large size groups, insurers will generally base rates completely on the group's claims experience. For smaller groups, particularly those for which the current insurer has a limited claims history, only partial credibility is usually given to the claims experience. The insurer's manual rates (the average rate for a group with similar demographics) is also factored into the rate calculation.

When establishing renewal rate structures for an experience rated benefit, most insurers will use the following formula, which evaluates a group's past experience with allowance for expected future claim trends.

Required Rate = Incurred Loss Ratio
Target Loss Ratio
 x Inflation x Trend

The components of this formula are described below.

  1. Incurred Loss Ratio is the ratio of incurred claims and paid premiums during the policy year period. A description of the calculation of incurred claims is provided below

Incurred Loss Ratio = Incurred Claims

Incurred Claims = Actual Cash Claims + Change in Cash Reserves Requirements*

*When a company changes its insurance carrier, the insurer continues to be liable for expenses that were open before the date of cancellation. Insurers hold a buffer against this contingency referred to as the "incurred but not reported" claims reserve (IBNR). 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.

  1. Target Loss Ratio or Breakeven Loss Ratio is the insurer's objective in maintaining claims costs equal to a fixed percentage of premium. This is essentially the insurer's break-even position, where the remaining percentage is reserved for expenses, or the insurer's cost of doing business and insurer profit
  2. Inflation - due to the trend of rising health care costs it is necessary to adjust past experience figures for the inevitable rise in future claim costs. An inflation adjustment is therefore included when evaluating the claims experience. The inflation rate for health benefits is typically significantly higher than the general Consumer Price Index (CPI)
  3. Trend - there are several factors that contribute to increasingthe frequency of claims or plan utilization including:
  • an ageing workforce
  • cost shifting by provincial plan
  • technological advances resulting in more expensive treatment
  • public awareness of health issues

Below is a sample of our method of evaluating rates for the health benefit. A similar method is used for the short term and dental benefits.

Renewal Rate Analysis

In order to determine the appropriateness of the renewal rates for the health plan, three different models have been developed which differ in the amount of credibility given to each year's experience.

  • Model A: An analysis using the most recent year's experience only
  • Model B: An analysis using the last two periods of experience which places 66.7% credibility on the most recent year and 33.3% credibility on the previous year
  • Model C: An analysis which applies 50% credibility on the most recent year's experience, 30% on the previous year's experience, and 20% on the experience two year's previous

Health Rate Analysis

The following premiums and claims data have been used to analyze the renewal rates for the health plan.

Period Paid Premium Adjusted Premium Paid Claims Incurred Claims Adjusted Claims Adjusted Loss Ratio
Year 1 $115,447 $122,986 $92,103 $94,370 $94,370 76.73%
Year 2 $101,689 $137,973 $69,433 $69,284 $77,944 56.49%
Year 3 $87,520 $101,590 $70,924 $72,909 $91,865 90.43%
  1. The adjusted premium reflects the premium that would have been paid if the current monthly rates had been in effect since the beginning of Year 3
  2. The adjusted claims are calculated by multiplying last year's incurred claims by last year's adjusted inflation/trend factor of 15.0%. An adjusted inflation/trend factor of 12.5% is used to adjust the Year 3 incurred claims to the Year 2 level. This adjustment is necessary so that last year's claims are evaluated at a level consistent with the current year's claims

Inflation/Trend for the Health Plan

The following inflation/trend factors have been utilized to analyze the health plan rates:

  • The annual inflation/trend factor is 15%, or 1.25% per month
  • The adjusted inflation/trend factor takes into account the time lag between the end of the most recent experience period and the renewal date. For example, the most recent experience period ends August 31, 201x whereas the renewal begins December 1, 201x. Thus, there is a lag of 3 months. Therefore, the adjusted trend/inflation factor is 18.75% (15 months X 1.25% per month)

As previously noted, the formula for determining the renewal rates is as follows:

Required Rate = Loss Ratio
Adjustment Target Loss Ratio
x Inflation/Trend Factor

Applying this formula to each of the rate adjustment models produces the following results:

  Rate Model A
Current Year's Experience
Rate Model B
2/3 - 1/3 Credibility
Rate Model C
3 Year Weighted Average
Adjusted Loss Ratio 76.7% 70.0% 73.4%
Inflation/Trend 18.75% 18.75% 18.75%
Target Loss Ratio 83.0% 83.0% 83.0%
Formula 76.7/83.0x1.1875
= 109.8%
= 100.1%
= 105.0%
Rate Adjustment 9.8% 0.1% 5.0%

The rate models illustrated above have resulted in rate adjustments of +9.8%, +0.1% and +5.0% respectively for the health plan.