An Overview Of How Your Premiums Are Calculated & What You Can Do To Manage Them
You know when you sign up for a new cable package and you get this fantastic rate – only to find out that it’s goes up exponentially after a certain time frame? That can happen in the employee benefits world too. In fact, all too commonly, we see insurance companies competing for your business by offering you the lowest price on a benefits package that has all the bells and whistles. And unfortunately, this ‘lowest cost’ option is likely not sustainable, nor does it provide the right plan design for the company.
How Does The Above Scenario Impact Your Renewal Costs?
Often, extravagant plan designs are presented with quotes returned based on numbers below the “book rates” from insurance companies in hopes of having the best price and locking in your business for the next 16-24 months.
Now fast forward to your renewal. Your claims experience shows that one of your employee’s has a spouse on a high cost drug that has been billed over $2000 per month to the plan. Another had some extensive dental work to get done, and generally, your employees were excited about their new program, and utilized this valuable part of their compensation - now you’re faced with an 89% increase in premiums.
For your broker, this is where the tough conversation comes into play and they now have to sit down to explain why you are receiving a 89% increase to those amazing rates you got a year and a half ago. Because the initial costs and plan design were presented below ‘book rates’, it didn’t take into account your unique situation and the projected claims for your company as a whole, you are now left with an unexpected increase in your cost. Even though the new rates are actually much more realistic, wouldn’t you have rather known that ahead of time and built a more sustainable program to have more control over your future costs?
How Are Health & Dental Premiums Calculated?
The simplest way to explain it is your projected claims + administrative fees and taxes = your premiums. In reality, it’s much more complex than that and there are numerous formulas used to calculate claims forecasts & premiums.
In order to get pricing you feel is reasonable and sustainable, your broker should really get to know your business and its unique needs. This will include much more than your employee demographics. What your overall objectives are, what you hope to include within your plan design, what your budget is, why are you investing in benefits in the first place, etc. All of this information will then be taken into account and some of it utilized within the plan design recommendations and rate calculations to meet your unique situation and budget!
How Can You Mitigate Risks?
There are many ways that you can mitigate risks within your benefits plan, which can prevent high, unexpected premium hikes at renewal. Plan design with caps on coverage, cost sharing and co-insurance all have a positive impact on claims, mitigating the risk of unexpected high claims again in the future.
By understanding how premiums are calculated will allow employers to offer a plan that is not only valued by employees but stable for employers.