Employee Benefits Plan Renewal: How Is It Calculated?
When implementing a benefits plan for the first time you and the insurance company don’t know what the anticipated claims are going to be for your group, so they use “book” rates that are based on the experience of similar sized companies in similar industries. In a way, it’s a guess.
Renewal Calculations Are Dependent On The Product
Overall, there are 5 different mathematical calculations that are used to determine the amount of premiums at time of renewal. It’s important to note that this is also determined by the type of benefits plan that you are enrolled in. For example, a fully pooled benefits plan (like the Chambers Plan) will be calculated based on the demographics and claims of the providers group of clients as whole vs. your individual organization.
Experience rated benefits will look at the claims experience for your respective group. We won’t get too in-depth with regard to how each calculation works, but simply put your renewal will take into account current employee demographics, ratio of premiums to claims, inflation and trends, credibility, claims weighting, etc. to determine your projected usage for the upcoming year.
What Causes A Fluctuation In Premiums At Renewal?
It’s important to remember that insurance companies are a business. They are looking to process health & dental claims from the premiums you paid and keep a portion to cover admin costs and of course, profit. So, what happens when you have more claims than premiums paid? You guessed it…you get an increase in your renewal rates. Conversely, if your premiums well exceed your claims, you could see a decrease.
Your Renewal Should Not Be A Surprise
First off, your advisor should be able to discuss with you how renewals are calculated. They should also communicate with you regarding claims experience as needed and explain the possible outcomes at the end of the year based on preliminary reporting.
If you’re a new to group benefits and therefore have no history of claims experience, you were likely quoted book rates and given a best estimate in terms of premium. It is also possible that discounts were applied to those rates in order to make a particular carriers’ rates appear more appealing. Be aware that those discounts may not be sustainable. Depending on the product you chose, you might see an increase as your premiums level out to reflect your experience, and the providers’ desired profits, etc. But again, this should not be a surprise and would be adequately communicated to you by your advisor. For more on renewal rates, check out this article: Why Is My Renewal So High?