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Posted by Alexandre Timothy, Group Insurance and Group Annuity Plans Advisor, mars 7 2018
Savings strategies
Risk Pooling: Is This The Right Way To Go?

Group insurance plan costs have been rising substantially and steadily for the past several years. Why not join a group insurance pool to better control future cost increases? The information presented below will enable you to validate whether plan pooling is the optimal solution for your business.

How does plan pooling work?

The basic idea is to pool together the group insurance plans of several companies in order to benefit from economies of scale. The insurer will price the coverage as if the pool were one “large” group plan instead of several “small” plans. Grouping plans together can lead to savings, mainly through lower administration costs and risk pooling charges. In theory, this is a great idea; however, all pools are not created equal.

Saving on administration costs

The initial attractiveness of plan pooling generally comes from the prospect of saving on administration costs. Of course, some savings are to be expected, but they depend on how much the insurer saves and could turn out to be lower than anticipated. Savings result from the reduction of the insurer’s workload on a case. However, if all cases stem from different plans, are administered separately or are handed out piecemeal, the insurer will not save much.

Saving on risk pooling fees

Risk pooling fees are collected directly from the premiums paid and are used to mitigate large risks, such as travel insurance or highly expensive drug claims. In Quebec, the Quebec Drug Insurance Pooling Corporation requires mandatory risk pooling for drug claims. The applicable charges and thresholds vary based on group sizes.

Substantial savings on risk pooling charges can be achieved through plan pooling, especially for businesses with 50 employees or less as the risk is shared between more companies. Larger businesses can also achieve savings, but usually to a lesser extent.

Sharing the risks

Pooling the plans goes hand in hand with sharing the risks. Group insurance pricing is affected by several factors including experience (premiums vs. claims). When plans are pooled together, there is a possibility that the groups with the best ratios will subsidize the less performing ones. However, if the strong groups can get better pricing outside the pool, they will leave, negatively impacting the entire pool. Ultimately, if nothing is done, the pool will come to an end.

On the other hand, if the insurer must prepare detailed renewal analyses for each group within the pool, this requires the same amount of work as in the case of separate groups, offsetting the economies of scale in that respect. Therefore, priority must be given to implementing a simple but effective pricing management process, in order to ensure fairness across the groups without unnecessary red tape.

Prevention and cost management

To avoid disaster scenarios and ensure the pool maintains a positive experience, sound risk management is key. It requires establishing stringent eligibility criteria. The harder it is to join a pool, the more you can expect the pool to be well managed and costs to remain stable over time. If you have a sense that anyone can join the pool, there is every chance that actual savings will not be forthcoming.

Implementing sound cost management measures will also help limit future increases and ensure the pool’s sustainability.

A good solution

Being part of a pool of group insurance plans can be a highly attractive proposition for companies with 50 employees or less. However, you must choose your pool with the utmost care! If the winning conditions are not met, it is most likely that the savings will not be sustainable.

Thinking of joining a group insurance pool?

Learn more about Elite 5-49 pool, a product exclusive to AGA Benefit Solutions.

Elite Plan AGA Benefit Solutions

 

Group Insurance and Group Annuity Plans Advisor | With a Bachelor in finance, Alexandre Timothy understands the challenges and realities of his clients, both from a financial point of view as well as a level of human resources and benefits. With his new outlook in a traditional industry, Alexandre offers innovative solutions to ensure the sustainability of social benefits while meeting the needs of participants and employers. During his six years of experience, Alexandre has stood out for his creativity and integrity, becoming a highly valued adviser by many of his customers.
Alexandre Timothy, Group Insurance and Group Annuity Plans Advisor