Do you have a feeling that your group insurance premiums keep rising and the only way to lower the requested increases is to call for tenders? This is sometimes called the yoyo game!
However, there are several other ways to reduce or control costs, and when a business reaches a certain size, it is possible to enter into profit-sharing agreements with insurers or even do without an insurer for some benefits. The three major types of financial arrangements for group insurance are described below.
Fully Insured
For most SMBs, group insurance plans are fully insured. The employer pays the premiums and the insurer pays the claims, pure and simple! When claims are significantly higher than expected, the insurer cannot increase the premiums before the next rate renewal date and therefore incurs a loss. Conversely, if claims are significantly lower than the premiums paid, the insurer will reap the profits! This type of financial arrangement for group insurance is well suited for SMBs that cannot sustain large cost fluctuations from month to month.
Self-Insurance
As the name suggests, with this type of financial arrangement for group insurance, claims are not insured for certain benefits. The actual claims are billed, along with related administration fees and taxes. Thus, the contract holder (usually the employer) takes on the financial risk instead of the insurer. In other words, you pay exactly what it costs!
Self-insurance may appear scary to the uninitiated, but it comes with several risk-control mechanisms. This is an excellent solution for stabilizing and minimizing insurance costs.
Self-Insurance: The Right Way to Go For Your Business?
Retention (Profit Sharing)
The retention agreements strike a nice balance between fully insured and self-insured plans. There are several types of retention agreements, but in most cases, the underlying concept is the same: the employer pays the premiums, the insurer pays the claims and charges fees, and at the end of the year, the insurer issues a financial report stating whether the plan generated a surplus or a deficit.
To make things clear, the insurer provides a document that specifies the terms of the agreement, including administration fees, claim adjustment expenses, profit and risk charges, commissions, applicable interest rates, reserve factors for claims incurred but not reported, etc.
Depending on the terms of the retention agreement, the profit may be shared in part or kept by the insurer in a stabilization fund that will be used to cover any future deficits. If applicable, accumulated deficits may or may not be recovered from future premiums, depending on the agreement. The stabilization fund is capped and any profit exceeding this maximum will be returned to the contract holder as a rebate. Also, the stabilization fund belongs to the contract holder in the event of plan termination.
The ability to negotiate this type of agreement with insurers depends on a number of parameters, including the size of the group. In general, there must be at least 100 employees. Retention agreements are suited for businesses wishing to develop long-term partnerships based on transparency.
What To Know About Financial Arrangements For Group Insurance
In most cases, self-insurance and retention agreements only apply to short-term disability, medical and dental care coverage. Life insurance and long-term disability coverage usually remain fully insured, as they involve, by their nature, few but very costly claims.
Whatever your situation, one of our advisors can help you understand these options and find solutions to implement financial arrangements that will reduce your costs for the risk level you are willing to take. Contact us!
With AGA Benefit Solutions for more than 20 years, Chantal has the experience required to help businesses of all sizes set up and administer their group insurance plans. Her proactive approach leads to an informed vision of the various strategic planning opportunities. With her professionalism, determination and excellent communication skills, Chantal makes sure her clients fully understand the issues pertaining to group insurance and retirement plans.