As mentioned in the article Four ways to save on group insurance costs , different financial arrangement options become available when a business reaches a certain size. The three major types of financial arrangements for group insurance are the following:
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 incurs a loss. Conversely, if claims are significantly lower than the premiums paid, the insurer will reap the profits.
This type of financial arrangement is well suited for SMBs that cannot sustain large cost fluctuations from month to month.
As the name suggests, claims are not insured with this type of financial arrangement, and the contract holder (usually the employer) takes on the financial risk instead of the insurer. The actual claims are billed, along with related administration fees and taxes. In other words, you pay exactly what it costs!
To learn more about self-insurance, click here to read the article Self-Insurance: Myths and Facts.
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 concept remains the same: just as with a fully insured plan, the employer pays the premiums that can be higher or lower than the actual claims. However, the difference lies in the treatment of the resulting profits or losses.
At year end, the insurer provides a financial statement evidencing whether the plan generated a surplus or a deficit. 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 refund. Also, the stabilization fund belongs to the contract holder in the event of plan termination.
In all cases, the insurer provides a document that clearly 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.
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.
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!
Holding a Bachelor degree in Actuarial Science and a Fellowship with the Canadian Institute of Actuaries, Vincent Soucy worked for the first 10 years of his career in an actuarial consulting firm where he advised national clients on their benefit and retirement plans. He joined AGA in March 2014 and supervises the consulting and underwriting team.
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