Collective
Purchasing Plans – The new battleground
Gord
Hart, Partner, Employee
Benefits & Pensions
With healthcare
inflation exceeding 15% annually and consolidation of the
marketplace, employers are facing a difficult future in the
pricing of their employee benefit plans. Traditionally, employers
utilized a “marketing” approach to ensure that
their employee benefit plan underwriter(s) maintained competitive
pricing based on the risk associated with their policies.
If a policyholder felt that a renewal rate adjustment was
“uncompetitive”, they could have a broker prepare
a request for quotation. Underwriters would respond with their
offer for providing the coverage submitted, and the policyholder
would determine whether the incumbent was fair or if a change
of underwriter was required.
This simplistic
approach may have worked in the past where underwriters may
have used little or no claims history in assessing the premium
rate requirement, but most if not all underwriters now use
claims experience in assessing the proper premium rate structure.
Underwriters all utilize similar underwriting criteria in
the SME (Small to Medium Enterprise <250 employee) marketplace.
This then reduces or eliminates most premium savings generated
by a change of underwriter. If insurer retention rates (administration
rates) differ by less than 5-10%, how can underwriters provide
premium reductions of more than 1-5% overall? Simple, marketing
discounts. Underwriters will spend dollars and “invest”
in new clients to achieve new sales goals, but upon renewal,
will put the policyholder through the same renewal underwriting
process as the previous underwriter. On top of the “marketing
discounts”, a new underwriter will likely require a
full funding of the reserve (reserve is established to offset
a perceived lag in claims).
So why
would a policyholder change insurers? Two primary reasons,
Service
is a difficult variable to calculate. It often is a reflection
of how the underwriter deals with situations that have little
or nothing to do with their own services. Typically issues
with the service providers or application of the underwriter’s
administration rules cause a bulk of the “service”
issues that policyholders face. The continued consolidation
within the employee benefit underwriter marketplace is rationalizing
the market sources, and has left a majority of the SME policyholders
with a handful of providers. What this means is that service
issues likely will not change significantly with a change
of underwriter. This would require a new approach to addressing
the service component of the employee benefit plans.
Initial
Price is a loss leader. As outlined above, underwriters (for
the most part) utilize the same underwriting criteria to establishing
premium rates. So over time, there is little to no significant
price separation between the underwriters. Initially though,
underwriters may be willing to discount historical claims
experience in an attempt to acquire the business. Due to the
“investment” made by underwriters, policyholders
could walk away from legitimate renewal rate adjustments,
in favour of a “lower price”. But as mentioned
before, these initial savings often disappear and if claims
unexpectedly spike in the first policy year for a new underwriter,
these savings could easily disappear and may never be realized
over an extended period. With the limited Human Capital resources
available in SMEs, implementing a change of underwriters without
achieving significant long-term premium reductions can be
fool hearty.
So what
are the alternatives? Self-Insure, Defined Contribution Plans
or Collective Purchasing Plans
Self-insurance
and Defined Contribution plans require a fundamental change
in the risk and participation in the long term welfare of
the policyholder and plan members. These will be investigated
in a future position paper.
Collective
Purchasing Plans are relatively a new concept in the employee
benefit marketplace, although they have existed in many other
industries for decades. The concept is simple, harness the
collective purchasing power of a group of policyholders while
maintaining complete independence of the members. Although
the concept is simple, less than half a dozen of these arrangements
exist in the Ontario marketplace. Why have they not proliferated
the SME employee benefit marketplace? The answers are simple,
- Revenue
& Profit– underwriters and brokers can
generate greater revenues by maintaining independent relationships
with policyholders.
- Supply
& Demand – consolidation generates revenue
growth that shareholders of these corporations require,
this reduces the need to generate revenue by underwriting
new policies.
- Critical
Mass – underwriters require a good business
case to put aside their revenue for profits per account to
turn their sights on lower margins but higher revenue growth
and retention rates.
-
Sophistication of the Brokers – many
brokers are comfortable and successful without innovating
within their markets, often SME’s policyholders count
on the existing broker to bring new and innovative approaches
to them for potential implementation.
How do
Collective Purchasing Plans generate cost reductions?
-
Reduced retention charges (administration
rates).
-
Improved plan design options and features (large case product
offerings, claims management tools, and underwriting methodology/criteria).
- Portability
(CPP members are willing to change underwriters to achieve
efficient combination of price and
service).
So
the obvious question may be what is in it for the underwriter?
Consolidation will eventually come to an end, and in the meantime
smaller underwriters have a great incentive to gain market
share to ensure their future or improve value for shareholders
if in a merger or acquisition. So as revenue drives underwriters
away from CPPs, revenue also makes them responsive to the
opportunity to gain market share at the expense of competing
underwriters. Also, lapse rates (rate at which underwriters
lose business) improve significantly when you remove part
of the “fixed” cost in a variable cost based product.
What this means is that the retention charges are relatively
fixed or fixed as a percentage of premium or claims. Claims
are by their nature variable. So if premiums are a function
of retention plus claims plus taxes plus risk, then by delivering
a reduced retention charge, the underwriter effectively takes
some price out of the equation. Why would a SME policyholder
change underwriters knowingly if the costs of providing the
coverage will be guaranteed to be higher with the new underwriter
relative to the incumbent? Bad advice.
SME’s
are also looking to self-insurance in greater numbers as the
value proposition (price relative to services provided) of
the traditional “insured” plans are examined.
If underwriters reduce the potential savings from self-insuring
to less than 2-6% versus a CPP retention charge, the business
case to self-insure diminishes greatly. Collective Purchasing
Plans keep premiums on the books.
So in
the end, the issues surrounding why insurers would hesitate
to participate in Collective Purchasing Plans, also draw them
to participate in the programs. So help us help you change
the balance of power, ask us about Beneflex® and the
Collective Purchasing concept.
To learn
more about Beneflex® and how it works, contact your
Selectpath client care unit, or call 1-888-327-5777.
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