Our next 2 blogs will be a compact summary of the various ways a business can manage the cost of benefits.  We are often asked about Health Spending Accounts, Flex Benefits, Cost-Plus, and Administrative-Services-Only as alternative ways to manage rising premiums.  This posting explains the most common form of purchasing benefits:  fully insured, with no risk being held by the Employer.

How do you craft a benefits plan which will be popular with employees without breaking your budget?  How can you freeze your costs so that they are predictable for future budgeting purposes?

Let's start with the basics -

The basic principal behind any type of insurance is the “safety of large numbers” or "spread of risk amongst a larger group" and is relevant to Employee Benefit plans.  If you put 20 people in a room, some will have health conditions, some will not.  One person in that group may be living with a condition which will eventually lead to permanent  disability or death at an early age.  The “magic” of Group Insurance is that employees are all accepted onto the plan up to certain levels without medical questions.  The larger the Group, the higher the “non-medical” limits available to all employees – healthy or not.  A fully-insured Group Benefits Plan is “progressively experience rated” at each renewal to determine the rates to charge next year.  

Progressively experience rated plans continue to be the most viable risk-free solution for most small to mid-sized businesses.  This is the most common method for providing coverage.   Progressively experienced rated means that next year’s premiums will be established by the Insurer based on last year’s claims results to a large extent.  The insurer compares the premium received to the claims paid, and your 'Loss Ratio' is calculated.  

In a good claims year with low loss ratios, the Insurer gets to keep all the profit.  Harrumph!  How can that be good, you might ask?  Well  - in a bad year with a very poor loss ratio (high claims), you may receive a rate increase for the next year, but you will not have to pay back premiums.  

A good Benefits Advisor will negotiate on your behalf to ensure the renewals are fair and budgetable, and will suggest alternative benefits or plan changes to keep within the budget.  A good advisor will also recognize that the relationship between the business and the Insurer can be a successful partnership which can last many years, adding value and stability for both parties.  

On our next blog, we will discuss the types of flexible benefits which are available, and what kind of business is a good fit for flex benefits.