Why Aren’t Insurer Expense Charges Going Down?

As an employer providing an employee benefits program, you have likely noticed rising costs. We all recognize the issues related to an ageing and less healthy population.  Along with newer high-cost drugs and treatments, both are factors contributing to rising claims costs that are at the foundation of your overall benefits plan costs.  However, have you ever questioned why insurer expense charges are not decreasing given advancements in things like technology and automation?

As the Canadian population continues to age, it is becoming less healthy, thereby increasing the need to utilize employee benefits plans.  Simultaneously science continues to make advancements in new therapies for both existing and new diseases and conditions, allowing us to live longer and healthier.  Additionally, governments have historically “downloaded” costs on to benefits plan sponsors but have also not really “uploaded” coverage on to provincial drug plans for new and costly services on a timely basis.

With these variables at play, it is really not that surprising that the cost of employee benefits plans have been under pressure due to a significant growth in the underlying claims.  Employee benefits plan costs have risen, on average, by approximately 6% per year over the last 25 years.  However, claims costs are only one part of the overall cost of group benefits plans.  The cost for insurers to run these plans are also an integral component in your plan’s costs, with insurer expense charges ranging from 8% to 30% of underlying claims, depending on the size of your group and the nature of the benefits in question.

So, it begs the question of why those insurer expense charges have not been reducing relative to the underlying claims costs.  If an insurer applies expense charges to underlying claims that are increasing at 6% annually, then their expense charges, in dollar terms, are also growing at 6%.  Arguably, if the cost for insurers to run their businesses is not rising at 6%, those operating costs relative to the underlying claims costs should theoretically be going down.

However, we have not really seen insurer expense factors (represented in their Target Loss Ratios) improving for insured plans, nor have we seen self insured (Administrative Services Only/ASO contracts) expense charges going down.  More often, we have observed these insurer expense charges unchanged, at best, or even going up.  This seems counterintuitive given the improved claims automation employed by the industry. For example, there really is no longer much of a need for insurers to manually cut open envelopes and key information from submitted paper claims forms.  Dental claims are almost entirely processed electronically. The vast majority of employee benefits plans have drug cards. Most paramedical practitioners are processing claims directly with insurers, and employees are quite comfortable using online claims submission or insurers’ on-line portals and/or mobile Apps.

Why then are insurer costs not coming down?  We can’t directly confirm if there are other costs now impacting the insurers’ ability to run their business or whether the efficiencies achieved from technology are simply improving their profitability.  What we do know is that employee benefits plan sponsors need to be confident consistently that they are getting the best deal available in the market.  

Ultimately plan sponsors should expect that their advisor advocates for transparency and competitive pricing, ensuring their plan meets the needs of their business and employees while staying cost-efficient.  To ensure their plan remains cost-effective, they need their advisor to:  

• Benchmark expense charges: Regularly compare insurer expense charges to market standards

• Analyze underwriting and rating: Understand the details behind the plan’s cost structure

• Consider marketing your plan: Periodically assess if a better deal is available elsewhere

We would be pleased to discuss your specific situation with you to identify the best strategy for your employee benefits plans. Should you have any questions on the above, please do not hesitate to contact any member of our team.   

ZLC Employee Benefits Solutions is one of the fastest growing advisors for employee benefits and group retirement programs in Vancouver and we are fortunate to have the best people, resources, and clients. We provide value by leveraging one of the most skilled benefits teams – collectively over 450 years of experience within our team of 21 employee benefits specialists. We have been working with businesses ranging from 3 to over 75,000 plan members for the past 40 years.