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Employee benefits renewal is simpler than you think – here’s the key

You may be an accountant, or work in human resources. Or perhaps you are a cost controller, chief financial officer or small-business owner. In any of these roles, you face the same daunting challenge every year: At employee-benefits-renewal time, how best to deal with rate adjustments while keeping costs under control?


Renewal reports can be mind-bogglingly complicated. They don’t have to be. Yes, you have a great deal of data to consider in understanding your group’s claim usage. But there’s a key factor that defines your renewal adjustment.


This factor has to do with:
1.) target loss ratio, or TLR, and
2.) two formulas that will help you understand where your renewal should stand.


TLR, sometimes also called a break-even ratio, is a percentage that indicates the expense level of the insurance carrier. This expense level directly affects how much your group can claim before the insurance carrier loses money.


For example, let’s assume your TLR is 80%. First we need to calculate the loss ratio, which is claims paid/premiums paid. In this case, let’s assume claims paid were $90 and premiums paid were $100:

  • loss ratio = total claims paid/total premium paid
  • estimated adjustment = loss ratio/target loss ratio.

This would yield a 90% loss ratio. Then, to find the estimated adjustment, you would divide the loss ratio of 90%/the TLR of 80%, which would yield +12.5%.


There is a lot more that goes into calculating a renewal, especially when it comes to larger groups. For illustration purposes, we didn’t take into account a few other factors, such as trend (inflation) and reserves (claims lag). But the above, in a nutshell, is essentially how renewals are calculated. It’s a quick and easy way for a plan administrator to do the math to see where their group should stand.


How is the TLR determined?

You might ask: How is the TLR determined? Usually, it’s determined at the time of inception and illustrated on the initial quote. Included in the TLR calculation are the insurance company’s costs in handling servicing and claims adjudication, as well as any commission paid to the broker. As the group size grows, typically the TLR will increase and the administration cost will be lower relative to the amount of premium the insurance carrier is receiving.

So, the lower the TLR, the greater the portion of your premium going into expenses and administration and commissions.


You want to ensure that your TLR is updated accordingly and is negotiated to be as high as possible. And you can do this by working with specialized employee benefits brokers that have preferred pooling arrangements.

If you would like to have an in-depth discussion about understanding your renewals, please feel welcome to contact me with any questions.



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