Can changes in the economy impact my benefit program?
By: Cameron Campbell
Depending on the size of your organization you may feel the impact of changes in the economy differently. While changes over the past two years have adversely affected many businesses, few have taken the time to consider the impact to their benefit plan.
Studies have shown that in times of economic uncertainty, occurrences for some benefit claims increase such as Long Term Disability (LTD), dental care and prescription drugs. Employees often feel insecure about their future and the stability of their company (or job). This factors into increased claiming patterns as an employee may feel the need to maximize their coverage.
Fluctuations in Demographics and Benefit Claims
As decision makers for businesses we are often concerned with the financial well being of our company during times of economic instability. For many employees the concern is also for their own financial future. As a result, employees tend to utilize benefits out of fear that the benefits may no longer be available to them, therefore overall claims increase in times of uncertainty which leads to higher costs for the plan and additional financial strain on the employer.
For example, if your company is forced to temporarily reduce production or employee hours, claims will almost certainly increase. If these reductions lead to lay-offs, the services of younger workers tend to be terminated before those of older tenured employees and as a result the demographics of your group may change to represent an older population.
This causes two key issues, 1) the chance of high claims increases with age, and 2) pooled benefits such as Life and Disability are based largely on your group’s demographics. By increasing the average age of your employee population you can increase your risk of large claims significantly which will lead to higher rates for all benefits at time of the renewal.
For small groups, insurers may not accept your individual claims experience as credible since additional claims for one employee (or lack of claims within your organization) could have a large impact on the performance of your group. In these cases the insurer may apply their “manual” rate factor to your plan at renewal. The “manual” rate is essentially the average for that insurers’ block of business and could be of benefit or detriment depending on the performance of your plan.
Long Term Disability (LTD) and Low Interest Rates
The incidence of LTD also increases in many industries during times of economic uncertainty. Employees face additional financial pressures at home which often lead to family stresses, resulting in greater absenteeism costs for the company.
In addition, interest rates can have impact on the rate for disability benefits, if an employee submits a claim and is approved for disability the insurer is required to establish a fund called a ‘Disabled Life Reserve’ (DLR) to pay all future expected claims. The DLR periodically decreases in value through payouts to the employee and earns interest over time, however when interest rates are low the DLR does not receive as much interest.
Therefore to ensure the DLR is sufficient to pay out the employee’s claims the insurer must put more money in the DLR at the time of claim to make up for the lower interest rate received. The insurer then passes along this additional cost to the employer through higher LTD rates.
Consumer Price Index (CPI) vs. Trend
On a regular basis insurance carriers review historical trends and anticipate future costs based on new legislation and products/services offered. The result is a trend factor which is applied at renewal and can differ between carriers. The trend factor is the expected rate of cost increase for your plan over the next year, and has been significantly higher than CPI inflation for each of the last ten years.
Based on the increased occurrences of claims for high cost drugs and costs associated with older employees in the workforce it is anticipated that this factor will continue to outpace CPI inflation for the foreseeable future.
Don’t get caught in a tough situation by only budgeting for a benefit increase equal to the CPI inflation rate. Be prepared by using The Benefits Budgeter.
Creating a plan design that limits your exposure to areas where outside factors impact your benefit plan is a strategic approach to help keep your rates and claims below the average. Only an elite advisor like BHH Benefits can investigate your plan and help to minimize losses and maximize savings regardless of the outside influences.
Cameron Campbell is the Vice President of Group Insurance at BHH Benefits in Stoney Creek. He can be reached at 1.800.514.4944 or at c.campbell@bhhbenefits.com
