Collective Purchasing Plans – The new battleground

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 and 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
  • Initial Price

Service is a difficult variable to calculate. It often is a reflection of how the underwriter deals with situations that has 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 the not proliferated the SME employee benefit marketplace? The answers are simple,

  • Revenue and Profits – 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 drive 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 profits drives underwriters away from CPPs, profits 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 participating 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 us at 888-327-5777.