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How Carriers Calculate Benefit Renewals: A Simplified Review

Let’s face it – dealing with formulas, percentages, administration costs, and loss ratios probably lies somewhere between mundane and daunting on the spectrum of HR responsibilities for most team leaders. Dealing with rate adjustments while controlling costs can be tricky when calculating employee benefits renewals.

We’ve pulled together some key elements of the benefits renewal process to help shed some light on the practice and simplify the task.

What is an insurance renewal?

A renewal is an annual or bi-annual process during which an Insurer or Third-Party Administrator (TPA) reviews the previous year’s insurance claims paid versus premiums paid to establish a rate adjustment. If a rate adjustment is necessary, it is implemented to ensure the plan continues to be sustainable for employers and employees.

What factors affect a renewal?

In addition to annual inflation, factors that determine renewal rates include:

  • Claims experience: The frequency and value of past claims.
  • Credibility: The group size and length of time with the
  • Group demographics: Age, gender, occupation, geographic location.
  • Administrative costs: Expenses for administering the plan.
  • Target Loss Ratio: Premiums received versus claims paid.

What is a Target Loss Ratio, and how is it determined?

A Target Loss Ratio (TLR) is a percentage that indicates the expense level of the insurance carrier. TLR is the insurance company’s projected profit point, or the maximum dollar amount of claims paid by the insurance company expressed as a percentage. The expense level directly impacts how much the group can claim before the insurance provider loses money.

TLR is determined by the insurance company’s costs in plan servicing, claims adjudication, and any commission paid to brokers. Typically, the TLR will increase as the size of the group grows. The higher the TLR, the lower the premium costs for administration, expenses, and commissions.

Formulas that impact an adjustment

There are four main formulas that insurance companies consider when calculating renewals. Here’s an example of an annual renewal calculation based on $75K claims.

Negotiating insurance renewals can be a nuanced process. That’s one of the reasons it can be highly beneficial to work with an experienced and specialized employee benefits advisor to alleviate the confusion, stress — and unnecessary costs involved.

Book a Call with Orchard Benefits to discuss your options.