Dear Editor,In relation to your November/December issue cover story of “Where is the industry going”…I often wonder where the employee benefit/group insurance industry is going?
Brokers from across Ontario have been telling us stories of how insurers are buying business. They appear to be discounting prices to new, all time lows to try to maintain or grow their market share. This is far from a new phenomenon.
In the past 20 years we have seen many insurers experience a “fourth quarter rush” to meet annual sales targets and as a result prices were reduced prices to ensure the sales targets were met. Carriers and their sales reps who were at or above target kept the good business that had been “right priced” through the year and those below target bought their way in by aggressively subsidizing rates.
The trend now is that the market consistently tries to build (or hold) market share by under pricing rates. It has become such a common occurrence that we are actually seeing an evolution to “Reverse ASO” business. This situation occurs when a mid to large client, that may have changed from an insured style plan to an ASO (Administrative Services Only) funded model previously, is lured by low prices to switch back to an insured plan. Often the rates charged are below the claim costs. This can happen as marketing discounts are available to insured products that are impossible to see in an ASO plan.
We are also experiencing situations where insurers state that they require larger increases than what seems necessary and as a result are requesting that brokers shop the market to justify a further reduction in rates. This can backfire causing underfunded plans, and reduced commissions and simply delays the problem of the higher renewal for a year when the process will begin all over again.
One example is a “not so great” renewal that saw a 29% rate increase offered by the insurer. After the broker completing their fairly conservative analysis, it appeared that the increase should have been closer to a 14% increase. The insurer returned with an offer of a 24% increase as their best position.
The broker was faced with either supporting this inflated increase or “shopping the market” to see what other carriers had to offer. They chose to shop the market where results showed companies returning with a “no rate change” to a 5% increase over the pre-renewal rates. A 19% drop from the insurer position of 24% is a considerable difference to say the least. When the results were shared with the current insurer for a last “kick at the can”, the insurer agreed to reduce the original 29% increase to 7% to maintain the business. The broker agreed and the client gladly renewed with their current carrier to avoid the hassle of changing providers.
So what’s the problem?
- The broker was “forced” to market the case, wasting their time and that of the other insurers2
- The insurer lost premium of 7%3
- The broker lost commission of 7%4
- The clients’ plan is underfunded by 7% going into the next year and as a result “the problem” is simply deferred.5
- If the broker discloses the process, the client may think an insurer has 22% flexibility to drop the rates each year.
What is the soluti
Brokers educating clients on what is a “fair price” helps the business take a step up.
Insurers dealing with brokers who are group specialists (rather than one shot wonders) would make life easier for all concerned.
Brokers supporting insurers when a renewal is fair and “standing up” to clients when required.
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