My last Benefits Canada online column was entitled “Insurer trend factors drop and it’s good news…sort of.” In it, I pointed out a cascade effect: one insurer published its health trend factor, and, subsequently, several other insurers published the same trend number. The feedback I have received and continue to receive on the column has been overwhelming. Plan sponsors and advisors alike responded positively to it with what seemed like a collective sigh of relief—someone else had finally said what had been on their own minds.
However, not everyone responded well to the article. A couple of insurers took exception; they argued that the industry was being painted as uncompetitive.
It is great that the column generated so much debate and discussion. That is the goal of these blog posts: to advance the discussion on topical issues. And on this issue of insurer trend factors, I hope the debate continues. I think it is incumbent on everyone in the industry to better understand this concept of “trend” and to ensure greater transparency in benefits plan pricing in the future.
With that in mind, let me add some additional comments to the debate.
As I said in my original article—and I will say it again—we need a competitive insurance market. It is also completely within the purview of insurers to respond to market conditions in what they believe to be a fair and appropriate way.
Also, as I mentioned previously, the reduction in trend factors is generally a positive development. The issue is one of transparency. Each insurer published its trend factor as an accurate reflection of future medical costs, based on exhaustive research of business data. Yet each insurer, with its unique set of clients, came up with the same number: 11.5%.
I heard from many advisors whose clients’ actual trends have been in the lower single digits over the last several years. The trend rates, however, were still closer to 15%. Perhaps, as many believe, there has been a margin built into the trend factors for many years. The “new number” feels a lot better; whether there is margin in this number will emerge over time. However, embedded in all of this is an important message for the industry as it relates to the pricing of benefits: the cost of benefits—particularly health benefits—is very much on the radar of most plan sponsors. Sponsors of all sizes are demanding more information on cost drivers and more accountability in plan pricing. With this increased focus, it would seem to be in everyone’s best interest to ensure that plan pricing is appropriate and supported by the unique circumstances of each plan sponsor. Trend factors should be negotiable or at least supported by compelling evidence.
The swift industry reaction to publish the same trend factor is also a good reminder of the importance of price in the purchase decision regarding employee benefits. Insurers felt compelled to drop their trend factors in order to compete for business. As advisors, Mercer’s job is to ensure that our clients pay an appropriate price for their benefits coverage. However, it is also incumbent on us to ensure that our clients acknowledge that value is defined by more than just price. Quality service, competitive products and value-added services are all equally important in the buying decision.
Plan sponsors and advisors are demanding more accountability in the pricing of benefits. In turn, insurers are expecting more accountability from advisors and plan sponsors to ensure that price is not the only criteria used in the benefits-buying decision. We need insurers to meet the benefits needs of our clients and their employees. The objective of the pricing process is to develop a sustainable premium or contribution base to support the ongoing risk. There are many unknowns in this equation (such as trend); therefore, it must be a collaborative process.
We must work together to determine the right price—not just the lowest possible price. This seems like a fair trade to me.
Related article: