Shopping The Market For Employee Benefits

1. Shopping the market for group benefits beneplan.ca President, Beneplan Vince Principato

2. Shopping The Market 2 “I just got a quote for our team’s health benefits plan, how do I know if it’s a good deal?”

3. Shopping The Market 3 Agenda 1. Benefits At A Glance 2. Two Main Funding Approaches 3. Fully Insured vs. Self Insured (ASO) 4. Pricing Of Benefits And Renewal Factors 5. The Hydro Analogy to Benefit Pricing 6. Marketing “Lowball” Prices 7. What To Ask Your Broker 8. Case Study

4. Shopping The Market 4 Benefits at a Glance Employee Benefits has been around for a long time and with a few exceptions, the offering and pricing model has not changed much over the last 20 years Benefits continue to rise in cost by an average of 8% YOY, mainly due to drug costs Aside from Salaries & Rent, Health insurance is top 3 expense for employers

5. Shopping The Market 5 Accountants How do we control cost? Everyone has an interest

6. Shopping The Market 6 Accountants How do we control cost? Plan Administrators How can we administer benefits as efficiently as possible? Everyone has an interest

7. Shopping The Market 7 Accountants How do we control cost? HR Managers Are we offering the best to our employees and new hires? Plan Administrators How can we administer benefits as efficiently as possible? Everyone has an interest

8. Shopping The Market 8 Accountants How do we control cost? Employees I want more and better coverage! HR Managers Are we offering the best to our employees and new hires? Plan Administrators How can we administer benefits as efficiently as possible? Everyone has an interest

9. Shopping The Market 9 Accountants How do we control cost? Employees I want more and better coverage! Owners How do I make everyone happy? HR Managers Are we offering the best to our employees and new hires? Plan Administrators How can we administer benefits as efficiently as possible? Everyone has an interest

10. Shopping The Market 10 How can all of these perspectives be met and reconciled? …understanding the pricing methodology!

11. Shopping The Market 11 How can all of these perspectives be met and reconciled? …understanding the pricing methodology!

12. Shopping The Market 12 2 Categories of Benefits Pooled BenefitsExperience Rated Benefits • Life, Accidental Death, Long Term Disability • Benefits rarely realized, difficult to predict • Pricing of this benefit is complex: actuaries make predictions based on group demographics, men vs women, industry type etc. • Prescription Drugs, Dental, Vision, Paramedical etc. • Benefits used on regular basis, predictable • Pricing of this benefit is simple: previous claims + fees

13. Shopping The Market 13 Experience Rated Benefits There are 2 ways to go about funding your experience rated benefits (Drugs, Dental, Vision, Paramedical etc.) Fully Insured Low Risk • Your company pays Insurer to take on all the risk and pay all the claims • No refunds of premiums or deficits for employer • Higher cost because of the Insurer fee structure and risk-taking • Typically reserved for smaller groups of less than 50 employees Self Insured (ASO) High Risk • Contracts the Insurer or Third Party Administrator (TPA) to run their benefits programs at a specific fee to process claims • Your company is “the insurer” by paying all the claims and assuming all risk • If there is surplus, company keeps, if there is deficit, company must pay out of pocket to cover • Typically reserved for larger groups of 100+ employees

14. Shopping The Market 14 Experience Rated Benefits There are 2 ways to go about funding your experience rated benefits (Drugs, Dental, Vision, Paramedical etc.) Fully Insured Low Risk Self Insured (ASO) High Risk Stop Loss Level $10K or $15K

15. Shopping The Market 15 More employees = less claims volatility

16. Shopping The Market 16 Which funding arrangement works best for your business? 10 Beneplan

17. Shopping The Market 17 “My renewal rates have just gone up! I don’t understand why it got so much more expensive!”

18. Shopping The Market 18 Premiums = Claims + Expenses Benefit Pricing & Renewal is simply an exercise in budgeting and projections.

19. Shopping The Market 19 Where Do My Premiums Go? The vast majority of paid premium is used to directly pay claims and remaining portion is needed to pay administrative expenses. These figures vary based on size of group. Admin Fees 28% Paid Claim s 72% 2.2% 5.1% 10% 10.7 % Advisor Commissions Profit Taxes Overhead

20. Shopping The Market 20 Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Charges

21. Shopping The Market 21 Represents the insurer’s admin fees, margins and overhead. It is expressed as % of premiums that go towards covering claims and can range between 71%-84%. Ex: If TLR was 80%, then 80% of premiums go towards claims and 20% go towards insurer admin fees which actually represents a 25% margin (20:80 or 1:4 ratio). Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Level

22. Shopping The Market 22 IBNR = Incurred But Not Reported Reserves, aka Incurred But Not Reported Claims. Represents a fund of money that insurers charge for and “employers” need to fund for “time delayed” claims. An example of “time delayed” claims is when an Employer leaves an insurer on November 30th but October and November claims are received by the insurer in December. The IBNR fund is used to pay these claims. Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Level

23. Shopping The Market 23 Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Level

24. Shopping The Market 24 Inflation % to account for the rise of health, drug and dental costs. Dental is dictated by the dental fee guide. Health & drug is dictated by new medications on the market & provincial health plan changes. Renewal Factors for Experience Rated Benefits Target Loss Ratio Trend CredibilityIBNR Stop Loss Level

25. Shopping The Market 25 Expressed as a % of how much the underwriter believes the claims experience of the company. The more employees and longer your company has benefits, the higher the credibility. Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Level

26. Shopping The Market 26 Also referred to as Pooling, it is re-insurance coverage that protects employers for claims that exceed predetermined levels (ie drug costs exceeding $10,000 per employee per year). Think of it as the employer’s deductible per employee. Renewal Factors for Experience Rated Benefits IBNRTarget Loss Ratio Trend Credibility Stop Loss Level Stop Loss Level Insurer Pays Employer Pays $10,000

27. Shopping The Market 27 The Hydro Analogy To Benefit Pricing Assume you are a newly hired accountant and your manager has asked you to prepare a 2020 budget for the company’s hydro. What do you do?

28. Shopping The Market 28 Start with Historical Let’s assume you find the spend figures for last 3 years: 2019: $57,500 2018: $55,000 2017: $50,000

29. Shopping The Market 29 Start with Historical Let’s assume you find the spend figures for last 3 years: 2019: $57,500 2018: $55,000 2017: $50,000 Now we need to calculate the weighted average. We calculated this by multiplying each year with respective weights - high for most recent year, low for older years. 2019: $57,500 * 70% = $40,250 2018: $55,000 * 20% = $11,000 2017: $50,000 * 10% = $5,000

30. Shopping The Market 30 Start with Historical You conclude that the weighted average is$56,250 Let’s assume you find the spend figures for last 3 years: 2019: $57,500 2018: $55,000 2017: $50,000 Now we need to calculate the weighted average. We calculated this by multiplying each year with respective weights - high for most recent year, low for older years. 2019: $57,500 * 70% = $40,250 2018: $55,000 * 20% = $11,000 2017: $50,000 * 10% = $5,000

31. Shopping The Market 31 Next, Layer In More Factors To get a more accurate estimate for our hydro budget we think about including the following factors: Delays between meter reading and billing received by the employer Upgrades to more efficient appliances Administration fees Hydro rate increase

32. Shopping The Market 32 Doing the Math

33. Shopping The Market 33 Doing the Math 3 year weighted average of hydro bill $56,250

34. Shopping The Market 34 Doing the Math 3 year weighted average of hydro bill $56,250 Upgrading to energy efficient equipment, save 5% -$2,813

35. Shopping The Market 35 Doing the Math 3 year weighted average of hydro bill $56,250 Upgrading to energy efficient equipment, save 5% -$2,813 Meter time delay, add 4% +$2,250

36. Shopping The Market 36 Doing the Math 3 year weighted average of hydro bill $56,250 Upgrading to energy efficient equipment, save 5% -$2,813 Meter time delay, add 4% +$2,250 Hydro rate increase, assume 3% +$1,671

37. Shopping The Market 37 Doing the Math 3 year weighted average of hydro bill $56,250 Upgrading to energy efficient equipment, save 5% -$2,813 Meter time delay, add 4% +$2,250 Hydro rate increase, assume 3% +$1,671 Management fee, assume 10%* +$5,736 *Multiplied based on the sum of all previous items

38. Shopping The Market 38 Doing the Math 3 year weighted average of hydro bill $56,250 Upgrading to energy efficient equipment, save 5% -$2,813 Meter time delay, add 4% +$2,250 Hydro rate increase, assume 3% +$1,671 Management fee, assume 10%* +$5,736 Total 2020 Hydro Budget $63,094 *Multiplied based on the sum of all previous items

39. Shopping The Market 39 Applying it to Dental 3 year weighted average of dental claims (claims history) $56,250 Adding a dental deductible, save 5% -$2,813 Time Delay Claims (IBNR), add 4% +$2,250 Dental fee guide increase (trend), assume 3% +$1,671 Insurer Admin fee (TLR), assume 10%* Total Dental Premium +$5,736 $63,094 *Multiplied based on the sum of all previous items

40. Shopping The Market 40 “Hi John, I can save you 20% on your benefits cost if you switch your plan to me!”

41. Shopping The Market 41 "I shop the entire market" “Special arrangement with insurance company” "I get a special deal" "Part of a larger group” “I charge lower fees”

42. Shopping The Market 42 The Truth Behind These Marketing “Lowball Prices” Aggressive discounts offered by insurance companies in order to entice businesses Annual savings in first year can range from 10% to even 30% Typically, the premiums quoted are not enough to pay for the anticipated claims. Renewals sky rocket in subsequent years Lowball prices are also made possible by manipulating time delay claims (IBNR factor)

43. Shopping The Market 43 Remember, Premiums = Claims + Expenses If the quoted premiums are equal to or less than your claims, you are dealing with a Marketing “Lowball Price”

44. Shopping The Market 44 Ask the right questions 1. What is the “Target Loss Ratio” for Extended Health Care (EHC) and Dental? 2. What are the “Incurred but not reported reserves” (IBNR) for this quote and how are they calculated? 3. What are the “Trends” that will be applied to the EHC and Dental? 4. What is the Stop Loss or Pooling Level? 5. What is the Stop Loss or Pooling charges? 6. If Rate Guarantees are being offered ask if there are any conditions that must be adhered to, for Example: changes in employee population, any restrictions, read fine print.

45. Shopping The Market 45 Read the fine print!

46. Shopping The Market 46

47. Shopping The Market 47

48. Shopping The Market 48 A Real Case Study Example A current Beneplan client recently received attractive pricing plan from competing carriers for the same coverage. Let’s evaluate their best course of action

49. Shopping The Market 49 Client Background Trade Association based in Mississauga 20 full time employees Beneplan customer since 2015 $10,845 in refunds to date Current Monthly Premium $5, 444

50. Shopping The Market 50 Which Offer Should They Take? Beneplan Current Carrier A Carrier B Monthly Premium Annual Premium $5,444 $65,328 - CA$4,529 CA$54,343 -17% CA$4,931.12 CA$59,173 -9% CA$5,423 CA$65,078 -0.4% Beneplan Renewal % Change YOY vs Current

51. Shopping The Market 51 Which Offer Should They Take? Beneplan Current Carrier A Carrier B Monthly Premium Annual Premium $5,444 $65,328 - CA$4,529 CA$54,343 -17% CA$4,931.12 CA$59,173 -9% $5,423 $65,078 -0.4% Beneplan Renewal % Change YOY vs Current

52. Shopping The Market 52 Which Offer Should They Take? Beneplan Current Carrier A Carrier B Monthly Premium Annual Premium % Change YOY vs Current $5,444 $65,328 - $4,529 $54,343 -17% CA$4,931.12 CA$59,173 -9% $5,423 $65,078 -0.4% Beneplan Renewal

53. Shopping The Market 53 Which Offer Should They Take? Beneplan Current Carrier A Carrier B Monthly Premium Annual Premium $5,444 $65,328 - $4,529 $54,343 -17% $4,931.12 $59,173 -9% $5,423 $65,078 -0.4% Beneplan Renewal % Change YOY vs Current

54. Shopping The Market 54 Buyer Beware We must look at the renewal factors and see how they affect premiums in Year 2 & Year 3

55. Shopping The Market 55 Renewal Factor Breakdown Renewal Factors Target Loss Ratio Incurred But Not Reported (IBNR) Trend Stop Loss or Pooling Level Maximum Rate Increase Guarantee (Year 1) Rate Guarantees Maximum Rate Increase Guarantee (Year 2) Stop Loss or Pooling Charge Credibility Single Family Health Dental Beneplan 84.50% 84.50% 5.00% of Claims 9.00% 5.00% $3.00 n/a n/a n/a n/a n/a n/a $6.00 n/a 100.00% 100.00% Health Dental Carrier A 82.80% 82.80% 12.00% 8.81% $2.86 n/a n/a n/a n/a n/a n/a $6.66 n/a 0.00% 0.00% Health Dental Carrier B 76.80% 76.80% 9.80% 10.09% $2.08 n/a n/a $4.85 n/a 0.00% 0.00% 10.0% 10.0% n/a n/a n/a n/a n/a n/a n/a n/a $10,000.00 $10,000.00 $10,000.00 5.00% of Claims 6.00% of Premiums 6.00% of Premiums 6.50% of Claims 6.50% of Claims

64. Shopping The Market 64 Monthly Premium Y1 Beneplan $5,423 Current Y2 $5,529 Y3 $6,346 Y1 $4,529 Y2 $6,008 Y3 $6,949 Y1 $4,931 Y2 $5,255 Y3 $7,410$5,444 Carrier A Carrier B Total Premiums Paid Over 3 Years -0.4%% Change YOY 3% $206,801 13% -17% 33% $209,824 16% -9% 7% $211,155 41% Detailed Renewal Analysis

74. Shopping The Market 74 Monthly Premium Y1 $5,423 Current Y2 $5,529 Y3 $6,346 Y1 $4,529 Y2 $6,008 Y3 $6,949 Y1 $4,931 Y2 $5,255 Y3 $7,410$5,444 Total Premiums Paid Over 3 Years -0.4%% Change YOY 3% $206,801 13% -17% 33% $209,824 16% -9% 7% $211,155 41% Detailed Renewal Analysis Beneplan Carrier A Carrier B

75. Shopping The Market 75 Monthly Premium Y1 $5,423 Current Y2 $5,529 Y3 $6,346 Y1 $4,529 Y2 $6,008 Y3 $6,949 Y1 $4,931 Y2 $5,255 Y3 $7,410$5,444 Total Premiums Paid Over 3 Years -0.4%% Change YOY vs Current 3% $206,801 13% -17% 33% $209,824 16% -9% 7% $211,155 41% Detailed Renewal Analysis Beneplan Carrier A Carrier B

76. Shopping The Market 76 Playing the Long Game This costing exercise showed that the perceived savings in year 1 offered by the other carriers were quickly eaten up by the large renewal increases in year 2 & year 3. After seeing this, the client stayed with Beneplan.

77. Thank You Vince Principato President, Beneplan Inc. vprincipato@beneplan.ca Desk: 416-863-6718 x235 Cell: 416-832-4797 500-150 Ferrand Dr. Toronto ON M3C 3E5 | Beneplan.ca Questions?