Loss ratios and your business
It is becoming increasingly popular for Hong Kong-based businesses to implement wellness benefits, with many focusing on offering a comprehensive package that attracts and maintains the best staff. One of the major pillars of the most successful wellness plans is health insurance, and while companies have offered insurance to their employees for a considerable amount of time, it is becoming increasingly important for HR managers and business owners to strike a balance between meeting your employee’s coverage needs and managing escalating premiums.
There are many tactics commonly employed these days to achieve this balance, a common one being working with brokers like Pacific Prime. When working with brokers, or even reviewing your own plan, there is one important ratio that you may want to pay attention to: The loss ratio. In this article, we define what exactly this is, and how it can be used to help ensure you get the most out of your company-sponsored health insurance plan.
Define: Loss ratio
A loss ratio is a ratio between the amount (usually in dollars) of premiums taken in by an insurer compared with the amount of claims paid out. For corporate plans, the loss ratio is usually calculated just for the plan and is a sound indicator of the overall health of the insurance plan.
For example, if an insurer takes in USD 12 million in premiums and pays out USD 10 million in claims, the loss ratio will be 83.3%. Essentially, insurers will use this ratio and the percentage it generates to ensure that there will be enough premiums in a select pool in order to pay out the estimated claims against that pool.
How does a loss ratio help businesses?
While the loss ratio is primarily used by insurers to judge the success of the plans they offer, it can prove to be incredibly helpful for HR and health plan managers at companies, as it can be used to determine what is called a ‘fair claims loss ratio’.
A fair claims loss ratio is a ratio that takes the loss ratio and turns it into something useful for business by amalgamating the loss ratio with other important business information, including premiums, claims and even profit for the insurer. When used properly, it essentially sets a benchmark ratio that is believed to be fair for both the business and the insurer.
HR and plan administrators can determine this ratio by looking at past premiums paid and claims submitted in order to find a desired ratio that works for the business. Once this ratio has been determined, it can be used to:
- Benchmark plan performance
- Identify outliers in claims that should be addressed. For example, if you see an increase in claims related to lifestyle diseases like diabetes, you may want to consider a targeted wellness plan to help your employees manage disease while reducing claims.
- More accurately determine if your provider will increase premiums.
- Predict future claims loss ratios.
- More accurately predict coverage needs in the future.
How to interpret results
Once you have determined the fair claims loss ratio for your company, you can combine this with the insurer’s loss ratio and begin to interpret the results. It is important to note here that the fair claims loss ratio will be different for each company and plan, and a ratio that will work for a company in one location might not necessarily work in another.
That said, in Pacific Prime’s experience there is a general band of 60-80% that most companies will set as their fair claims loss ratio. This means that the yearly claims make up 60-80% of the premiums taken in. If your ratio is higher or lower than this, it is not necessarily a bad thing but it could pose a future concern. For example, we have seen companies with an established fair claims loss ratio of 120% or higher.
To show how to interpret the results, let’s take a look at a company based in Hong Kong that offers health insurance to 200 employees. They have set a fair claims loss ratio, based on previous plan data, of 80% and in 2016 see premiums paid of USD 13,000,000 and claims submitted of USD 10,000,000. This would set their loss ratio at 76.9%, which means that claims and premiums are in line with expectations. You will likely see a minimal increase in premiums or may even be able to negotiate no increase.
Generally speaking, if the loss ratio is higher than your fair claims loss ratio, you will likely see insurers raise premiums in order to ensure that there is enough money from premiums available to cover claims. For businesses, this is also a red flag that indicates that attention is needed. It would be a good idea to investigate claims submitted, premiums charged, etc. in order to try and uncover any areas that need to be managed.
If for example, you see a higher loss ratio than usual in 2016 and conduct an audit to find that two members of the plan were in a serious car accident, you may want to discuss with the insurer about not increasing rates as accidents like these are a fairly rare occurrence. However, if you see that the number of claims associated with colds and seasonal illnesses has increased then it may be worth looking into prevention programs such as flu shots and flu awareness drives in order to try and get claims back to a reasonable ratio, as premiums will likely increase.
On the other hand, if the loss ratio is significantly lower than your fair claims loss ratio it likely could mean that:
- The plan is not being used by employees. It could be because they simply don’t need the level of coverage you are offering, or there is dissatisfaction with the plan as it is not covering what the employees want/need covered.
- You can increase coverage. In some cases, we have seen companies with a lower than expected loss ratio over a number of years, who are ok with their current fair claims loss ratio. If this is the case, it most often means you can afford to increase the level of coverage, or add extra coverage elements.
- You’re being overcharged. While this is rare, it has happened before where when analyzing plan performance we find that a company is being overcharged for their health insurance plan.
How does Pacific Prime Hong Kong help?
Determining the loss ratio, along with the fair claims loss ratio, and then analyzing what the data means can be a time-consuming process, especially because many insurers are sometimes reticent to share the loss ratio. Combine this with the fact that picking a fair claims loss ratio to use as a benchmark can be a tough thing to do, especially if you don’t have historic claims data, and it can become nearly impossible to be successful.
The staff at Pacific Prime Hong Kong can help you with this. As one of the largest insurance brokers in Asia, we have the knowledge and expertise to help companies effectively manage their health insurance offerings. By reviewing all of the information available we can help set benchmarks, and even suggest tactics you can take to get the most out of your health insurance plan.
To learn more about our business solutions, please visit our website today.
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