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How Fair Loss Ratios factor into your business
Posted on Aug 23, 2016 by Rob McBroom
UAE Medical Insurance discusses what business owners and HR teams need to know about fair loss ratios and how they impact health insurance premiums.
Dubai is an interesting city when it comes to its workforce. With a large percentage of the workforce being made up of foreigners, it is common to hear of companies struggling to attract and maintain the best. One of the more successful ways companies have been attracting employees is by offering comprehensive wellness programs, which include health insurance coverage for your employees.
Here in Dubai health insurance is mandatory for all employees, which means that business owners, managers, and HR teams have had to strike a balance between offering plans that not only meet legal coverage requirements, but also meet employee demands while also maintaining costs at a reasonable level.
In their 2015 International Private Medical Inflation report, Pacific Prime (UMI's global partner) found that international health insurance premiums were on the increase in Dubai and predicted that premium inflation in 2016 and beyond would reach double figures. This highlights a going concern for many companies: How can they manage increasing premiums?
When looking to manage health insurance premiums for your group plan, there are a number of things to consider and measure. Most importantly is the loss ratio. In this article we take a look at what exactly this ratio is and how it is used by companies to ensure that they are getting the most out of their group health insurance plans.
What exactly is a 'loss ratio'?
In terms of insurance, including health insurance, the loss ratio is used to describe the ratio between the monetary value of premiums taken in by an insurer compared and the monetary value of claims paid out. This ratio is one of, if not the most, important indicator of the overall health of an insurer's insurance plan and is often used as a key indicator of what will happen with future premiums.
For corporate health insurance plans, insurers will usually determine the loss ratio just for that specific company plan. For example, if a company's health insurance plan takes in USD 10 million in premiums, and pays out USD 8.5 million, the loss ratio will be 85%. Insurers will use this percentage to ensure that there will be enough premiums available to cover the estimated claims on that plan.
How businesses benefit from the loss ratio
The loss ratio is most commonly used by insurers to judge the success of the insurance plans they offer, but it is also a helpful metric for companies as it can be used to help determine what we refer to as a 'fair claims loss ratio'.
The fair claims loss ratio is a benchmark metric that amalgamates the loss ratio for a company's health insurance plan with relevant business data like claims, types of claims, profit, etc. to help a business determine a loss ratio that is fair for all parties involved.
To determine this ratio, most businesses and insurance brokers helping businesses will look at premiums paid and claims submitted in the past. This ratio can then be used to:
Benchmark plan performance.
Spot claims outliers that should be addressed. For example, if you see an increase in claims for costly care e.g., diabetes, you will likely need to address this issue and implement a program or support for colleagues in order to help reduce claims.
Determine whether your provider will increase claims
Predict future claims loss ratios.
Predict coverage needs with better accuracy.
Interpreting the results
Before we look into how you can interpret the results of both the claims loss ratio and fair claims loss ratio, it is important to point out that these ratios will be different for each company and insurer. A fair claims loss ratio that works well for one company likely won't work well for yours. This is even true for ratios used in different offices. A ratio that works well in the UK likely will not be well suited for an office in Dubai.
That said, in UMI's experience many companies in Dubai have historically seen fair claims loss ratios of between 60% and 80% for international health insurance plans. This percentage means that 60-80% of premiums are paid out in claims. If your office's fair claims loss ratio is higher or lower than this general band - UMI has seen companies with a fair claims loss ratio of 120% - it is not necessarily a bad thing, but it should raise some warning flags and your plan should be reviewed.
In order to help explain how to interpret the results, let's take a look at a company based here in Dubai that administers health insurance for 300 people (250 employees + 50 dependents). Last year the plan administrators (HR team in this case) reviewed historical health plan data and set their fair claims loss ratio at 75%. In 2016 the company paid USD 10,000,000 in premiums and has seen claims submitted of USD 8,000,000. This would equate to a claims loss ratio of 80%, which is slightly higher than the expected fair claims loss ratio. In this case, the company can expect to see premiums increase.
In UMI's experience, if the loss ratio is higher than the fair claims loss ratio you can expect to see insurers raising premiums. This is done in order to ensure that there are enough premiums in the collective pool to pay for claims. For businesses, this means you will probably want to investigate the situation and look for any areas that require better management.
To continue the example from above: The company investigates their claims and finds that there were three standout claims that really ate into the premium pool. Investigating further, it was found that the three claims were all related to a serious motor accident. Car accidents and serious claims are considered to be fairly rare, which means that the company may be in a better bargaining position with the insurer. If they can prove that these claims are rare, they may be able to stave off a large premium increase.
On the other hand, if the increase stems from a high number of claims submitted for common ailments like colds, flus, etc., then you will likely see an increase in premiums. That said, these are manageable. For example, you may want to consider implementing some form of wellness or awareness program that aims to improve overall health in order to try to get claims back to a reasonable level. This in turn, can minimize future increases.
If you notice that your company's loss ratio is less than the set fair claims loss ratio, this is not necessarily a good thing, especially if it is considerably lower. It could show that:
The plan is not being used - If you find that there are coverage elements that are not being used by your staff, it may be worthwhile adjusting your plan to ensure that it is actually being used. In Dubai it is important however to ensure that you still offer the legally required coverage.
You could increase coverage - We have seen cases where a company has consistently lower loss ratios than their set fair claims loss ratio and who are ok with this. Should this be the case, it likely means that you can afford to increase the level of coverage or introduce new coverage elements.
You are being overcharged - While this is not overly common in Dubai, it has happened before where UMI finds that a company is being overcharged by an unscrupulous insurer.
How can UMI help?
While it is possible to develop a fair claims loss ratio yourself, it - along with analyzing all of the data generated with the plan and developing a reliable ratio - can be incredibly time consuming. This is made worse by the fact that some insurers are not overly keen on sharing loss ratio data with clients, or the fact that some companies don't have enough historical claims data.
That is where UMI comes in. Our knowledgeable health insurance team is here to work with companies to ensure that they are getting the most out of their health insurance plan, including working with and understanding loss ratios and utilizing the information produced to ensure you don't pay too much for health insurance. By working with you to review your information, we can help determine a ratio that works for your company and suggest ways to improve it. Contact us today to learn more.