What the Renewal Letter Is Actually Saying

The letter arrives about sixty days before the renewal date, sometimes fewer, with a number in it and a tone that suggests the number is a fact. For most small employers, what happens next is that somebody sighs, forwards it to payroll, and the new rates take effect. That is a reasonable response to a document that looks like an invoice, and it is the wrong response, because it is not one. A renewal is a proposal built from several components, some of which are arithmetic and some of which are judgment, and the ones that are judgment can be discussed. The employers who do discuss them are not being difficult; they are reading the document as what it is. This article explains what the number is made of, which parts of it are genuinely arguable, what to ask for and when, and the mistake of putting a plan out to market every year as a reflex.

What the number is made of

Four things build a renewal, and knowing which is which is what makes a conversation possible.

Your own claims experience is the first, and for the benefits where it is used it is the most visible. Health and dental claims are relatively predictable in aggregate, so an insurer charges a group broadly for what that group used, plus expenses.

Pooling is the second, and it is the one most employers have never had explained. Some benefits are too volatile to charge to a single employer: one life insurance claim or one very large drug claim would otherwise devastate a small group’s rates. Those risks are pooled across many employers and charged as a pooled rate. Understanding what is pooled in your plan, and what the pooling threshold is, explains a great deal about a renewal.

Trend is the third: the insurer’s assumption about how costs will move over the coming year, applied to everybody. It is a judgment, it is applied broadly, and it is the component employers most often accept without asking what it is.

And expenses and margin are the fourth: the cost of administering the plan and the insurer’s own return. This is the part that is genuinely negotiable in the ordinary sense, and it is also the part nobody sees itemised unless they ask for it.

Credibility, the concept that decides small group pricing

This is the most valuable idea in this article and it is almost never explained to a small employer. Credibility is the weight an insurer gives to your own claims experience versus the experience of a larger book of business.

A group of eight people has almost no statistical credibility. One person having a bad year is not evidence about the group; it is noise. A group of three hundred has a great deal of credibility, because its own numbers actually describe something.

The question to ask, in those words, is what credibility factor has been applied to my experience in this renewal. If a very small group is being charged as though its own claims predict next year, that is a conversation to have, and it is a conversation that has to be had in the language the insurer uses, which is why the question matters more than the answer.

The same idea explains why a small employer’s rates can swing violently from one year to the next while a large employer’s move smoothly. It is not that the small employer is being treated unfairly. It is that small numbers are volatile, and the remedy is pooling and credibility rather than indignation.

What to ask for, and when

Ask for the renewal report rather than the renewal letter. A letter states a number; a report shows the claims experience, the pooled amounts, the credibility applied, the trend assumption and the expense component. You are entitled to understand what you are being charged, and the report is how.

Ask for it early. The single most effective thing a small employer can do is request the renewal package well before it would normally arrive, because everything else on this page requires time. A renewal received thirty days before the effective date leaves room for exactly one decision.

Ask what changed and why, specifically. A large increase driven by one exceptional claim in a small group is a different conversation from a large increase driven by trend, and they have different answers.

Ask what would change the number. Plan design is the lever that is always available and is usually reached for last: deductibles, coinsurance, maximums, the drug plan’s structure, whether certain benefits are pooled differently. Some of those changes are invisible to employees and some are deeply felt, and knowing which is which is the work.

Going to market, and its real cost

Putting the plan out to other insurers is the obvious response to an increase, and it is a legitimate tool. It is also not free, and the costs are not financial.

It takes work: data has to be assembled, questions answered, and a decision made under time pressure. It disrupts employees, because changing insurers means new cards, new claim procedures, and sometimes a benefit that behaved one way behaving another. And an employer who markets the plan every single year acquires a reputation for it, which is a real thing in a market where the people quoting know each other.

There is also a pattern worth understanding rather than resenting. A new insurer’s first year rate can be competitive to win the business, and the second year renewal is where the plan’s actual experience arrives. An employer who moves every year on first year pricing is not lowering their cost; they are restarting the same cycle repeatedly and paying the disruption each time.

The reasonable practice for most small employers is to go to market periodically rather than annually, to do it properly when they do, and to use the years in between to understand and manage the plan they have.

What actually changes a renewal, over years

Renewals are driven by claims, and claims are driven by what the plan covers and how employees use it. That means the things that genuinely change a renewal happen in the eleven months before it, not in the negotiation.

Plan design is the largest and most immediate lever, and it should be reviewed deliberately every few years rather than only in a crisis. A plan designed in 2014 for a workforce that no longer resembles the current one is paying for benefits nobody uses and missing ones everybody wants.

How the drug plan is structured is frequently the single largest driver in a small plan, and it is the area where the options are most technical and least understood by the employer paying for them.

And communication matters more than employers expect. Employees who do not understand their plan use it inefficiently and value it less, which produces the worst combination available: a benefit that costs a lot and is not appreciated. A plan nobody understands is a plan being wasted in both directions.

Reading the experience report itself

Ask for the report rather than the letter and you will be handed several pages of tables. They are readable once you know what four of the lines are doing.

Paid claims are what the insurer actually paid out during the experience period. Incurred claims are what that period generated, including claims that occurred inside it and were submitted after it closed. A renewal is built on the second figure, and the gap between the two is a reserve: an estimate of claims incurred but not yet reported. An estimate is a judgment, and a judgment is a legitimate question.

The loss ratio compares claims to premium for the period. It is the number employers fixate on and it is not the renewal, because expenses, pooled charges and trend sit on top of it, and because credibility decides how much of it is used.

The experience period almost never runs to the renewal date. It closes some months earlier so the report can be produced, which means the most recent months of your own experience are projected rather than counted. If something changed in those months, in either direction, say so, because the report cannot know it.

And check the period itself. A report covering a different span than last year is not comparable to it, and comparing them anyway is the commonest error made by the person reading the report.

The funding arrangement underneath the rates

Two employers with identical claims can receive different renewals because their plans are funded differently, and most small employers have never been told which they are on.

The usual arrangement for a small plan is fully insured and non refund. The employer pays rates, the insurer carries the risk, and if claims come in below expectation the difference belongs to the insurer. It is simple and predictable, and it gives the employer no share of a good year.

Refund accounting works differently. The plan is accounted for on its own: premium in, claims and expenses out. A surplus can be returned to the employer, and a deficit is generally carried forward and recovered from later renewals. The second half is the part to understand before agreeing to the first. A deficit does not expire at the end of a plan year. It follows the plan, and it can sit inside a renewal increase without ever appearing as a line of its own unless somebody asks.

Administrative services only goes further again: the employer funds claims directly and buys administration and stop loss protection. It suits a larger and steadier group, and it moves real volatility onto the employer.

The question is one sentence. On what basis is my plan funded, is there an accumulated surplus or deficit, and what stop loss protection sits above it. If nobody can answer that quickly, the difficulty of getting the answer is itself the answer.

Frequently Asked Questions

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Read What Drives the Cost of Group Benefits for the underlying economics, Health Spending Accounts for Small Business for the alternative structure, and Which Group Benefits Are Taxable for the design decision inside the plan. The Group Insurance guide sets out the whole picture.