Monthly group insurance premiums rarely reflect the financial reality of this component of a company's benefits program. The purchase or sale price of a company can be greatly impacted by factors that are not immediately apparent.
To properly assess these issues, an in-depth analysis is required of:
- The type of financial arrangement in place
- The context in which the current premium rates were determined
- The company’s past experience results
Let’s examine each element in detail.
Different financial arrangements: from the company assuring full risk to delegating it to an insurer
Several types of financial arrangements exist for all sizes of companies and all levels of risk tolerance. The most common are:
- Insured financial arrangements: The insurer is responsible for the entire risk. Its only recourse in the event of a deficit is to impose premium adjustments upon renewal, typically every 12 months.
- Unilateral retention financial arrangements: The insurer remains solely responsible for the risk, but under this agreement, the company is free to capitalize a deposit fund from the premiums, which will be used, for example, to reduce the impact of a future deficit on premiums or to enhance the coverage of its group insurance plan.
- Bilateral retention financial arrangements: Here, the company becomes the guarantor of any deficits that may arise. In return, the insurer offers more advantageous administration fees to the company that accepts this risk.
- Administrative services only (ASO) arrangements: The company is both legally responsible for deficits and disputes with its employees regarding claims. To offset this increased risk, the insurer offers very low fees. Such financial arrangements are generally reserved for very large companies or those with a higher risk tolerance.
The pricing context: savings in a tender process or the creation of a deposit fund?
The pricing granted to a group insurance plan will not be the same if the company has just completed a tender process. Some insurers offer very attractive short-term premiums to win a contract, even if these rates are not sustainable in the medium or long term, to ensure that they secure an agreement with the company. It goes without saying that if future cost projections are made based on these values, without analyzing the underlying experience, a budget shortfall could quickly arise.
Conversely, depending on the financial arrangement in place within the company, it may have accumulated considerable surpluses in its deposit fund through prudent pricing over the years. These amounts can be used for a variety of purposes by the company, and this element must be quantified as part of a diligent HR review.
The company’s claim profile: between strict control of healthcare costs and increased incidents of disability
A variety of factors influence current and future group insurance rates. Do employees or their dependents use expensive medications? Does the company operate in the professional services or industrial sector? The profile of work absenteeism due to disability and, consequently, the future costs to be anticipated will be radically different. A comprehensive study of each factor is necessary to budget for potential expenses as accurately as possible.
In-depth analysis and strategic support: essential allies for a clear vision
Behind seemingly stable monthly premiums, surpluses or deficits with major impacts may be hidden, particularly in the context of mergers, acquisitions, or strategic reviews. Without an in-depth analysis of the financial arrangement in place, the pricing context, and the claims profile, the budgetary risks are very real. Our expertise allows us to shed light on these gray areas and secure your business decisions. It is essential to have clear data and a comprehensive overview to optimize your group insurance program.
Support from Lussier experts in HR due diligence
Lussier's specialists can help you secure every step of your acquisition with comprehensive due diligence and strategic support. Contact us today for a customized analysis tailored to your specific needs.
