3 Things You Should Know About The Pricing Of Employee Benefits
1. Target Loss Ratio (TLR)
The Target Loss Ratio is the percentage of every dollar your insurance carrier expects to pay out in the form of claims for experience-rated benefits (typically short-term disability, health and dental). The difference between the TLR and 100% represents the carrier’s expenses for managing your program.
If your group's TLR is 80% that means for every $1.00 you pay in premium the insurance carrier expects to pay out $0.80 in the form of claims. The other $0.20 represents the carrier's expenses for managing your program.
The TLR will typically increase with the size of the group. A group of 20 members might have a TLR of 70%.. A larger group of 100 members might have a TLR of 85%. The higher the TLR the lower your group's administrative expenses.
2. Incurred Loss Ratio
Your group's incurred loss ratio is the actual amount of claims incurred divided by the premium.
If your group has health claims of $75,000 and you have paid health premiums of $100,000, your incurred loss ratio is 75%.
3. Comparing Incurred vs. Target Loss Ratio
Typically you want your Incurred Loss Ratio to be as close as possible to the Target Loss Ratio and even a little above.
In the above example, if your group has an Incurred Loss Ratio of 75% with a TLR of 80% that means the insurance carrier is only paying out $0.75 of every dollar in the form of claims when they were supposed to pay out $0.80.
On the contrary, if your group has an Incurred Loss Ratio of 85% with a TLR of 80% that means the insurance carrier is paying out $0.85 of every dollar in the form of claims when they were only supposed to pay out $0.80.
The comparison of the Incurred and Target Loss Ratio's will evolve as your group grows and begins to consider other funding methods such as Refund Accounting or Administrative Services Only (ASO).
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