Click here to download pdf

What Really Drives the Numbers

Renewal season is one of the best opportunities to understand how your employee benefits plan works. Many employers ask, ‘Why are our rates increasing?’ or ‘Our employees hardly used the plan—why did premiums still increase?’ The answer is that renewals are based on much more than the claims paid over the past year.

Insurance Is About Sharing Risk

Insurance protects employers and employees from financial losses that would be difficult to absorb on their own. Premiums from many employers are combined into a shared insurance pool that pays eligible claims when they arise. Insurers spread the cost of routine claims, catastrophic drug claims and out-of-country emergency medical claims across thousands of covered members, allowing employers to provide protection that would otherwise be unaffordable.

Why Employers Offer Group Benefits

Group benefits are more than an employee perk—they are one of the most tax-effective ways to compensate and protect employees. In most cases, employer-paid premiums for health and dental benefits are a tax-deductible business expense, while eligible health and dental benefits received by employees are generally received tax-free. This allows employers to provide meaningful value in a way that is often more advantageous than providing the same dollars as taxable salary.

Group benefits also provide access to insurance coverage that many employees could not easily obtain or afford on their own, including Life Insurance, Disability Insurance, Critical Illness, Extended Health Care and Dental coverage.

Experience-Rated Benefits

Extended Health Care, Dental and often Short-Term Disability are experience-rated. Benefits such as Life Insurance and Long-Term Disability are generally priced using demographic and actuarial factors rather than day-to-day claims experience.

Claims Experience & Target Loss Ratio (TLR)

Claims experience compares premiums paid with claims incurred during the experience period.  If the insurer’s Target Loss Ratio (TLR) is 75%, and the plan design that you have chosen allows for annual incurred claims of $7,500, then the insurer’s targeted premium amount would be $10,000 per year as a break-even point.

The $2,500 in premium above claim amounts is used to fund administration, premium taxes, advisor support, reserves, stop-loss protection and pooling charges.

Each year the insurer prices their rates with the intent of finding that target loss ratio for the following year’s renewal, and they often use a weighting of 2-3 years’ claims experience in order to smooth out the volatility of having one bad year in claims (or vice versa).

Trend, Inflation & IBNR

Renewals also reflect future costs. Trend includes increasing prescription drug costs, annual dental fee guide updates, inflation, new treatments and higher utilization. Insurers also include IBNR (Incurred But Not Reported), representing claims that have occurred but have not yet been submitted.  For this reason, if your claims experience lands right on the TLR then you should still expect a small increase with the hopes of finding that same ratio at the following year’s renewal.

Credibility

Smaller or newer groups have less predictable claims patterns, so insurers rely more heavily on industry experience. As a group grows and develops a longer claims history, its own experience becomes more credible and has a greater influence on renewal pricing.

Stop-Loss Protection & Pooling

Many fully insured plans include stop-loss protection with a threshold of approximately $10,000 per covered person per policy year, although this varies by insurer. Once eligible claims exceed that threshold, the excess cost is transferred into a larger pool shared by thousands of employers and these claims will not impact your renewal rate calculations. Every employer contributes through pooling charges, allowing any employer to benefit if faced with a catastrophic drug claim or other exceptionally high-cost claim.

Monitor Your Plan Throughout the Year

A renewal should never come as a surprise. Reviewing your running claims experience during the year provides an opportunity to understand how the plan is performing and discuss strategies before renewal.

Managing Long-Term Costs

Employers can help keep plans sustainable by reviewing plan design periodically, considering deductibles or co-insurance where appropriate, promoting preventative care, ensuring only eligible dependents remain covered, supporting disability management initiatives and offering Employee Assistance Programs (EAPs).

The Bottom Line

A sustainable benefits plan is not about paying the lowest premium or ensuring every employee claims more than they contribute. It is about providing meaningful, tax-effective protection while sharing risk across a much larger population. Understanding the theory behind renewals helps employers make informed decisions and maintain a valuable benefits program for years to come. As your benefits advisor, our role is to help you understand these concepts and develop strategies that balance employee value with long-term sustainability.