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© Copyright 2000 Rogers Media. The following article first appeared in the July 2000 edition of
BENEFITS CANADA magazine.
Shareholders focus on group insurance profitability
Benefits plans must become more efficient.
By Brian Kassner
In free market economies such as Canada, the financial capital required by a demutualized insurance company
must come from investors. You could say that through a group insurance contract, the impact of the benefits
plan risk is transferred, via the insurer, from plan sponsors to investors.
In exchange for providing this capital, investors demand a return from the business that will compensate
them for this risk. Ultimately, investors will expect a return comparable to that of similar financial
institutions.
It is clear that in this new environment where capital movements will follow the best returns, there is no
longer a place for the plan that does not pay its way. Therefore, as the market evolves after
demutualization, plan sponsors can expect a growing focus on pricing practices that better reflect the
level of service and financial resources (capital) allocated to their plans. In turn, insurers can expect
increased pressure to define and deliver the levels of service that plan sponsors must pay for.
Balancing the degree of risk transfer and its associated cost of capital is one area to consider when
striving for the most cost effective delivery of a group benefits program. However, attention must also be
paid to effective claims management and the reduction or elimination of unnecessary plan complexities and
services. Changing the plan design and/or the ongoing funding commitment are other ways to control or
reduce costs.
For example, with the changing nature of the workplace and the associated increase in the number of
complex, often stress-related, disability claims, an effective disability claims management strategy will
likely deliver a much larger financial payback than any risk transfer arrangements that reduce the cost of
capital charge. This involves not only a review of external providers of claims management and adjudication
services, but also a careful analysis of the internal policies and procedures for reintegrating employees
back to work.
Reductions in the complexity of a plan's structure can be another means of reducing both internal and
external plan administrative costs. As such, plan sponsors should carefully consider the need to maintain a
multitude of plan designs resulting, for example, from a merger. Along the same lines, plan sponsors should
also consider eliminating or reducing unnecessary services that add little, if any, value to the operation
and management of the plan.
Introducing a flexible benefits plan where the plan sponsor can control the increases in flexible spending
dollars allocated to employees may also help control long-term plan costs. Of course, plan sponsors can
always turn to benefits reductions, through premium and/or claims cost sharing arrangements or limiting the
eligible expenses covered, to reduce plan costs.
There are many approaches that may be taken to reduce and/or control group benefits costs. These must all
be considered together before adopting an arrangement that balances the cost of the program with the value
derived from it by the organization. The most successful ones will be those that become working
partnerships where both the plan sponsor and the insurer understand each other's needs and derive value
from the relationship.
Brian Kassner is director, group underwriting with Sun Life Financial in Toronto.
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