I recently attended a presentation by an insurer where it posed this question. It was trying to challenge the perception that benefits had become a cost-driven commodity purchase, and that focus on final premium rates and the cost of delivering these benefits (administration and claims settlement expenses) ignored the bigger piece of the pie—the claims cost. The insurer concluded that an appropriately managed benefits program can add value to the employment relationship and therefore increase profitability.
I agree—somewhat.
I agree that far too many people view benefits as simply a cost and therefore a commodity. But we got to this point honestly. The insurance industry has long competed based on price—being prepared to discount the cost of their services in an attempt to increase revenues and build market share. And as advisors, we want to do the best job for our clients and cost is important. If an insurer is prepared to reduce its costs for one client, this forms the baseline for all clients with that insurer. And no one wants to pay more than they have to. Unfortunately it is a vicious circle—one that is difficult to break.
Claim costs are important. For most plan sponsors, insurer expenses represent less than 30% of the total premium cost (for larger employers this would be less than 10%) with the rest of the premium used to fund the payment of claims. All insurers manage claims the same way, right? Well, any plan sponsor that has changed insurers knows that this is simply not the case—there can be significant differences in how insurers handle seemingly straightforward claims. And some insurers are becoming increasingly innovative and sophisticated in their claims management practices, particularly as it relates to integration with government programs and the handling of complex disability claims. They purport this more aggressive claims management will reduce the actual cost of claims while not disadvantaging the claimant—a win/win for everyone. And I say “purport” because, while the potential exists, these insurers have not done a great job of proving their point with facts and figures to back it up.
Value (to the employer and their employees) comes in other forms, such as service. Increasingly technology is being used a differentiator in benefits delivery but it clearly needs to be appropriately focused. There have been tremendous technology innovations over the last several years, however not all have been client-centric but rather being used as ways to improve efficiencies—and therefore reduce cost. But once again, it is a bit of a vicious circle. Insurers are trying to improve efficiencies—to reduce costs—to be able to compete more effectively.
So what’s the answer? Well, first and foremost, benefits are not a commodity and an effectively managed benefits program can add value to the employment relationship. Benefits are an important piece of an individual’s total compensation package with their employer and few would argue with the observation that benefits are gaining in significance. And it is simply not a cost decision—although cost can not be discounted—but value must also consider the level of benefits delivered, the quality of the employee (and employer) experience with the service provider, and the overall management of the program (including the management of the claims cost).
We all have a role to play in ensuring that we maximize the value in benefits programs. Insurers must deliver on their service commitments to their clients and if they wish to be acknowledged for their value-added contributions in the management of claims. Prove it, not just say it. Plan sponsors need to hold their insurers to their service expectations and be prepared to act should these expectations not be met. Complacency breeds complacency. And benefits need to be viewed for what they are—an investment. And finally, plan advisors need to do a better job of helping plan sponsors understand and appreciate the differences in insurers’ value propositions. Advisors need to drive innovation by ensuring our clients are discerning (and prepared to reward excellence) and that the insurance industry is in a position to deliver.
Benefits are not a commodity.