Demutualization, mergers and acquisitions, even bankruptcy — the insurance industry has been through many changes in recent years. Employers going to the market for benefits and pension plans will find fewer vendors and a greater reluctance by carriers to take on high-risk clients.
“Where formerly there were 14 or 15 carriers for a line of business, now there are eight to 10,” says Ken Cooke, a consultant with Aon Consulting. “We find carriers are selective in their bidding depending on their business strategy. Companies that quote aggressively to increase volumes, may hold back on subsequent business.”
“Companies that have gone through demutualization are now accountable to shareholders,” says Rick Holinshead, managing partner, Ontario Group Practice at Morneau Sobeco. “Non-stock companies, while in the minority, have followed the lead of the stock companies. In general, the insurance industry is more selective and more cautious in their pricing models.”
Insurance companies are pursuing bottom-line profitability for each line of business. Formerly, profits in one area might offset losses in another, the intention now is to price each component to stand on its own.
Insurance providers are also directing clients on what they will and will not provide. Employers that go out with a predetermined plan may find it does not correspond to the standard packages available on the market.
“Costs are rising,” says Larry Green, president of Retirement Benefits Insurance Ltd. of Oakville, Ont. “Inflation is a factor but changing utilization patterns, new drugs and the delisting of provincial health services have pushed annual premium increases into the 17- to 20-per-cent range.”
Consolidation has affected access to life and health insurance, says Green. “For small companies, there has been shrinkage in the number of providers. For large employers the access to providers is largely unchanged.
“Over the last 10 years,” Green continues, “insurance providers have become much more choosy in placing their business. Some employers find it hard to get quotes. Carriers are concerned about stability of revenues for organizations that rely on government grants or charitable donations. In the insurance business uncertainty translates into higher claims experience and lower profitability.”
Small employers and companies with high incidents of long-term disability (LTD) also have problems attracting quotes. Louise Stevens, director of housing with City of London in Ontario, was involved in acquiring a new plan for 55 employees, four on LTD. “Out of 14 companies we approached, only one would provide a quote. At issue was the high cost of providing drug benefits to the LTD recipients. In the end we elected to exclude the LTD recipients from the plan and pay their claims directly.”
Profitability in LTD has long been a challenge for carriers. With the downturn in the stock market, the assumed rate of return on LTD reserves that carriers must set aside has not been realized. This is affecting LTD premiums, and in some cases, the availability of LTD coverage.
Where an employer wants to protect against an unusually high level of claims in a given year through the payment of a non-recoverable premium (pooling), Cooke reports that even with no change in employer circumstances, insurers are setting higher levels for claims pooling, and increasing the pool charges.
Despite these extra challenges produced by industry consolidation it has not been all bad news for employers looking for an insurance provider. “For the most part acquisitions are strategic transactions where buyers are gaining services or products they did not have. The ensuing synergy should result in better services. Even with consolidation there is still a range of providers including large full-service companies, smaller companies catering to niche or regional markets and specialty underwriters,” says Holinshead.
Colin Ripsman, head of the Defined Contribution Consulting Group at Mercer Investment Consulting, notes that consolidation has also affected the pension market. “Over the last few years, some of the smaller players have exited the field. This has helped raise minimum service levels in the industry. Now some of the larger players are merging. The resulting economies of scale should provide the basis for new offerings and for improvements in technology.”
Insurance companies offer financial management and administrative services for defined contribution plans, that include information and education tools. Insurance companies also offer group RRSPs, a market shared with money managers and mutual funds. Ripsman notes that consolidations have brought services formerly offered by separate providers into new combinations available through a single access point.
Defined benefit plans are, for the most part, not affected by consolidation as they are administered by a limited number of specialist companies outside the insurance industry. Because of recent volatility in the stock market, employers are facing potential increases in costs, after a period of reduced contributions or premium holidays. In some cases, the asset that the pension plan represented on the corporate books has become an unfunded liability.
Green says some employers are moving away from defined benefit plans and investigating defined contribution plans because of the perceived complexity and risks associated with their defined benefits plans.
It was inevitable that services would be affected in some way by consolidation, says Ripsman. “Companies going through consolidation have a divided focus as they merge operations and their customer base. Their staff face job uncertainty and new procedures. Consolidation creates the potential for uncompetitive pricing and poorer service, particularly at the smaller end of the market (under 100 members).”
Where once it was relatively easy to move from one insurance company to another to address service problems or obtain better rates, in the future employers will find insurers want three to five years of new business to recoup set-up costs. Businesses that are in the midst of organizational change may find they need to stabilize before they can attract the best rates for pension or benefits services.
Technology will continue to play an important role in the industry as clients look for electronic services to streamline operations. At one time this meant interactive voice mail to answer employee questions. Now it includes Internet capability so employees can change personal information, track claims, manage pension portfolios, download forms and explore “what if” scenarios. Employers want electronic data transmission and money transfers, access to real time reports on usage and costs, and program analysis tools.
“The pattern,” says Cooke, “has been for one carrier to gain competitive advantage by creating a break through application like the first electronic claims look-up for employees or claims history review for employers. Whoever is out of the gate with the next application assumes the lead until the industry catches up.”
Cost mitigation will drive other changes. Insurance companies have introduced programs to help control costs, such as health-care spending accounts that provide a financial ceiling for claims, and drug cards that allow immediate review and direct payment.
Flexible benefits plans are being promoted to reduce costs. Some companies add employee assistance (EAP) or a wellness component to their services. Collaborative disability management programs are designed to facilitate early and safe return to work.
Employers will increasingly look to such strategies as prevention, disability management and employee involvement in plan design to tackle the steady increase in benefit costs. New funding choices, including the split between employer and employee contributions, the structure of benefit payments (expenses only, a premium with or without accounting, reserves and refunds, or pay as you go) and decisions on pension plan design (defined contribution versus defined benefits) will be explored for savings.
Carriers, to reduce costs and improve service, will continue to explore strategic partnerships that combine core specialties and take advantage of a proven administrative capability or a specialized electronic application. The ultimate outcome will be an increasingly automated and seamless system of self-service for employees and employers irrespective of the provider.
Susan Singh is a Toronto-based freelance writer.