Disruptors Series Part IV: The Issue of Risk Management

This is the fourth installment of our “Disruptors” Series where we provide additional information on each of the issues that we believe “Disruptors” are missing for employee benefits in the long term. We offer the following information for your consideration around the key Issue of Risk Management. To follow this series and more, visit our blog. You can read the original article here, as well as the other articles where we covered the issues of Cost and Invincibility.

More and more we hear references to the word “Disruptors” in various industries, including employee benefits. Some new players are entering the market with promises to revolutionize benefits programs and thus make them more appealing to employees. Other new players are promising to provide other human resource services for “free” if you purchase your employee benefits through them. However, is what they are offering really all that new and can you really get “something for nothing” in the long run?

The “Pareto Principle (80/20 Rule)” generally holds true in the employee benefits industry – about 80% of employee benefits costs are driven by 20% of employees and, in turn, 80% of employees drive only 20% of plan costs. So why would a “Disruptor” allow the relatively healthy employees to shift their unused dollars when the remaining higher-cost users would then be financially punished with higher premium rates?

The Issue of Risk Management:

• From a business perspective, insurers rely on receiving premiums from group plan members, the majority of which do not use the plan heavily, in order to pay the costs related to those that do. The premiums paid by those heavy plan users typically are no where near sufficient to pay their own claims costs so we effectively rely on healthy employee participating in the plan. This is a basic concept underlying insurance and is probably better understood from a home insurance perspective – you would gladly pay fire insurance premiums for 50 years and never make a claim and, as well, you may not even be able to recall a single fire in your own neighborhood over the past 50 years. However, those paid premiums would still likely have not been sufficient to rebuild your house if you had saved and invested them instead. You and the many others who do not have home fires pay to have new homes built for those that do – but you never know, as it could be you one day.
• When healthy employees elect to not pay premiums into plans, we encounter a significant underwriting risk referred to as “anti-selection”. Insurers typically manage this risk currently through enrollment deadlines and exclusions for late applicants. However, by allowing employees to opt out of core insurance coverage or limit their coverage in order to move funds to other non-insurance areas (e.g., health care or wellness spending accounts), we are effectively doing the same. Based on our experience with flex plan redesigns, these moves by employees to lower insurance coverage levels typically increase the insurance premium costs for the remaining employees by 15% to 20%.
• In today’s world of privacy, we may not know who these relatively unhealthy employees are and it might not be their fault that they are suffering from an illness that drives high cost drugs, supplies or therapy. Nor should we know who these employees are – it could be us one day. When we have insurance coverage in place, we should hope to stay healthy and never use it but we should sleep well at night knowing that we will be taken care of if we become sick. There is no point in attempting to identify healthy employees (and thus also the unhealthy ones) and make financial decisions based on the past as unhealthy employees were once healthy
• The reality is that you simply can not get insurance once you are sick or, if you do, your current medical illnesses will not be covered. As such, you need to participate in the group employee benefits plan when you are healthy in order to cover your risks and costs if and when you are sick and relatively unhealthy. Trying to guess if and when it makes sense to secure insurance coverage is a risky guessing game which has no place in group employee benefits.

Perhaps there is an underlying reason why many parts of the employee benefits offering have remained intact and connected to a broader HR strategy over the last 30 years. Employers continue to provide benefits that include life and disability insurance along with extended health and dental benefits, and employees continue to value them for the most part. Risks around income protection in the event of disability and cash payouts for beneficiaries in the event of death continue to be needed as the underlying risks are still unchanged. Extended health and dental benefits are arguably even more important now as governments continue to download (or delay taking on) new drugs and services.

Note that at ZLC Financial we believe there is a better way for employee benefits, but we also believe the solution is not in “throwing the baby out with the bath water”. We are concerned that these new “Disruptors” are attracting attention with flashy ideas in the short term but are missing the key issues for employee benefits in the long term. Instead we recommend reviewing your current and future employee needs, understanding the financial reality for your company around projected inflation trends, and developing a benefits program that works for you in the long term and truly supports your broader HR strategy and business plan.

Each organization’s needs are unique and warrant a customized solution. We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits program. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.

ZLC Financial is one of the fastest growing employee benefits advisors in Western Canada and we are fortunate to have the best people, resources and clients. Our goal is to work with you to find a better way for your employee benefits plan. We provide this value to you by leveraging one of the most skilled benefits teams in the city – almost 300 years of experience within our team of 14 employee benefits specialists. We have been working with businesses ranging from 4 to over 10,000 employees for over 30 years.

By Dan Eisner

Update: to follow this series and more, you can read subsequent articles where we dive into each of these issues further, such as the issues of Communication and Experience.