Why premiums are C.R.A.P.

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Employers are ignoring the long-term profit loss their businesses are experiencing by remaining fully insured. To force CFOs and CEOs to see the expensive future, brokers need to introduce the cost of inaction over a five year window.

That was the advice Craig Lack, president of Energi Insurance Services based in San Juan Capistrano, Calif., gave to adviser attendees of the Underground Adviser Masterclass in Dallas, Texas.

Lack says every broker who is attempting to move their clients from fully insured to self-insured needs to go into their prospect meetings thinking, “Premiums equal C.R.A.P.” By this, he meant:

· Claims
· Reserves
· Admin
· Pooling charges

This acronym identifies the four main components that effect health plan premium costs. By identifying the cost of each of these points, the broker can estimate what the employer is spending year over year on their total premium.

While the average broker starts his or her presentation around administration fees, Lack says claims are the most important because they make up roughly 63% of their premium cost while admin only makes up around 7%.

“Why do competitors focus on admin,” he asks. “Because they have no idea how to reduce the frequency and severity of claims.” If the claims are lowered the administrative cost for the employer will always remain beneath it.

Following claims, reserves — money left over after all claims for the year are paid — make-up 22% of the premium while pooling charges — the underwriting method used for all group benefits for small groups — make-up roughly 8%.

Cost of Inaction
On a year-to-year renewal basis, C-suite executives can look at the potential profit and loss on their health plan for the year as relatively small when put into the form of a percentage.

Lack recalled a story a broker told him where they could have saved a potential client $200,000 — 5% — over two years; however the CFO said that he does not bother with $200,000 decisions.

“CFOs deal in a world of initials — net present value, internal rate of return, ROI,” Lack says. “We need to give them a new number to talk about, and what brokers are forgetting to mention is that there is an opportunity cost for not taking action.”

Rather than selling an employer an annual or biannual plan, brokers should extend their cost saving strategy out to five years or more to give the CEO or CFO a wider perspective of the amount of profit they are losing if they continue to remain in a fully insured plan.

“Don’t sell them a three to five year blueprint and tell them what they’ll save after two years,” he says. “The new term for the CFO is COI — “Cost of Inaction.””

When brokers sell a five year plan to the CFO and show a loss of $500,000 or more, they are more likely to take action if the cost of inaction is too great. “We’re talking about possibly a $1 million decision today, rather than a $200,000 decision,” Lack adds.

The adviser can then beg the question, does human resources have the authority to write a $1 million check for the company? During one of Lack’s prospective client meetings, he asked this same question causing the employer to respond, “Why the hell would I give HR the authority to manage my second largest operating expense when they don’t even have the authority to pick the paint color in the office?”

Mick Rodgers, founder and managing partner of The Axial Benefits Company in Boston, Mass., says every prospect meeting should have the CEO, the CFO or some other C-suite executive in the room in order to have these large cost discussions.

“Keep pushing the meeting until the CEO is in the room if the broker is going to have an impactful number slide,” Rodgers says. “The CEO needs to see that number so it cannot be ignored.”

With a broader spectrum to pull data from and larger potential for profit loss, it becomes more difficult for the CFO or CEO to ignore the discussion to switch from fully insured to self-insured allowing the broker to rollout their savings strategy.

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